IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL No. 338 of 2010 For Approval and Signature:
HONOURABLE MR.JUSTICE V. M. SAHAI HONOURABLE MR.JUSTICE N.V. ANJARIA ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of the judgment ?
Whether this case involves a substantial question 4 of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ?
5 Whether it is to be circulated to the civil judge ?
========================================================= COMMISSIONER OF INCOME TAX - III - Appellant(s) Versus PRABHUDAS KISHORDAS TOBACCO PRODUCTS PVT LTD. - Opponent(s) ========================================================= Appearance :
MS PAURAMI B SHETH for Appellant(s) : 1, MRS SWATI SOPARKAR for Opponent(s) : 1, =========================================================
CORAM : HONOURABLE MR.JUSTICE V. M. SAHAI
and HONOURABLE MR.JUSTICE N.V. ANJARIA Date : 09/08/2012 ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE N.V. ANJARIA) The present appeal preferred by the Revenue is directed against the order dated 18.09.2009 of the Income Tax Appellate Tribunal, Ahmedabad Bench `C', in Income Tax Appeal No.1492 of 2009.
1.1 While admitting the appeal, this court formulated following substantial question of law for consideration and determination:
“Whether the Appellate Tribunal is right in law and on facts in allowing the appeal of the assessee against the order u/s..263 of the Act passed by the CIT-III, Ahmedabad on 16/03/2009 holding that 50% of the amount of Rs.24,40,539/- was on account of penalty levied by the Regional P.F. Commissioner on account of delay in deposit of P.F. amount which is not an allowable expenditure u/s.37 of the Act?”
2. We heard learned advocate Ms. Paurami Sheth for the appellant and learned senior counsel Mr. S.N. Soparkar, assisted by Ms. Swati Soparkar for the respondent.
3. The assessee company was engaged in manufacture of tobacco products. For assessment year 1993-94, the Assessing Officer completed the assessment under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as `the Act' for sake of brevity) determining total income at Rs.22,56,62,246/-. After completion, the Deputy Commissioner of Income Tax proposed action under section 263 of the Act upon noticing that the Assessing Officer had not made full inquiries in respect of certain issues. The issues related to (i) the penalty of Rs.24.40 lakhs, (ii) the subsidy received, (iii) the deduction claimed under section 80 IA and (iv) in respect of certain quantitative details. The issue in the present appeal is whether it was proper and permissible for the assessee to treat the amount of Rs.24,40,539/- charged by the Regional Provident Fund Commissioner under section 14B of the Employees Provident Fund Act, 1952 (hereinafter `the Provident Fund Act') as allowable under section 37 of the Act.
3.1 A notice under section 263 of the Act came to be issued on 29.12.2008 calling upon the assessee to give explanation inter alia in respect of treatment of Rs.24.40 lakhs given by in his accounts, which was the amount held leviable under section 14B of the Provident Fund Act, by the Regional Provident Fund Commissioner for late payment of employer's contribution by the assessee. The assessee had claimed the said amount as an allowable expenditure under section 37 of the Act.
3.2 The Commissioner of Income Tax in his order passed under section 263 of the Act held that the amount levied by the Provident Fund Authority was also a penalty. According to him, only because the words `damages and interest' were used, it did not cease to be penal in nature. He by his order dated 16.03.2009 directed the Assessing Officer to disallow 50% of the said amount on the reasoning that the bifurcation of the portion representing compensation and the one representing penalty was not made. The assessee's appeal before the Income Tax Appellate Tribunal against the aforesaid order came to be allowed for that ground. The Tribunal observed that the damages payable under section 14B of the Provident Fund Act, were separate from penalty imposable and it was also distinct from fine imposable upon prosecution under the said Act.
