Supreme Court of India
PRAKASH COTION MILLS PVT. LTD.versusCOMMISSIONER OF INCOME TAX (CENTRAL) BOMBAY
- Citation
- 1993 INSC 140
- Decided
- 6 April 1993
- Disposal
- Case Partly allowed
- Bench
- B P JEEVAN REDDY
Holding
A statutory impost is deductible under section 37(1) only to the extent it is compensatory; if it is composite, the assessing authority must bifurcate the amount and allow deduction only for the compensatory portion, while the question of entertainment expense deduction is a factual matter for the fact‑finding authority.
Issues considered
- Whether interest paid for delayed payment of sales tax under the Bombay Sales Tax Act and damages paid for delayed contribution under the Employees' State Insurance Act are allowable deductions under section 37(1) of the Income‑Tax Act.
- Whether the entire amount claimed as entertainment expenses is deductible under section 37(2) of the Income‑Tax Act.
- Whether a statutory impost that is composite (partly compensatory, partly penal) must be bifurcated for tax deduction purposes.
- Whether the determination of the proportion of entertainment expenses that are business‑related is a question of law or fact.
Legislation cited
- Bombay Sales Tax Act, 1951s. 36(3), s. 36(5)
- Employees' Provident Funds and Miscellaneous Provisions Act, 1952s. 14B
- Employees' State Insurance Act, 1947
- Income Tax Act, 1961s. 256(1), s. 256(2), s. 37(1), s. 37(2)
- U.P. Sugarcane Cess Act, 1956s. 3(3), s. 3(5), s. 4
Subjects
Income Tax deductionSection 37InterestDamagesPenaltyCompensatoryEntertainment expensesBifurcation of composite impostFact‑finding authoritySupreme Court of India
Judgment
PRAKASH COTION MILLS PVT. LTD. A
COMMISSipNER OF INCOME TAX (CENTRAL) BOMBAY
APRIL 6, 1993
"' B
[B.P. JEEVEN REDDY AND N. VENKATACHALA, JJ.]
- 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. c
~
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
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. G
"!'· 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. ~
Therefore, whenever any statutory impost paid by assessee by way of
B 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
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
could be regarded as compensatory (reparatory) as would entitle the
-1'
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
of the levy as interest, damages or penalty is not conclusive.. ~-
E (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
-
Chemical Industries v. Union of India, A.l.R. 1979 S.C. 1803.
F '(
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
delayed contribution under Employees State Insurance Act, as the I.T.O.
G and the appellate authority had refused the allowance without any ex-
amination of the schemes of the provisions of the Bombay Sales Tax Act -~
and the Provident Fund Act. (991-D]
This Court further held that the question as to what .portion of
H expenses claimed, is deductible entertainment expenditure, has to be
PRAKASH COITON MILLS v. C.I:i'. [VENKATACHALA, J.) 985
decided by tbe fact finding authorities, while assessing the relevant A
materials placed before them. No question of law arises, particularly when
the. fact finding authorities had recorded concurrent findings on con-
sideration of relevant material. Hence the question was decided against
the assessee • appellanL [992-8)
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1279 B
- (NT)/1977.
From the Judgment and Order dated 17.6.1976 of the Bombay High·
Court in I.T. Application No.63 of 1976.
1- Mrs. A.K. Verma, Mrs. S.V. Pathak (For J.B. Dadachanji & Co.) for C
the Appellant.
P.S. Pot~ Ms. A Subhashini (NP) and R. Satish for the Respondent.
The Judgment of the Court was delivered by
D
VENKATACHALA, J. Two questions are raised for our decision in this
appeal. First, whether the appellant was entitled to claim as allowance under
Section37(1) of the Income-taxAct, 1961 (the l.T. Act) the interest paid by it
for delayed payment of sales tax under the Bombay Sales Tax Act, 1951 (the
BST Act) and the damages paid by it for delayed payment of contribution E
-- under Employees' State Insurance Act, 1947 (the ES! Act.) Second, whether
the appellant was entitled to claim as allowance under Section 37(2) of the
I. T. Act the entire expenses incurred by it as entertainment expenses.
The appellant is a company carrying on the business in the manufac-
y ture of textile goods. It is the assessee. In the income-tax return of the F
assessee for the Assessment Year 1966-67 (the previous accoiinting year
being from 1st July, 1%4 to 30th June, 1965), the interest and the damages
of Rs.19,635 paid by if for delayed payment of sales tax under the BST Act
and for delayed payment of contribution under the ESI Act, was claimed
as revenue expenditure, allowable under Section 37(1) of the I.T. Act. So G
also the sum of Rs.3,865 paid by it for entertainment expenses was claimed
as revenue expenditure, allowable under Section 37(2) of the I.T. Act. The
I.T.O., in his assessment order made on that return, treated the said item
of expenditure of Rs.19,635 as· penal interest and disallowed it; As lo the
item of expenditure of Rs.3,865, he disallowed Rs.2,500 treating it as
el<clusive expenditure incurred on its Directors. Appeals preferred before H
. ·~
.
