9911796707
TMI Blog1982 (4) TMI 203X X X X Extracts X X X X X X X X Extracts X X X X ..... charges to the fund within fifteen days of the close of each month. But the assessee had delayed the payment. The assessee had pleaded that the delay was due to lock-out and strikes in the factory as well as restriction by the RBI on borrowing on security of cotton and resultant paucity of liquid funds to pay the amounts on the due dates. The assessee also pleaded that the assessee had paid the contribution in time in certain months and, therefore, there was no deliberate default. The Regional Provident Fund Commissioner, however, felt that the grounds advanced were not sufficient to waive the damages imposable under section 14B but, since the assessee was very regular in payment and had promptly transferred past accumulations, a lenient view should be taken and restricted the damages to 6 1/4 per cent of the amount due. It was as a result of this order that the assessee had to pay a sum of Rs. 4,33,093 in respect of employees' provident fund account No. 1 and Rs. 9,838 in respect of employees' provident fund account No. 2. The assessee claimed that these payments were expenditure laid out for the purpose of the business and deductible in computing the total income. Both the ITO as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure to pay any tax is not an offence. It has been recognised that failure to pay the tax even for a long time per se does not prove fraudulent conduct. It is only fraudulent evasion which creates a right to the Government to impose a penalty. It is in this context that section 14B enacts that any default in complying with the provisions of a scheme shall be an offence punishable with imprisonment or fine. Section 14B further enacts that where an employer makes default in the payment of any contribution to the fund, the appropriate Government may recover from the employer such damages not exceeding 25 per cent of the amount of arrears as it may think fit to impose. Section 8 of the Employees' Provident Funds Act provides that contributions payable to the fund and the damages recovered under section 14B may be recovered by the appropriate Government in the same manner as an arrear of land revenue. We have to consider whether these provisions in effect impose penalty for violation of law. A close reading of these provisions and in the light of the principles enunciated by the Supreme Court, leads us to the inference that section 14B does not impose any penalty. Firstly, the section it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that in case of the employer being adjudicated insolvent, the contribution payable to the fund as well as the damages recoverable under section 14B shall have priority over other debts, thus, indicating that the amount due under section 14B is treated only as a debt due by the employer. Since even the contribution is only a debt, the delay in discharging the debt cannot be considered to be an offence or contravention of law unless specifically made so by the statute. Therefore, the damages payable for the delay in discharging the debt can only be regarded as compensation for the use of the funds due to the provident fund and is nothing more than interest which may be commercially payable for the use of borrowed funds or funds of others especially when there is a separate section creating an offence providing the penalty therefor. In our opinion, therefore, the damages payable under section 14B cannot be regarded as a penalty for any contravention of the law. 5. The revenue relied upon the decision in the case of Saraya Sugar Mills (P.) Ltd. where it was held that damages payable under section 14B of the Employees' Provident Funds Act were of the same nature and character as int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we are only concerned with the interpretation of section and not the constitutionality of it. Therefore, the question is whether the two decisions of the Allahabad High Court and the Gujarat High Court could be considered to be safe precedents to follow. In view of the subsequent decision of the Supreme Court, which has overruled the decisions followed by the Gujarat High Court and has also undermined the reasons adopted by the Allahabad High Court, it cannot be said that those decisions are clearly binding. In the circumstances, on the principles adumbrated by the Supreme Court, we cannot but hold with due deference to the decisions of the High Courts that damages recoverable under section 14B amount only to compensatory interest for use of the funds due to the provident fund and is not in the nature of penalty for any contravention of law. 7. The second question that arises is, whether, even if it were a penalty, it is deductible or not. The leading case is that of the Supreme Court in the case of Haji Aziz Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350. It was held in that case that an infraction of law was not a normal incident of business carried on by the assessee and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of law, the postponement of such payment was really in the interest of the assessee's business, for the assessee in the absence of liquid funds could raise money only by liquidating its assets which would not obviously be commercially expedient. On the other hand, though the payment of the amount to the provident fund was delayed, the assessee had the use of the funds with which further income was earned and which is now being charged to tax. Naturally, the earning of such income being based on the funds utilised by postponing the payment to the provident fund, the damages paid for such use must of necessity be considered as an admissible deduction in computing that income. We also notice that in the case of Mahalakshmi Sugar Mills Co. the question whether the interest payable on delayed payment of cess could be considered as interest paid on borrowed capital was noted as not argued. On the facts of the present case, it appears that for that additional reason also, the damages paid under section 14B must be considered either as business loss or expenditure or as interest paid on borrowed capital and in either case admissible as a deduction. We notice that similar claim of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal