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Second Income-tax Officer Vs. Bisleri (i) (P.) Ltd. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1985)12ITD116(Mum.)
AppellantSecond Income-tax Officer
RespondentBisleri (i) (P.) Ltd.
Excerpt:
1. the only ground in this appeal by the department relating to the assessment of the assessee, a company, for the assessment year 1980-81 is: on the facts and in the circumstances of the case and in law, the learned commissioner (appeals) erred in holding that the sales tax penalty of rs. 62,284 constituted an admissible deduction in the computation of the assessee's total income.the amount, in dispute, comprises of rs. 58,400, being penalty imposed and paid under section 36(2)(c) of the bombay sales tax act, 1959, and rs. 3,884 being also penalty imposed and paid under section 36(3). the commissioner (appeals) has, following certain orders of the tribunal mentioned by him in his order, held that the entire amount of penalty, i.e., rs. 62,284, is allowable as deduction.2. at the time of.....
Judgment:
1. The only ground in this appeal by the department relating to the assessment of the assessee, a company, for the assessment year 1980-81 is: On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in holding that the sales tax penalty of Rs. 62,284 constituted an admissible deduction in the computation of the assessee's total income.

The amount, in dispute, comprises of Rs. 58,400, being penalty imposed and paid under Section 36(2)(c) of the Bombay Sales Tax Act, 1959, and Rs. 3,884 being also penalty imposed and paid under Section 36(3). The Commissioner (Appeals) has, following certain orders of the Tribunal mentioned by him in his order, held that the entire amount of penalty, i.e., Rs. 62,284, is allowable as deduction.

2. At the time of hearing, the Bench was confronted with conflicting views taken by different Benches of the Tribunal on the subject.

Reference was made to the President for constituting a Special Bench for resolving the dispute so far as the Tribunal is concerned. The proposal was accepted and, hence, the appeal has come up for hearing before the Special Bench. There are two interveners, namely, Champion Engg. Works (P). Ltd. and Nitin Traders. The issue involved in the case of Nitin Traders is, whether the penalty paid by the assessee under Section 36(3) is allowable as deduction, In the case of Champion Engg.

Works (P.) Ltd., the issue relates to the question of deduction as regards damages and interest paid to the Provident Fund Commissioner under the Employees' Provident Fund Act, 1952 ('the Provident Fund Act'), and interest paid under the Employees' State Insurance Act, 1948 ('the Insurance Act').

3. So far as the penalty under Section 36(2)(c) is concerned, Shri G.S.Jetly, the learned standing counsel for the department, stated that it is of the same nature as a penalty imposed under Section 271(1)(c) of the Income-tax Act, 1961. Reference, in this context, has been made to the case of Premier Automobiles Ltd. [1981] 48 STC 552, the relevant observations being at page 556. The provisions in both the Acts, i.e., the Income-tax Act and the Bombay Sales Tax Act are stated to be identical, including the deeming provisions. It is pointed out that penalty under Section 36(2)(c) cannot be imposed for a mere venial or technical breach of law in view of the decisions of the Supreme Court in the cases of CIT v. Anwar Ali [1970] 76 ITR 696 and Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26. Inviting then our attention to Section 63(1)(c) of the Bombay Sales Tax Act and Rules 22, 29 and 71 of the Bombay Sales Tax Rules, 1959, it is urged that what is imposed under Section 36(3) also is not a penalty in name only. It is penalty in nature as well. In support of his contention that the penalty under Section 36(3) of the Sales tax Act is levied/imposed for breach or infraction of law, Shri Jetly submitted that: (i) it is misnomer to describe the penalty imposed under Section 36(3) as interest or even as penal interest as the words 'interest or penal interest' have not been used in Section 36(3) ; (ii) imposition of the penalty both under Section 36(2)(c) and 36(3) is not automatic. Opportunity to show cause has got to be given and on sufficient cause being shown for the default/lapse, penalty in either case cannot be imposed ; (iii) separate and specific orders have to be passed, which are appealable ; (iv) in case of penalty under Section 36(3), powers vest in the authorities to remit the whole or a part of the penalty in appropriate cases ; (vi) the decision of the Supreme Court in the case of Khemka & Co.

agencies (P.) Ltd. v. State of Maharashtra AIR 1975 SC 1549 at page 1556 is an authority for the proposition that even the non-payment of tax in time is an offence.

Similar view, it is stated, has been taken by a Full Bench of the Gujarat High Court in the case of Addl. CIT v. I.M. Patel & Co. [1977] 107 ITR 214, the relevant observations being at page 223.

