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TMI Blog1997 (1) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... s an admissible deduction in computing the income from the business of the assessee ?" The assessee is a public limited company. It paid a sum of Rs. 16,061 as damages under section 14B of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (hereinafter referred to as "the Act"). The assessee claimed that this sum of Rs. 16,061 paid as damages should be allowed as business expenditure, on the ground that it was paid out for the purpose of business and the amount paid under section 14B of the Act did not amount to penalty or fine. The Income-tax Officer disallowed the claim on the ground that the amount paid represented the penalty paid for not complying with the statutory provisions of the Act and hence, the expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt to which it represents penal nature, it is not allowable as business expenditure. He also submitted that the view of the Tribunal that the obligation of the assessee has arisen because of the carrying on of business is not correct, and the obligation to pay the amount under section 14B of the Act arose because of the default in payment of the contribution and not in carrying on of the business of the assessee. He strongly placed reliance on the decision of the Supreme Court in Organo Chemical Industries v. Union of India [1979] 55 FJR 283 ; AIR 1979 SC 1803, and submitted that the nature of the payment made under section 14B of the Act was considered by the Supreme Court, and the Supreme Court held that it is to be both penal as well as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e entire amount paid would be business expenditure and he submitted that in so far as it relates to the portion, which is compensatory in nature, that can be allowed as business expenditure. We have carefully considered the submissions of learned senior standing counsel for the Department as well as learned counsel for the assessee. The nature of the payment made under section 14B of the Act was considered by the Supreme Court in Organo Chemical Industries v. Union of India [1979] 55 FJR 283 ; AIR 1979 SC 1803, wherein after considering the scheme of the Act, the Supreme Court held that the imposition of damages under section 14B of the Act serves both the purposes, and that it is meant to penalise defaulting employers as also to provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is penal in nature, it is not allowable as business expenditure, but only that portion which is compensatory in nature, is allowable as business expenditure. The Andhra Pradesh High Court in CIT v. Hyderabad Allwyn Metal Works Ltd. [1988] 172 ITR 113 considered this precise question whether the damages paid under section 14B of the Act was allowable as business expenditure or not and held that the amount paid under section 14B of the Act comprises the elements of penal levy as well as compensatory payment, and only that portion of the amount paid as damages under section 14B of the Act, which is compensatory in nature, is allowable deduction under the Income-tax Act. The above decision of the Andhra Pradesh High Court was quoted by the Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and held that only that portion of the amount paid as damages under section 14B of the Act which represents compensation paid is allowable as business expenditure, and the other portion which is penal in nature cannot be allowed. In this view of the matter, we are unable to agree with the Tribunal that the entire amount is allowable as business expenditure. Therefore, we direct the Tribunal to determine after giving opportunity to the assessee, the portion of the amount paid under section 14B of the Act as compensatory in nature and allow the same. The other portion which is of penal nature is not allowable as expenditure. We are also not in agreement with the view of the Tribunal that the liability has arisen in the course of carrying on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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