986 SUPREME COURT REPORTS [1993) 2 S.C.R.
A the A.A.C. and the Income-taic Appellate Tribunal (Tribunal) questioning
the disallowance nf claims of the appellant by the I.T.O., did not succeed.
Application made by the assessee under Section 256(1) of the I.T. Act
before the Tribunal to raise the questions covering the said matters and
get them referred for decision by the High Court, also did not meet with
B success. Again, the application made thereafter by the assessee under
Section 256(2) of the I.T. Act before the Bombay High Court to obtain a
reference on the questions relating to the said matters for its decision, was
rejected. Hence, the assessee has filed this appeal by special leave, ques-·
tioning the aforesaid orders made by the authorities and the High Court.
Reference sought to be obtained from the Tribunal for decision by the
-
C High Court, was on the following questfons:-
1. Whether the sum of Rs.19,635 debited in the interest
account paid by way of interest for delayed payment of
sales taic and Employees' State Insurance contribution
could be said to have not been incurred, wholly and
D exclµsively for the purpose of business?
2. Whether on the facts and in the circumstances of the
case, the sum of Rs.19,635 claimed by the assessee was an
.allowable expenditure under the Income-taic Act, 1961?
E
3. Whether on the facts and in the circumstances, the
Tribunal was justified in holding that the disallowance of
Rs.2,500 out of expenditure incurred by the assessee at
Diners Club and C.C.I. could be disallowed even though
the said expenditure was less than the expenditure allow-
-
F able under Section 37(2) of the I.T. Act?
4. Whether there was any evidence or material before the
Tribunal to hold that the expenditure to the extent of
Rs.2,500 at Diners Club and C.C.I. was not laid wholly
and exclusively for the purposes of business of the asses-
G see-company?
Questions 1 & 2 are .covered by First Question indicated at the
outset. So also, questions 3 & 4 are covered ·by Second Question indicated
at the outset. Indeed, after hearing counsel for the parties we were inclined
H to think that the said questions ought to be remitted to the High Court for
PRAKASH COITON MILLS v. C.!.T. lVENKATACHALA, J.] 987
its opinion under Section 256 of the LT. Act. In the normal course, we A
would have done so and left the questions to be answered by the High
Court. But, regard being given to the fact that the questions relate to a 2'1
year old case of the Assessment Year 1966-67 and the fact that they could
be considered by us on the facts found in the order of the Tribunal, we
consider it most appropriate to deal with the quelition5 ourselves and B
answer them. Such course is resorted to by us not merely because of the
said peculiar facts and circumstances of this case, but also because of our
- inclination to remit the First Question with our answer thereon for a final
decision by the Tribunal.
First Question: c
Section 37{1) of the LT. Act corresponds to Section 10{2){XV) of
Predecessor Indian Income-Tax Act of 1922 {the LT. Act of 1922), is
undisp~ted. ·
D
In Maha/akshmi Sugar Mills Co. v. Commissioner of Income-tax,
Delh~ {1980) 123 !TR 429, this Court had to decide the question whether
the interest paid by the appellant-assessee therein under Section 3(3) of
the U.P. Sugarcane Cess Act, 1956 for delayed payment of cess payable
thereunder was an allowable expenditure under Section 10{2){XV) of the
LT. Act of 1922. ·For deciding that question, this Court examined the E
provisions of Sugarcane Cess Act, 1956 which providedfor taking of several
- kinds of action against a person who defaulted in payment of the cess
impo,ed under that Act. Section 4 was found to make the defaulter liable
to imprisonment or fine or both. Section 3{5) was found to make the
defaulter liable for payment of penalty, an amount which far exceeded the F
y amount of cess. Then, Section 3(3) was found to make the defaulter liable
for payment of interest at 6 per cent per annum from the date of default
till the date of payment. Oil an analytical examination of the said
provisions, this Court took the view that interest paid under Section 3(3)
by the defaulter for delayed payment of the cess could not be described as
-,.,
--- ""' .
