1. This appeal arises out of Income Tax Reference No. 543 of 1977 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 1, 3 and 4 are concerned, the High Court has mentioned that the learned counsel for the assessee had conceded, that Questions 1 and 3 were covered by the decision of the Full Bench of the said High Court in Saraya Sugar Mills (P) Ltd. v. CIT AIR 1978 All 405, (1979) 116 ITR 387 and that Question 4 was covered by the decision of the Full Bench in CIT v. Geeta Ram Kali Ram (1980) 121 ITR 708, 1980 Tax LR 40 (All) decided on 23-8-1979.
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 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 1 and 3 Shri Mahajan, placing reliance on the decision of this Court in Prakash Cotton Mills (P) Ltd. v. CIT (Central) (1993) 3 SCC 452, 1993 AIR SCW 2412, has submitted that the said questions may be remitted for consideration to the High Court in view of the said judgment.
3. Questions 1 and 3 were as under:
“(1) 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 and Miscellaneous Provisions Act, 1952?
(3) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the penalty of Rs 7667 levied on the assessee under the Central Sales Tax Act,1956 could not be allowed as a deduction while computing the income of the assessee?”
Question 1 was referred at the instance of the Revenue while Question 3 was referred at the instance of the assessee.
4. In Prakash Cotton Mills (P) Ltd. (1993) 3 SCC 452, 1993 AIR SCW 2412 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, 1948 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 impost concerned 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.
5. In Prakash Cotton Mills case (1993) 3 SCC 452, 1993 AIR SCW 2412 this Court has approved the judgment of the Andhra Pradesh High Court in CIT v. Hyderabad Allwyn Metal Works Ltd. (1988) 172 ITR 113, 1988 Tax LR 1486 (AP), 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 and Miscellaneous Provisions 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 not as mere interest.
6. In view of the said decision in Prakash Cotton Mills (P) Ltd. (1993) 3 SCC 452, 1993 AIR SCW 2412 Question 1 requires to be examined in accordance with the principles laid down by the Andhra Pradesh High Court in CIT v. Hyderabad Allwyn Metal Works Ltd. (1988) 172 ITR 113, 1988 Tax LR 1486 (AP) which have been approved by this Court. Since the question has not been examined in this light, it becomes necessary to remit the said question to the High Court for consideration.
7. As regards Question 3 we find from the judgment of the Tribunal that the penalty that was imposed was not on account of any delayed payment of Central sales tax but was for contravention of the provisions of the Central Sales Tax Act. There is nothing on the record to show that the amount of penalty had a compensatory element in it. In the circumstances, we do not find any infirmity in the answer given by the High Court to Question 3.
8. The appeal is, therefore, partly allowed to the extent that the matter is remitted to the High Court to consider Question 1 referred by the Tribunal in accordance with the principles laid down by this Court in Prakash Cotton Mills (P) Ltd. (1993) 3 SCC 452, 1993 AIR SCW 2412 and if for the purpose of such consideration the High Court considers it necessary it may ask the Tribunal to submit a supplementary statement of case. The appeal is disposed of accordingly with no costs.