to the business. The penalty was for breach of a rule which does not contemplate any mens rea or moral culpability so as to be regarded as personal to the person committing the default. It is a statutory impost which does not take into account any extenuating circumstances and is to enforce compliance of the rule regarding maintenance of a minimum balance of excise duty rather than a punishment for any deliberate default. When an employee of the assessee is entrusted with the work of complying with the regulations, any penalty imposed, invited by negligence or mistake of that employee, must of necessity be considered as incidental to the carrying on of the business because the negligence of the employee is incidental to the business and arises in the course thereof. The businessman has to take into account the loss that may be incurred due to negligence or mistake of his agents which may not be recoverable from the employee concerned. We are, therefore, of the considered opinion that as in the case of damages paid for delay in the payment of provident fund contributions, the penalty paid under rule 173(q) of the Central Excise Rules is also expenditure or loss occurring in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act depreciation was allowable only on the written down value and since the written down value has been defined in section 43(6) of the Act to mean only the actual cost less depreciation already allowed, there was no question of imagining any depreciation that was required to be allowed for the earlier years which could be allowed in the present assessment year. 11. On consideration of the rival submissions, we are of the opinion that the assessee may not be entitled to succeed on this point. We may first notice the relevant sections of the Act. Under section 32, in respect of machinery and plant owned by the assessee and used for the purpose of his business, a deduction shall be allowed in respect of depreciation at such percentage on the written down value thereof as may be prescribed. Section 43(6) defines 'written down value' in the case of assets acquired before the previous year as the actual cost to the assessee less the depreciation actually allowed to him. Reading these two sections together, it would mean that if the actual cost of a machine was Rs. 100 and depreciation of 20 per cent had been given for the preceding assessment year, the assessee would be entitle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be Rs. 22, at the rate of 20 per cent and the further depreciation for the present assessment year at the rate of 10 per cent on Rs. 88 (Rs. 110 minus Rs. 22) will be equal to Rs. 8.80. The total depreciation for both the assessment years would be Rs. 22 plus Rs. 8.80, i.e. Rs. 30.80 whereas according to the revenue, the total depreciation allowable would be Rs. 20 plus Rs. 9 (10 per cent of 90) i.e., Rs. 29 only. The assessee claims deductions of depreciation allowable for the earlier years on the revised cost and the depreciation actually allowed as a deduction. 12. We find that this contention is based on the presumption of construction of statutes that words in a statute are used precisely and a statute ought to be so construed that if can be prevented, no word shall be superfluous, void or insignificant. Section 43A states that it is the actual cost as defined in section 43(1) which should be revised due to exchange fluctuation. No doubt, section 32 grants depreciation on written down value which has been defined as the actual cost less depreciation actually allowed. Yet, the use of the words 'actual cost' in section 43A instead of the 'written down value' must have some si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into account the depreciation deductible in respect of the revised actual cost which is necessary if the useful life of the asset is not to be artificially extended. Section 43A itself came into picture only to allow the assessee to have the benefit of capitalisation of additional expenditure arising from fluctuation of rate of exchange which would not otherwise be allowable as revenue expenditure. Once such expenditure is capitalised, it is a mere corollary that the depreciation thereon is to be worked out by substituting the revised value for the actual cost. If the intention of the Parliament was to the same effect as the contention of the revenue, it would have been enough if only written down value is revised in the year in which the additional liability is incurred due to exchange fluctuation. It is also significant to note that section 43A(2) specifically provides that the revised figure of actual cost by reason of the additional liability shall not be taken into account for the purpose of deduction of development rebate under section 33 of the Act, i.e., even though the actual cost is revised from the inception, the natural corollary that the revised value should be the amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accept the claim that the resultant difference in the depreciation which ought to have been allowed for the earlier years and the depreciation actually allowed could be deducted only in the current assessment year merely because it had not been charged earlier and became a charge on the profits of the assessee only in the year in which the assessee incurred additional liability by reason of the exchange fluctuation in the absence of a statutory mechanism to give effect to it. As seen above, section 32 grants depreciation on the written down value of the asset. Section 43(6)(b) defines 'written down value' in the case of assets acquired before the previous year as the actual cost less depreciation actually allowed. As far as this assessment year is concerned, we can accept that the actual cost has to be revised because of exchange fluctuation as required by section 43A. But, the other component 'depreciation actually allowed' cannot be revised without rectifying the assessments of the earlier years nor is there anything specific in the Act to allow the difference between the depreciation allowable for the earlier years as a consequence of the revision of actual cost and the depreci ..... X X X X Extracts X X X X X X X X Extracts X X X X
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