a penalty imposed upon him for infringement of the law but ought to be G
regarded as an amount of compensation paid by him to the Government
for delayed payment of the cess levied against him under the Act. In that
view of the matter, this Court held that the interest paid by the appellant-
assessee on delayed payment of cess was an allowable expenditure under
Section 10(2)(XV) of the l.T. Act of 1922. H
A
988 SUPREME COURT REPORTS [1993) 2 S.C.R.
In Commissioner of Income .Tax v. Hytkrabad All"'Yn Metal WO/kr
I..imited, (1988) 172 ITR 113, a Division Bench of the Andhra Pradesh High
.,
,
Court had to i!ecide two questions; (i) whether the damages paid by the
respondent:assessee under Section 14B of the Employees' Provident Funds
and Miscellaneous Provisions Act, 1952, was an allowable deduction under
Section 37(1) of I.T. Act and (ii) whether the interest paid under the BST
B Act, for delayed paymen\ of sales tax thereunder, was an allowable deduc-
tion under Section 37(1) of the I.T. Act. For deciding question (i), the
Division Bench, referred to the view of A.P. Sen, J. of this Court found in
c
a passage of his concurring judgment in 0'8ano Chemical Industries v.
Union of India, AIR 1979 SC 1803, on the expression 'damages' occurring
in Section 14B of Central Act of 1952, which read thus:-
- '
"The expression 'damages' occurring in section 14B is, in
substance, a penalty imposed on the employer for the
breach of the statutory obligation. The object of imposi·
D tion of penalty under s. 14B is not merely 'to provide
compensation for the employees'. We are clearly of the
opinion that the imposition of damages under s.148 serves
both the purposes. It is meant to penalise defaulting
employers as also to provide reparation for the amount of
loss suffered by the employees. It is not only a warning to
E employers in general not to commit ·a breach of ·the ·
st<1tutory requirements of section 6, but at the same time
it is meant to provide compensation or redress to the
F
beneficiaries, i.e., to recompense the employees for the
loss. sustained by them. There is nothing in the section to
show that the damages must bear relationship to the loss
-
which is caused to the beneficiaries under the Scheme.
The word 'damages' in section 148 is related to the word
'default'. The words used in section 14B are 'default in
the payment of contribution' and, therefore, the word
'default' must be construed in the light of para.38 of the
G Scheme which provides that the payment of contribution
has got to be made by the 15th of the following month
and, therefore, the word 'default' in section 148 must -\
mean 'failure in performance' or 'failure to act'. At the
same time, the imposition of damages under section 14B
H is to provide reparation for the amount of loss suffered
PRAKASH COTION MILLS v. C.I.T. [VENKATACHALA, J.] 989
by the employees." A
The Division Bench, having regard to the said view of the expression
'damages' occurring in section 14B of Provident Fund Act, found that such
damages paid by the concerned assessee-respondent could not have been
)('
treated by the Tribunal as purely compensatory. While recording such
fmding, the real distinction that exists between an impost which is compen- B
satory and an impost which is a penalty, is pointed out, thus:-
- 'The question whether any such impost is in essence
compensatory or is by way of penalty will have to be
decided having regard to the relevent provisions of the c
law under which it is imposed and the circumstances
under which it has been imposed. The mere nomenclature
as )nterest, penalty or damages in the Act may not be
conclusive for the purpose of allowing it as a deduction
under the Income-taJC Act. Similarly, the circumstance that D
a fixed rate of interest has to be paid also may not be
conclusive. Section 14B of the Act provides for levy of
damages for delayed payment as a percentage of the
amount due up to a prescribed maJCimum. Such a deter-
mination is to be done by the appropriate authority after
giving an opportunity to the employer. Thus, the levy will E
be by a speaking order of the authority fixing quantum of
- damages. As held by the Supreme Court, the said amount
comprises both an element of penal levy as well as com-
pensatory payment. It will be for the authority under the
Income-taJC Act to decide with reference to the provisions F
of the Employees' Provident Funds Act and the reasons
given in the order imposing and quantifying the damages
to determine what proportion should be treated as penal
and what proportion as compensatory. The entire sum can
neither be considered as mere penalty nor as mere inter-
est." G
1'-- Then, dealing with question (ii) relating to interest paid by the
concerned respondent-assessee under the BST Act which the Tribunal had
treated as an allowable deduction under Section 37(1) of the I.T. Act, the
Divi<ion Bench considered the relevant provisions of the BST Act bearing H
··"'\
990 SUPREME COURT REPORTS (1993] 2 S.C.R. _,
<\_ on the question and held, thus:-
'From a reading of the aforesaid provision and in the
background of the various sections mentioned above, it
cannot be said that the levy under section 36(3), though
called a penalty, is merely compensatory or in the shape
B of interest for d~layed payment or penal in character. The
Act does not provide for automatic payment of interest
c
due to delay in payment. The levy under sub-section (3)
of section 36 is to be made after giving notice to the dealer
and after recording reasons for it where the tax has not
been paid within the time contemplated for payment by
-
the Act. The Commissioner has also the power to remit
.the whole or any part of the interest calculated in the
manner mentioned in it which can be only on relevant
grounds. Sub-section (5) of Section 36, which is extracted
above, indicates that after the levy of this amount under
D
sub-section (3), immunity is granted from prosecution on
the same facts. These indicate that the imposition, though 1
called a penalty, is a composite one comprising both a
penalty and a compensation for delayed payment. The
Tribunal, therefore, was not right in treating the entire
E payment as merely interest for delayed payment. As al-
ready indicated while discussing question No.(1), the
F
nomenclature of the levy as interest, damages or penalty
may not be conclusive."
