The nature of a levy, whether penal or compensatory, must be determined by considering the relevant provisions of the law under which it is imposed and the circumstances under which it has been imposed.

UPENDRALAL WAGHRAY, J.

( 1 ) THIS is a reference at the instance of the Revenue under section 256 (1) of the Income-tax Act, 1961, in which the following two questions are referred for the opinion of this court :" (1) Whether, on the facts and in the circumstances of the case, the interest paid under section 14b of the Employees Provident Funds Act, 1952, is an allowable deduction under the Income-tax Act, 1961 ? (2) Whether, on the facts and in the circumstances of the case, interest paid on account of delayed payment of sales tax is an allowable deduction under the Income-tax Act, 1961 ?"

( 2 ) THE assessee is a public limited company and the relevant assessment year is 1973-74. Question No. (1) refers to the interest paid under section 14b of the Employees Provident Funds and Miscellaneous Provisions Act, 1952 (hereinafter called "the Act"), but what is payable under that provision is damages. It is useful to extract section 14b of the Act :"14b. Power to recover damages.- Where an employer makes default in the payment of any contribution to the Fund, the Family Fund or the Insurance 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 or in the payment of any charges payable under any other provision of this Act or of any Scheme or Insurance Scheme or under any of the conditions specified under section 17, the Central Provident Fund Commissioner or such other officer as may be authorised by the Central Government, by notification in the Official Gazette, in this behalf may recover from the employer such damages, not exceeding the amount of arrears, as it may think fit to impose : Provided that before levying and recovering such damages, the employer shall be given a reasonable opportunity of being heard. "

( 3 ) THE question is, therefore, reframed to read as "damages" in the place of "interest".

( 4 ) THE Income-tax Officer had disallowed the claim of the assessee for deduction of the amount paid by it as damages under section 14b of the Act, as it stood then. According to the assessee, it collected a sum of Rs. 9,31,000 from the employees towards their contributions to the Employees Provident Fund, but delayed the remittance to the authority under the Act. For this default, a sum of Rs. 22,964 was imposed as damages by the authority under the Act. The assessee claimed the amount paid as damages as a business expenditure on the ground that the delay in the remittance was because the amount was used in its business activity which, otherwise, would have had to be borrowed on interest.

( 5 ) THE Income-tax Officer has disallowed the deduction on the ground that the levy was penal in nature. The first appellate authority confirmed the order of the Income-tax Officer. On further appeal, the Tribunal has held that the levy was compensatory and akin to interest for delayed payment and allowed the deduction. It applied the ratio of the Supreme Court decision in Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429 and held that the earlier decision of the Allahabad High Court in Saraya Sugar Mills (P) Ltd. v. CIT [1979] 116 ITR 387 (All) [fb], relied upon by the first appellate authority, was no longer good law in view of the said Supreme Court decision.

( 6 ) COUNSEL for the Revenue has reiterated the stand taken before the Tribunal and has relied upon the decision in Saraya Sugar Mills (P) Ltd. v. CIT [1979] 116 ITR 387 (All) [fb] and the decisions of some other High Courts holding that the levy of damages under the provisions of this Act was penal in nature. Counsel for the assessee has supported the order of the Tribunal and placed reliance on the same decision of the Supreme Court as well as on subsequent decisions of the Allahabad High Court in Triveni Engineering Works Ltd. v. CIT [1983] 144 ITR 732 (All) [fb] and of the Kerala High Court in RPF Commissioner v. Bharat Plywood and Timber Products [1980] Lab IC 446.

( 7 ) THE Supreme Cou

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