4. The Tribunal in its reasoning inter alia compared the provision of section 14B of the Provident Fund Act with section 3(3) of the Uttar Pradesh Sugarcane Purchase Tax Act, 1961, which was subject matter of decision of the Tribunal in another case. The Tribunal observed as under, “We find that the Tribunal in the case of H.P. Agro Industries Corporation Ltd. vs. Deputy Commissioner Of Income Tax ITAT, CHANDIGARH THIRD MEMBER BENCH R.M. Mehta, Vice President; R. K. Bali, A.M. & U.B.S. Bedi, J. M. Misc. Petn. No. 10/Chd/1997 in ITA No. 153/Chd/1991; Asst. yr. 198081 17th March, 1999 (1999) 64 TTJ (Chd)(TM) 850 : 69 ITD 89 (TM) has held that " 7. Coming back to the aforesaid decision once again i. e. Saraya Sugar Mills (P.) Ltd. ' s case (1979)116 ITR 387 (All)(FB), their Lordships initially dealt with the question of interest under s. 3(3) of the U.P Sugarcane Purchase Tax Act, 1961 and held that it was not an allowable deduction and applied this decision to the question of damages paid under s. 14B of the Employees 'Provident Fund Act as follows : "In respect of the third question, s. 14B of the Employees ' Provident Funds Act provides :
Where an employer makes default in the payment of any contribution to the Fund or in the transfer of accumulations required to be transferred by him under subs. (2) of s. 15 or in the payment of any charges payable under any other provision of this Act or of any scheme or under any of the conditions specified under s. 17, the appropriate Government may recover from the employer such damages, not exceeding twentyfive per cent of the amount of arrears, as it may think fit to impose. ' The Act goes on to make provision for ITA No.1492/Ahd/2009 imposition of penalty for continued delay as well as for prosecution resulting in fine and/ or imprisonment. Sec. 14B calls the imposition ' damages ' . It stands on the same footing as interest under the Sugarcane Purchase Tax Act qua penalty. Under s. 14B the appropriate Government is entitled to recover damages. The Provident Fund Commissioner demanded payment of damages on behalf of the Government. The damages as well as penalty are civil sanctions, as opposed to prosecution resulting in fine or imprisonment, which is a criminal sanction."
5. Section 14B of the Provident Fund Act provides for damages and says that where an employer defaults in payment of any contribution of the fund or other amounts payable under the provisions of the Act, the appropriate Government may recover from the employer such damages, not exceeding twenty-five per cent of the amount of arrears, as it may think fit to impose, after giving opportunity of being heard to the employer. The damages under this section are recovered with a primary object of compensating an employee for delayed payment of contribution by the employer. When the employer pays his contribution belatedly, employees would be deprived of enjoying the amount and earning interest thereon. The purpose is that the employees for whose benefit the fund is created should not suffer because of delay in making payment by the employer. Thus, the quantum of damage is essentially compensatory rather than penal in nature.
5.1 Above position is fortified by the by the other provisions of the Provident Fund Act. Section 14 of the Act is a separate provision for penalty. There are also penal provisions where the employer would be liable to be prosecuted for his act of avoidance of any payment required to be made under the Act. In certain cases, the default of payment is liable to be treated also as a cognizable offence. Therefore, having regard to the scheme of the provisions of the Act, when damages are ordered under section 14B in exclusion of other penal provisions, the payment thereunder is compensatory. Merely because a deterrent element is involved in the award of damages, that by itself does not make a penalty imposed. The bifurcation made by the CIT(A) treating 50% of the amount as penalty was without any concrete basis and was not founded on specific details. When the amount levied under section 14B of the Provident Fund Act is primarily and predominantly compensating in nature, treating it partly as penalty on the guess work and presumption would not be a correct approach in law. And in any case, the facts of present appeal did not indicate that there were repetitive or recurring defaults of delayed payment prior to the instant one.
5.2 The assessee claimed deduction of the aforesaid mount paid by the orders of provident fund authority under section 37 of the Income Tax Act. Section 37 which is a residuary section which provides that any expenditure laid out and expended wholly and exclusively for the purposes of business and profession shall be allowed in computing the income. The explanation to section 37 says that expenditure incurred for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business and profession and no deduction or allowance shall be made. Having regard to the nature of amount directed to be paid by the provident fund authority to be levied from the assessee, which was a compensation awarded for late payment of employer's contribution to the provident fund. Such expenditure, which was not a penalty imposed and incurring of which was not as a result of any offence by the assessee, would be deemed to have been incurred for the purpose of business, and was legitimately claimable as deduction under section 37 from business income. It had the characteristic of `spending' or `paying away' in business.
6. For the foregoing reasons and discussion, no error was committed by the Tribunal in allowing the appeal of the assessee against the order under section 263 of the Act. The question of law formulated is answered in affirmative and against the Revenue.
7. The appeal stands dismissed.
(V.M. SAHAI, J.) (N.V. ANJARIA, J.) (SN DEVU PPS)