- (1.) This appeal arises out of the Income Tax Reference No. 543/77 where the four questions that were referred to the Allahabad High Court by the Income Tax Appellate Tribunal (hereinafter referred to as 'the Tribunal') have been answered by the High Court against the assessee and in favour of the Revenue. Insofar as questions Nos. 1, 3 and 4 are concerned, the High Court has mentioned that the learned counsel for the assessee had conceded, that questions Nos. 1 and 3 were covered by the decision of the Full Bench of the said High Court in Saraya Sugar Mills (P) Ltd. v. Commr. of Income-tax, 116 ITR 387: and that question No. 4 was covered by the decision of the Full Bench in the Commr. of Income Tax v. Ram Gita Kali Ram, 121 ITR 708 decided on August 23, 1979.
(2.) We have heard Shri Mahajan, the learned counsel appearing for the appellant/assessee in support of the appeal and Shri G. C. Sharma, the learned senior counsel appearing for the revenue. Insofar as questions Nos. 2 and 4 are concerned Shri Mahajan has not been able to show any infirmity in the impugned judgment of the High Court. As regards questions Nos. 1 and 3 Shri Mahajan, placing reliance on the decision of this Court in M/s. Prakash Cotton Mills Pvt. Ltd. v. Commr. of Income Tax (Central), Bombay, (1993) 3 SCC 452 , has submitted that the said questions may be remitted for consideration to the High Court in view of the said judgment. Questions Nos. 1 and 3 were as under: "(i) Whether on the facts and in the circumstances of the case, the Tribunal was justified in allowing deduction of the liability of Rs. 34,131/- incurred by the assessee for the payment of damages under Section 14(B) of the Employees Provident Funds Act, 1952 (iii) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the penalty of Rs. 7,667/- levied on the assessee under the Central Sales Tax Act could not be allowed as a deduction while computing the income of the assessee - Question No. 1 was referred at the instance of the revenue while question No. 3 was referred at the instance of the assessee.
(3.) In M/s. Prakash Cotton Mills Pvt. Ltd. (supra) this Court has considered the question whether the interest paid for delayed payment of sales tax under the Bombay Sales Tax Act, 1959 and damages paid for delayed payment of contribution under the Employees' State Insurances Act were permissible deduction under Section 37(1) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'). This Court has held that 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 Act, the assessing authority is required to examine the scheme of the provisions of the relevant statute providing for payment of such impost notwithstanding the nomenclature of the impost as given by the statute, to find whether it is compensatory or penal, in nature. The authority has to allow deduction under Section 37(1) of the Act, wherever such examination reveals the concerned impost to be purely, compensatory in nature. Wherever such impost is found to be of a composite nature, i.e., partly of compensatory nature and partly of penal nature, the authorities are obligated to bifurcate the two components of the impost and give deduction to that component which is (sic) penal in nature. In that case this Court has approved the judgment of the Andhra Pradesh High Court in Commr. of Income Tax v. Hyderabad Allwyn Metal Works Ltd., 172 ITR 113 where the Court was dealing with the deduction of the amount paid by way of damages under Section 14(B) of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952. It was held that the said amount comprises both the element of penal levy as well as compensatory payment and that it will be for the authority under the Act to decide with reference to the provisions of the Employees' Provident Funds Act, 1952 and the reasons given in the order quantifying the damages to determine what proportion should be treated as penal and what proportion as compensatory and that the entire sum can neither be considered as mere penalty nor as mere interest.;