4. The department has a much better case so far as the damages paid under Section 14B of the Provident Fund Act are concerned as under the Provident Fund Act, there are separate provisions for charging interest like the U.P. Sugarcane Cess Act, 1956 ('the Cess Act') which has been subject-matter of consideration by the Supreme Court in the case of Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429. Interest paid under the Insurance Act and the Provident Fund Act, according to Shri Jetly, stands on the same footing as penalty under Section 36(3) of the Bombay Sales Tax Act. He has invited our attention to Sections 405, 406 and 409 of the Indian Penal Code, 1860, to show that non-payment of contribution under the Provident Fund Act and/or Insurance Act is an offence. It is stated that for disallowance of damages as deduction, direct authority is found in the following decisions: 1. Saraya Sugar Mills (P.) Ltd. v. CIT [1979] 116 ITR 387 (All.) (FB), the relevant observations being at page 392: This decision has been overruled by a decision of the Full Bench of the Allahabad High Court in the case of Triveni Engg. Works Ltd. v. CIT [1983] 144 ITR 732 only with regard to the question of deduction for interest paid under Section 3(3) of the Cess Act ; 2. CIT v. L.H. Sugar Factories & Oil Mills (P.) Ltd. [1980] 123 ITR 596 (All.) ; and 3. Haji Aziz & Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350 (SC), where it was held that the penalty paid of infraction of law is not allowable as a deduction is, of course, strongly relied upon.

Lastly Shri Jetly invited our attention to a decision of the Gujarat High Court in the case of CIT v. Navsari Cotton & Silk Mills Ltd. [1982] 135 ITR 546 for the purpose of showing that their Lordships have indicated in that case a few positive and negative tests, which must be satisfied before an expenditure can be allowed as a deduction. It is stated that the penalty/damages paid as well as the interest paid under the Provident Fund Act or the Insurance Act do not satisfy these tests.

5. Shri Y.P. Trivedi, the learned counsel for the assessee, has taken us through the facts and relevant materials on record to show that the assessee had complied with the Sales Tax Act and the Rules and was not in default at all. Fairly admitting that the orders imposing the above penalties have become final, Shri Trivedi submitted that, that fact by itself should not deter us from looking into the exact nature of the penalties ourselves. He stated that if this Tribunal was to consider whether those penalties were imposable, it would have taken no time to vacate them. In this background it is claimed that the assessee had to suffer the above penalties in the normal course of its business and in the capacity of a trader. In support of the claim that the payment of penalty under Section 36(2)(c) of the Bombay Sales Tax Act is also allowable as deduction, reliance is placed on an order, dated 30-6-1982, of Bombay Bench 'E' (Single Member) of the Tribunal (copy made available on record). It is pointed out that the penalty imposed under Section 36(3) has been held to be in the nature of interest and not for contravention or infraction of law, as such, in the following orders of the Tribunal--Juhu Hotel (P.) Ltd. [IT Appeal Nos. 3634, 3635, 3637 and 3638 (Bom.) of 1977-78, dated 25-10-1980], ABC (P.) Ltd. [IT Appeal Nos. 2573 and 2574 (Bom.) of 1968-69], CK (P.) Ltd. [IT Appeal No. 1593 (Bom.) of 1981, dated 13-11-1981], Premji Haridas & Co.

[IT Appeal No. 651 (Bom.) of 1979, dated 25-1-1980], Anglo French Textiles Ltd. v. ITO [1984] 8 ITD 161 (Mad.) and Bharath Printers v.Second ITO [1984] 8 ITD 802 (Mad.).

Identical view, it is urged, has been taken by the Madhya Pradesh High Court in the case of Simplex Structural Works v. CIT [1983] 140 ITR 782, the relevant observations being at page 785. Indirect support is also drawn from the decision of the Delhi High Court in the case of CIT v. Lake Nath & Co. [1984] 147 ITR 624. According to Shri Trivedi, penalty is nothing but an additional tax, as held by the Supreme Court in the case of C.A. Abraham v. ITO [1961] 41 ITR 425 at page 430.

