Om Prakash, J. - (1.) At the instance of the Commissioner of Income-tax, Kanpur, the Income-tax Appellate Tribunal, Allahabad Bench, referred to us the following three questions under Section 256(2) of the Income-tax Act, 1961 (briefly " the Act, 1961"), for our opinion : "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the payment of Rs. 31,572 by way of damages for late payment of provident fund deductions was made by the assessee in the course of its business and was deductible in computing the assessee's total income ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the payment of Rs. 32,259 being interest under Section 5(3) of the Sugarcane Cess Act was deductible in computing the assessee's total income ? (3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the payment of Rs. 86,263 being interest on purchase tax was deductible in computing the assessee's total income ?"
(2.) First, we take up question No. (1). The assessee claimed deduction of Rs. 31,572 representing damages for the late payment of provident fund deductions under Section 14B of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (briefly "the Act, 1952"), which in so far as relevant says that 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 Sub-section (2) of Section 15 or Sub-section (5) of Section 17, the Central Provident Fund Commissioner or such other officer, as may be authorised by the Central Government, may recover from the employer such damages not exceeding the amount of arrears, as it may think fit to impose. The Income-tax Officer was of the view that damages paid under Section 14B were penal in nature and, therefore, were not incidental to the business. He, therefore, disallowed the assessee's claim. The assessee appealed to the Appellate Assistant Commissioner, but failed. Then, the assessee filed an appeal before the Appellate Tribunal which reversed the order of the Appellate Assistant Commissioner on this point. The Appellate Tribunal held: "The payment of damages cannot be equated with the payment of penalty. The former is related to the business of the assessee whereas the latter arose due to the contravention of the Provident Fund Rules."
(3.) The question for consideration is whether damages paid under Section 14B of the Act, 1952, are in the nature of penalty or an allowable deduction being an expenditure incidental to the business. What is the true nature and character of "damages" paid by an employer who makes default in the payment of any contribution to the fund or in the transfer of accumulations required to be transferred by him under Section 14B? This question came up for consideration before the Supreme Court in Organo Chemical Industries v. Union of India, AIR 1979 SC 1803. The question as formulated by the Supreme Court for consideration in paragraph 2 on page 1804 was : "Whether Section 14B of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952, is unconstitutional and, if not, what is the semantic-juristic sweep of the expression 'damages' used therein?" Before this question was decided by the Supreme Court in Organo Chemical's case, AIR 1979 SC 1803, there was a conflict of opinion between different High Courts as to the meaning of the word "damages" in Section 14B of the Act. According to some of the High Courts, the word "damages" in Section 14B meant actual loss to the beneficiaries. The view is that Section 14B clearly indicates that an employer is liable to pay damages if he has made default in the payment of contributions. Any delay in paying the amount under Section 6 of the Act, 1952, causes loss to the beneficiaries of the Provident Fund Scheme, such as loss of interest and the like. This is the loss that is sought to be recovered from the defaulting employer for the purpose of indemnifying the beneficiaries of the Scheme, namely, the employees, to the extent of the loss suffered by them. The defaulter under Section 14B is, therefore, liable to pay damages which represent the loss but not anything more, as such recovery would amount to penalty and that is not permitted under the section. It is, therefore, held by these High Courts that the damages to be imposed under Section 14B should have correlation to the loss suffered and that damages under section 14B are intended to compensate the loss to the beneficiaries of the Scheme. This approach of some of the High Courts was not approved by the Supreme Court. But, at the same time, some other High Courts took the contrary view that damages paid under Section 14B are penal in nature. In para 46, on page 1816, the Supreme Court, disapproving the view that "damages" paid under Section 14B are simply to recompense the beneficiaries of the Scheme from the loss they suffered, remarked (p. 1816, para 46) : "The traditional view of damages as meaning actual loss, does not take into account the social content of a provision like Section 14B contained in a socio-economic measure like the Act in question. The word 'damages' has different shades of meaning. It must take its colour and content from its context, and it cannot be read in isolation, nor can Section 14B be read out of context. The very object of the legislation would be frustrated if the word 'damages' appearing in Section 14B of the Act was not construed to mean penal damages. The imposition of damages under Section 14B serves a two-fold purpose. It results in damnification and also serves as a deterrent. The predominant object is to penalise, so that an employer may be thwarted or deterred from making any further defaults.";