1986 (5) TMI 76 - AT - Income Tax

Issues Involved:
1. Validity of the deletion of Rs. 67,824 penalty levied under the Additional Emoluments (Compulsory Deposit) Act, 1974.
2. Classification of the amounts as penalty and damages.
3. Applicability of relevant case law and statutory provisions.

Detailed Analysis:

1. Validity of the Deletion of Rs. 67,824 Penalty Levied:

The primary issue in this appeal is the validity of the deletion made by the Commissioner (Appeals) of Rs. 67,824, which was initially levied as a penalty under the Additional Emoluments (Compulsory Deposit) Act, 1974. The revenue contended that the Commissioner (Appeals) should have confirmed the addition, arguing that the assessee-company failed to provide evidence that the payment was not due to an infraction of law.

The assessee, a public limited company, had the assessment year 1977-78 under scrutiny. The Income Tax Officer (ITO) had held that the compulsory deposits collected by the company from its employees were not paid to the appropriate authority within the stipulated period, resulting in penal interest of Rs. 67,824. The ITO concluded that this expenditure was not incurred for earning income but to overcome an omission or default by the company, thus disallowing it as an expenditure.

Upon appeal, the Commissioner (Appeals) applied the Supreme Court's ratio in Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429, determining that the interest paid on the delayed payment of compulsory deposit contribution should be allowed as business expenditure. Consequently, the disallowance of Rs. 67,824 was canceled.

2. Classification of the Amounts as Penalty and Damages:

The revenue's appeal described Rs. 22,526 as a penalty and Rs. 45,308 as damages for the delayed payment of family pension contributions. However, the Tribunal clarified that these descriptions were incorrect. The correct interpretation was that Rs. 45,308 represented the amount due for deposit or remittance, and Rs. 22,526 was the interest calculated at the bank rate plus an additional 5%.

3. Applicability of Relevant Case Law and Statutory Provisions:

The revenue relied on the Andhra Pradesh High Court decision in CIT v. Kodandarama & Co. [1983] 144 ITR 395, which held that payments made in contravention of law or opposed to public policy are not deductible as business expenditure. The revenue argued that the payment in question was a penalty for infraction of law.

Conversely, the assessee's counsel argued that there was no infraction of law and that the payment of interest was in accordance with the provisions of the Additional Emoluments Act. The interest liability arose automatically once the time limit for remittance was crossed, similar to the interest under section 33 of the Sugarcane Cess Act, 1956, as interpreted by the Supreme Court in Mahalakshmi Sugar Mills Co.'s case.

The Tribunal agreed with the assessee's counsel, concluding that the interest paid was not a penalty but a mandatory payment under section 23 of the Additional Emoluments Act. The interest was considered compensation for the delay in payment, not a penalty. The Tribunal found the provisions of section 23 to be in pari materia with section 3(3) of the Sugarcane Cess Act, as interpreted by the Supreme Court. The interest was deemed a part of the liability, accruing automatically upon default.

Ultimately, the Tribunal upheld the Commissioner (Appeals)'s decision to allow Rs. 67,824 as business expenditure, comprising Rs. 45,308 for the deposit and Rs. 22,526 for interest. The departmental appeal was dismissed.

Conclusion:
The Tribunal dismissed the departmental appeal, validating the deletion of Rs. 67,824 by the Commissioner (Appeals). The amounts were correctly classified, and the interest paid was deemed a compensatory liability, not a penalty, aligning with relevant case law and statutory provisions.

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