Further, in view of another decision of the Supreme Court in the case of CIT v. Piara Singh [1980] 124 ITR 40, holding that even illegal expenses of an illegal business are allowable as deductions, it is contended that the penalties paid represent allowable deductions. Great emphasis is laid on the fact that there are no separate provisions for charging of interest under the Sales Tax Act and that though named as penalty, what is charged under Section 36(3) is only interest. In this connection, Shri Trivedi has made a reference to Section 63 and Rules 29 and 71, respectively. Our attention, in particular, is invited to the comments at page 2710 of the learned commentators, Chaturvedi and Pithisaria, in third edn. of their treatise on Income-tax, where it is stated to have been held that the mere fact that the ITO has discretion to charge or not to charge interest under Section 139(8) of the Income-tax Act, it does not mean that what is charged is not interest.

Lastly, he has relied on a decision of the Gujarat High Court in the case of State of Gujarat v. Mukhi Stores [1969] 23 STC 334, where Hon'ble P.N. Bhagwati, CJ., as he then was, agreeing with Hon'ble Justice Divan, held that the delay in non-payment of sales tax is not a default in the technical sense.

6. Shri V.H. Patil, appearing for Nitin Traders, stated that sales tax is a charge on sales. The charge does not depend upon the dealer collecting the tax from the buyers. The fact that the sale is on credit and the sale price and/or the tax has not been recovered, has no bearing on the charge. In this context, he has relied on a decision of the Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd. v.CIT [1973] 87 ITR 542, where it was held that the amounts realised as sales tax represent the income of the assessee-auctioneer. Fairly admitting that the provisions of Section 36(3) are somewhat different from the corresponding provisions under the Gujarat Sales Tax Act, the Karnataka Sales Tax Act, 1957, and the Madras General Sales Tax Act inasmuch as unlike those Acts, it is necessary under the Bombay Sales Tax Act, for the department to give an opportunity to impose penalty only if sufficient cause for the delay in making the payment of sales tax is not shown and to pass a specific order, Shri Patil contends that this distinction in the provisions is not material, particularly, in view of the Karnataka High Court's decision in the case of 5.

Govindaraju v. CIT [1982] 138 ITR 495, where it is held that an opportunity is to be given before charging interest under Section 139(8)(a) and under Section 217(1A) of the Income-tax Act, even though there is no provision for it. The Supreme Court in the case of Mahalakshmi Sugar Mills Co. (supra), it is urged, was not called upon to consider whether penalty paid under Section 3(5) of the Cess Act was allowable as deduction. The Court was considering the question of allowance of interest paid under Section 3(3). It is in that context that certain elements in the provisions were highlighted to show that what was charged under Section 3(3) was interest not only in name but in nature also. It cannot, therefore, be held that the Supreme Court has laid down any proposition to the effect that if any of such elements are not found in a levy, the levy must not be allowed as deduction. The Madras High Court, it is stated, has held in the case of N.A. Mohd. Abdul Rahim v. Dy. Commercial Officer [1965] 16 STC 290 that looking at the amount of penalty for non-payment of sales tax, it could be said that the amount paid is for damages for the period for which the State is kept out of the money to which it is entitled to. Indirect support is drawn from a decision of the Madras High Court in the case of Addl. CIT v. Murugan Timber Depot [1978] 113 ITR 99, where it was held that no penalty can be imposed under Section 271 where no tax is payable by the assessee. The Calcutta High Court, in its decision in the case of Apeejay (P.) Ltd. v. CIT [1978] 114 ITR 544, is stated to have explained and applied the decision of the Supreme Court in the case of CIT v. S.C. Kothari [1971] 82 ITR 794 and yet allowed the deduction. Lastly, Shri Patil has taken us through two orders dated 7-9-1977 and 22-3-1984 of the Maharashtra Sales Tax Tribunal in cases of Sekseria Cotton Mills and Rajan Glass Industries, respectively (copies of the orders on record), to show that the Sales Tax Tribunal, which is like this Tribunal, a second appellate authority tinder the Bombay Sales Tax Act, considers penalty imposed under Section 36(3) as something like interest only.

7. Shri Missir, who appeared for Champion Engg. Works (P.) Ltd., submitted that his arguments with regard to the interest paid to the Provident Fund Commissioner and the interest paid under the Insurance Act are identical. According to him, the decision of the Supreme Court in the case of Haji Aziz & Abbul Shakoor Bros, (supra) has to be understood in the manner in which it has been understood by a number of High Courts, including the Bombay High Court in the case of CIT v.Pannalal Narottamdas & Co. [1968] 67 ITR 667. He has taken us through the orders of the Provident Fund Commissioner, whereby he reduced the damages to 20 per cent after satisfying himself that the assessee was helpless in making the payment of the provident fund contributions in time in view of a number of difficulties faced. When this is the position as regards the damages, Shri Missir contended that the interest charged and paid stands on a much better footing. There can be no question of disallowing any interest charged under the Provident Fund Act or the Insurance Act. In both the cases, the orders clearly show, according to Shri Missir, that interest and damages are in the nature of interest.