The decision of this Court, in Mahalakslimi Sugar Mills Company
-
(supra) and the decision of the Division Bench of the Andhra Pradesh
High Court in Hyderabad A//wyn Metal Works Ltd. (supra) with the views
of which we are in comple_te agreement, are, in our opinion,- decisions
which settle the law on the question as to when an amount paid by an
assessee as interest or damages or penalty could.regarded as compensatory
G (rcparatory) in character as would entitle such assessee to claim it as an
allowable expenditure under Section 37(1) of the l.T ..Act. Therefore,
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 LT. Act, the assessing authority is required to examine the
H Scheme of the provisions of the relevant statute providing for payment of
PRAKASH COTION MILLS v. C.l.T. [VENKATACHALA, J.] 991
such impost notwithstanding the nomenclature of the impost as given by A
the statute, to find whether it is compensatory or penal, in nature. The
authority has to allow deduction under Section 37(1) of the LT. Act,
wbereever such examination reveals the concerned impost to be purely
compensatory in nature. Whereever such impost is found to be of a
composite nature, that is, partly of compensatory nature and partly of penal B
nature, the authorities are obligated to bifurcate the two components of
the impost and give deduction to that componel)t which is compensatory
in nature and refuse to give deduction to that component which is penal
- in nature.
The facts of the case under our consideration disclose that the I.T.O. · C
and the Appellate authorities have refused to allow the claims made by the
assessee under Section 37(1) of'the LT. Act, without any examination of
the Scheme of the provisions of the BST Act, to find whether impost of
the interest paid by the assessee for delayed payment of sales tax was
compensatory in nature as would entitle it for deduction under Section D
37(1) of the LT. Act. The same is the position· as regards the impost of
damages paid by the assessee under the Provident Fund Act for delayed
payment of contribution thereunder. Hence, we consider it necessary to
remit the question to the concerned Tribunal for deciding the assessee's
claims for deduction of interest and damages under Section 37(1) of the
LT- Act. First Question is"answered ·accordingly. E
Second Question:
Miscellaneous expenses claimed by the assessee as <jeductible expen-
diture allowable under Section 37(2) of the LT. Act related to a sum of F
y Rs.3,865 incurred by the Directors of the assessee-company for entertain-
ment at the Diners Club and C.C.L The I.T.O. regarded a sum of Rs.1,365
out of the said sum of Rs.3,865 as permissible deduction under Section
37(2) of the LT. Act, while he regarded the remaining sum of Rs.2,500 as
impermissible deduction under Section 37(2) of the I.T. Act taking the view
that the same was attributable to personal expenses of the Directors of the G
assessee-company. The A.AC. in dealing with the said claim for deduction
in the appeal of the assessec filed before him, held the entire expenses
claimed as deductible expenditure under Section 37(2) of the LT. Act
could not be regarded as having been laid out or expended wholly and
exclusively for the purpose of th~ business of the assessee. He, therefore, H
992 SUPREME COURT REPORTS (1993) 2 S.C.R.
A refused to interfere with the order of the l.T.O. made in that regard. The
Tribunal, which considered the matter in the appeal of the assessee before
it, affirmed the view of the A.A.C. in the matter. As to what portion of the
miscellaneous expenses claimed, is a deductible entertairunent expenses of
the assessee being a matter to be decided by the fact finding authorities
B while assessing the relevant materials placed before them, no question of
law could arise in that regard, particularly, when the fact finding authorities
have recorded \heir concurrent finding on considl:ration of the relevant
material. Hence, the question under consideration is devoid of merit and
C
is answered against the assessee.
In the result, we allow that appeal partly and remit the,case relating
-
to appellant-assessee's claim for deduction under Section 37(1) of the
Income-tax Act 1.J961 to Income-tax Appellate Tribunal, Bombay 'for being,
decided in the light of crur answer to the First Question and decide. the
appeaL of the assessee, accordingly. No costs.
l.S.G. Appeal allowed partW
-
•
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