LexPRAKASH COTION MILLS PVT. LTD. versus COMMISSIONER OF INCOME TAX (CENTRAL) BOMBAY
Open in Lexace · Ask the AI about this caseJudgment (excerpt)
PRAKASH COTION MILLS PVT. LTD.
A
COMMISSipNER OF INCOME TAX (CENTRAL) BOMBAY
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APRIL 6, 1993
[B.P. JEEVEN REDDY AND N. VENKATACHALA, JJ.]
B
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Income Tax Act, 1961-A.Y. 1966-67-Allowance under section 37(1)
of interest paid by asscssee for delayed paymellt of Sales Tax under Bombay
Sales Tax Act and damages paid for delayed payment of contribution under
Employees State Insurance Aci, 1947.
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Allowance under section 37 ( 2) ofentenainmellt expenditure.
The appellant paid Rs.19635 in the accounting year for A.Y. 1966-67,
on account of interest, under Bombay Sales Tax Act, 1951, for delay in
payment of sales tax, and for damages for delayed payment of contribu- D
lion under Employees State Insurance Act, 1947. The assessee-appellant
in the return of income, claimed the amount as allowance under section
37(1) of I.T. AcL The appellant, also claimed the entire entertainment
.... expenses, amounting to Rs.3865 as allowance under section 37(2) of the
l.T. Act. The Income-tax Officer treated the payment of Rs.19635 as penal E
interest and disallowed it as allowance under section 37(1) of l.T. AcL Out
of the entertainment, expenses, amounting to Rs.3865 incurred by the
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Directors of the assessee company, for entertainment at the Diners club
and C.C.I, the l.T.O. regarded Rs.1365 only as permissible deduction
under section 37(2) of l.T. Act, taking the view that the remaining sum of
Rs.2500 was attributable to personal expenses of the Directors of the F
'r assessee company and therefore impermissible deduction under section
37(2) of the l.T. Act. The Assessee ·appellant did not succeed in appeals
before the A.A.C. and in the Income Tax Tribunal. Applications under
section 256 (1) of the l.T. Act before the Tribunal and under section 256
(2) in Bombay High Court were rejected.
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The assessee filed appeal by special leave in Supreme Court. This
Court allowed the appeal partly and,
HELD: That the authority concerned has to allow deduction under
section 37(1) of the l.T. Act, wherever the concerned impost is purely H
983
984
SUPREME COURT REPORTS
{1993] 2 S.C.R. ·-1
A compensatory in nature. Wherever such impost is found to be of a com-
posite nature, that is partly compensatory and partly penal, the
authorities are obligated to bifurcate the two components of the impost
and given deduction to the component, which is compensatory in nature
and refuse the deduction for the component which is penal in nature.
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B Therefore, whenever any statutory impost paid by assessee by way of
damages or penalty or interest is claimed, 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
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of the impost as given by the statute to find, whether it is compensatory
or penal in nature. This Court agreed with_ the view taken in earlier
c decisions by this Court and by the Andhra Pradesh High Court, which
settle the law as to when any amount paid as interest damages or penalty -1'
could be regarded as compensatory (reparatory) as would entitle the
assessee to claim· allowance under section 37 (1) of I.T. Act. This Court
concluded that the question whether the impost is in essence compen-
D satory or is by way of penalty, has to be decided having regard to the
relevant provisions of the law under which it is imposed, the reasons given
in the order imposing and quantifying the damages or penalty. The im- ·
position though called a penalty may be composite in nature comprising
penalty as well as compensation for delayed payment. The nomenclature
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of the levy as interest, damages or penalty is not conclusive ..
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(991-B, 990-H, 991-A)
Mahalakshmi Sugar Mills Co. v. Commissioner of Income Tax Delhi, -
(1980] 123 l.T.R. 429 S.C.; Commissioner of Income Tax v. Hyderabad
Allwyn Metal Works Ltd., (1988) 172 ITR 113 (H.C.A.P.) and Organo
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Chemical Industries v. Union of India, A.l.R. 1979 S.C. 1803.
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This Court, remitted the matter of the Tribunal concerned, so far as
it related to deduction under section 37(1) of I.T. Act, regarding impost of
interest for delayed payment of sales tax and impost of damages for
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delayed contribution under Employees State Insurance Act, as the I.T.O.
and the appellate authority had refused the allowance without any ex-
amination of the schemes of the provisions of the Bombay Sales Tax Act
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and the Provident Fund Act. (9Excerpt shown. Read the full judgment & AI analysis in Lexace.