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TMI Blog1993 (4) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... e damages of Rs. 19,635 paid by it for delayed payment of sales tax under the Bombay Sales Tax Act and for delayed payment of contribution under the Employees' State Insurance Act, was claimed as revenue expenditure allowable under section 37(1) of the Income-tax Act. So also the sum of Rs. 3,865 paid by it for entertainment expenses was claimed as revenue expenditure, allowable under section 37(2) of the Income-tax Act. The Income-tax Officer, in his assessment order made on that return, treated the said item of expenditure of Rs. 19,635 as penal interest and disallowed it. As to the item of expenditure of Rs. 3,865, he disallowed Rs. 2,500 treating it as exclusively expenditure incurred on its directors. Appeals preferred before the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal ( " the Tribunal " ) questioning the disallowance of claims of the appellant by the Income-tax Officer did not succeed. Application made by the assessee under section 256(1) of the Income-tax Act before the Tribunal to raise the questions covering the said matters and get them referred for decision by the High Court, also did not meet with success. Again, the application made there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with our answer thereon for a final decision by the Tribunal. First question: That section 37(1) of the Income-tax Act corresponds to section 10(2)(xv) of the predecessor Indian Income-tax Act of 1922 is undisputed. In Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429, this court had to decide the question whether the interest paid by the appellant-assessee therein under section 3(3) of the U. P. Sugarcane Cess Act, 1956, for delayed payment of cess payable thereunder was an allowable expenditure under section 10(2)(xv) of the Indian Income-tax Act of 1922. For deciding that question, this court examined the provisions of the Sugarcane Cess Act, 1956, which provided for taking of several kinds of action against person who defaulted in payment of the cess imposed under that Act. Section 4 was found to make the defaulter liable to imprisonment or fine or both. Section 3(5) was found to make the defaulter liable for payment of penalty, an amount which far exceeded the amount of cess. Then, section 3(3) was found to make the defaulter liable for payment of interest at 6 per cent. per annum from the date of default till the date of payment. On an analytical examination of the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n section 14B is related to the word 'default'. The words used in section 14B are 'default in the payment of contribution' and, therefore, the word 'default' must be construed in the light of para. 38 of the Scheme which provides that the payment of contribution has got to be made by the 15th of the following month and, therefore, the word 'default' in section 14B must mean 'failure in performance' or 'failure to act'. At the same time, the imposition of damages under section 14B is to provide reparation for the amount of loss suffered by the employees. The Division Bench, having regard to the said view of the expression" damages " occurring in section 14B of the Provident Funds Act, found that such damages paid by the concerned assessee-respondent could not have been treated by the Tribunal as purely compensatory. While recording such finding, the real distinction that exists between an impost which is compensatory and an impost which is a penalty, is pointed out, thus : "The question whether any such impost is in essence compensatory or is by way of penalty will have to be decided having regard to the relevant provisions of the law under which it is imposed and the circumstance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icate that the imposition, though called a penalty, is a composite one comprising both a penalty and a compensation for delayed payment. The Tribunal, therefore, was not right in treating the entire payment as merely interest for delayed payment. As already indicated while discussing question No. (1), the nomenclature of the levy as interest, damages or penalty may not be conclusive." The decision of this court in Mahalakshmi Sugar Mills Co. [1980] 123 ITR 429 and the decision of the Division Bench of the Andhra Pradesh High Court in Hyderabad Allwyn Metal Works Ltd. [1988] 172 ITR 113 with the views of which we are in complete agreement, are, in our opinion, decisions which settle the law on the question as to when an amount paid by an assessee as interest or damages or penalty could be regarded as compensatory (reparatory) in character as would entitle such assessee to claim it as an allowable expenditure under section 37(1) of the Income-tax Act. Therefore, whenever any statutory impost paid by an assessee by way of damages or penalty or interest is claimed as an allowable expenditure under section 37(1) of the Income-tax Act, the assessing authority is required to examine the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see filed before him, held that the entire expenses claimed as deductible expenditure under section 37(2) of the Income-tax Act could not be regarded as having been laid out or expended wholly and exclusively for the purpose of the business of the assessee. He, therefore, refused to interfere with the order of the Income-tax Officer made in that regard. The Tribunal, which considered the matter in the appeal of the assessee before it, affirmed the view of the Appellate Assistant Commissioner in the matter. As to what portion of the miscellaneous expenses claimed is a deductible entertainment expenses of the assessee being a matter to be decided by the fact-finding authorities while assessing the relevant materials placed before them, no question of law could arise in that regard, particularly, when the fact-finding authorities have recorded their concurrent finding on consideration of the relevant material. Hence, the question under consideration is devoid of merit and is answered against the assessee. In the result, we allow this appeal partly and remit the case relating to the appellant-assessee's claim for deduction under section 37(1) of the Income-tax Act, 1961, to the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X
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