1. These are two appeals by the assessee-company in respect of the assessment years 1978-79 and 1979-80. We find it convenient to dispose of both the appeals together since a common point is involved.
2. The assessee is a public limited company. It would appear that there was some delay in the payment of the dues from the company to the Provident Fund Commissioner. On account of this delay, the assessee had to pay an amount which was treated as interest. In respect of the contributions for the period from July to October 1977, the interest payable amounted to Rs. 21,109. This was claimed as a deduction in computing the income for the assessment year 1978-79. In respect of the period from July 1977 to April 1978, the assessee had to pay a sum of Rs. 53,950 by way of interest. This was claimed as a deduction in computing the income for the assessment year 1979-80.
3. We may mention that the assessee-company had a discussion with the Regional Provident Fund Commissioner with reference to the dues from the assessee. By their letter, dated 21-2-1978, the Provident Fund Commissioner directed the assessee to furnish bank guarantee for the amount in arrears to be transferred to the board of trustees for the period from July 1977 to October 1977. It was also directed that the company would pay 'penal interest' on all the delayed payments at the rate of 15 per cent per annum.
4. The accounting year followed by the company is the calendar year.
The ITO has rejected the claim for the deduction. On appeal, the Commissioner (Appeals) found that the assessee had delayed the payments. The interest levied on such delayed payments was at the discretion of the Provident Fund Commissioner. Following the decision of the Allahabad High Court in Saraya Sugar Mills (P.) Ltd. v. CIT  116 ITR 387, he held that such payments could not be allowed as a deduction.
5. The assessee is on further appeal before us. Shri Bhakta, the learned counsel for the assessee, submitted that the payment was not penal in nature. It was merely a compensation by way of interest for the delayed payment. He submitted that the interest was levied under Section 14B of the Employees' Provident Funds and Family Pension Fund Act, 1952 ('the Provident Fund Act'). Although, the expression 'damages' is used in that section, in substance, what is paid is not damages at all but merely interest to compensate for the delayed payments. He referred to a circular issued by the Central Board of Trustees of the Employees' Provident Fund dated 3-11-1982 which made it clear, according to Shri Bhakta, that the payments are only interest in nature. He then submitted that the ratio laid down by the Supreme Court in the case of Mahalakshmi Sugar Mills Co. v. CIT  123 ITR 429 would be applicable to the facts of the case. So long as the payment is not by way of penalty for any breach or infringement of law, it was only part and parcel of the dues. He then submitted that the decision of the Allahabad High Court relied on by the Commissioner (Appeals) is impliedly overruled by the Supreme Court because the Allahabad High Court had relied on one of its earlier decisions which was expressly reversed by the Supreme Court. With regard to the point that there is no special provision for levy of penalty in the Provident Fund Act, he submitted that the test is not whether there is a separate provision for penalty. The test is what is the nature of the levy. Only if it is found to be penal in nature the payment could be disallowed.
6. Having considered the submissions of the assessee, we are of the opinion that they will have to be rejected. The principles to be considered are now settled by the Supreme Court decision in Mahalakshmi Sugar Mills Co.'s case (supra). What we have to consider is whether -the payment made has penal character. Section 6 of the Provident Fund Act imposes a statutory duty on the employer to make contributions to the provident fund. Section 14 imposes a penalty on the employer who makes default in complying with the provisions of Section 6. The punishment prescribed is imprisonment for a term which may extend to 6 months. There is also further provision in Section 14AA for enhancement of punishments. The offence of failure to pay contribution is, thus, made cognizable. Section 14B makes a provision for recovery of what is termed as 'damages' from the employer who makes default in the payment of contribution to the provident fund. The amount of damages payable for this default is to be determined by the Provident Fund Commissioner. This could be equal to the amount of arrears itself.
There is also a provision that before levying the damages, reasonable opportunity of being heard shall be given to the employer.
7. Considering all these provisions, the damages payable under Section 14B do not appear to us to be merely interest on the arrears. In the first place, the term 'interest' is not used. Secondly, if it has been of the nature of interest, it would be a percentage of the arrears.
But, what is prescribed in the section is an amount to be determined at the discretion of the Provident Fund Commissioner. It could even be equivalent to the arrears itself. Further, the amount of damages is not payable automatically. It is only when an order to that effect is passed by the Provident Fund Commissioner that damages become payable.
We have already noted that there is a provision for giving an opportunity of being heard. This also indicates that the liability is not automatic. Considering all these aspects, we must hold that the levy is in the nature of a breach of statutory duty. Under these circumstances, it is penal in nature.
8 Shri Bhakta had submitted that the absence of any other provision in the Provident Fund Act for levy of penalty was not material. In our opinion, it is relevant. It. would show that Section 14B itself is a provision for such a levy. We do not accept the further submission of Shri Bhakta that the Allahabad High Court decision in respect of the provident fund payments stands impliedly overruled. We find that the Supreme Court has actually left the question open. While we accept this submission that the test is not whether there is a separate provision for penalty and further that the test is what is the nature of the levy, we find on our analysis that the nature of the levy is penal.
Under these circumstances, we will uphold the order of the Commissioner (Appeals) and dismiss the assessee-company's appeals.