8. In reply, Shri Tuli, the senior departmental representative, submitted that whether sale price or sales tax is realised/recovered or not, is not material at all. The assessee is liable to pay sales tax in time under the statutory provisions. Non-payment in time is clearly a breach of the provisions of the law. The penalty under Section 36(3), according to him, has all the ingredients of penalty. The penalty imposed cannot be converted into interest merely because it is imposed with reference to the period of default. The position regarding the damages paid under Section 14B of the Provident Fund Act is stated to be rather worse as there are separate provisions for charging interest under that Act. The penalty under the Cess Act and the damages under the Provident Fund Act are levied by way of penalty for non-compliance with the statutory provisions. For the proposition that non-compliance with the legal provisions is breach of law and is against public policy, Shri Tuli has relied on a decision of the Andhra Pradesh High Court in the case of CIT v. Maddi Venkataratnam & Co. (P.) Ltd. [1983] 144 ITR 373.

9. Before proceeding to consider the provisions under which the penalty, interest and damages are paid in the cases before us, we consider it desirable to first refer to the decision of the Supreme Court in the case of Haji Aziz & Abdul Shakoor Bros, (supra). In the said case, the assessee had imported dates at a time when their import was prohibited. The goods were confiscated under Section 167(8) of the Sea Customs Act, 1878. Option was given to the assessee to take delivery of the goods by paying a sum by way of penalty in lieu of confiscation of the goods. The assessee paid the penalty and took delivery of the goods. The Supreme Court held that the penalty was paid on account of infringement or infraction of law and since infraction of law is not an incident of business, the penalty cannot be allowed as a deduction. The same question came up before the Bombay High Court in the case of Pannalal Narottamdas & Co. (supra). In this case, the assessee had purchased import documents in good faith. When the goods were actually imported, it was found that the goods imported were different from their description in the documents. Here again, the goods were confiscated under Section 167(8) of the Sea Customs Act and an option was given to the assessee to pay a particular amount by way of penalty in lieu of confiscation. This was done. The Bombay High Court distinguished the decision of the Supreme Court on the ground that the assessee was not at fault, having purchased the import documents in good faith. Their Lordships took particular care to observe: In cases where the penalty has to be incurred because of the fault of the assessee himself, as for instance, for the reason of his having carried on his business in an unlawful manner or in contravention of certain rules and regulations, the penalty paid by the assessee for such conduct thereof, could not be regarded as wholly laid out for the purpose of the business, because the incurring of the said expenses has not been necessitated by the business but by the conduct of the assessee in trying to carry out the business in an unlawful manner.

10. It is evident that penalty under Section 167(8) of the Sea Customs Act has been imposed both in the cases of Haji Aziz & Abdul Shakoor Bros. (supra) and Pannalal Narottamdas & Co. (supra). The Bombay High Court's decision is binding on this Bench of the Tribunal. It is not open to us even to make an attempt of our own to find the correct ratio of the Supreme Court's decision in Haji Aziz & Abdul Shakoor Bros.' case (supra). The Bombay High Court has categorically expressed about it. This decision of the Bombay High Court has not yet been disapproved by any other High Court and the Supreme Court has, to our knowledge, not adversely commented upon it. In the circumstances, we consider ourselves bound to proceed on the basis of the Bombay High Court's decision. No doubt, the fact that a levy is penalty for non-compliance of statutory provisions, whether amounting or not amounting to breach or infraction of law, is relevant for deciding the question of its allowability as deduction under the Income-tax Act. However, the real test is and would be whether the levy is visited on the assessee on account of its own fault or whether the levy had to be suffered in spite of its acting in good faith and in the normal course of business as trader.

11. The question before the Supreme Court in the case of Mahalakshmi Sugar Mills Co. (supra) related to interest paid under Section 3(3) of the Cess Act on arrears of cess payable. The levy was, of course, described as interest. However, it was chargeable only if the cess was not paid on the date prescribed under Section 3(2). It was held that it was interest and not penalty and a number of reasons were given therefor, such as (i) there was a separate provision for imposing penalty under Sub-section (5) of the same Section, (ii) it was automatic, and (iii) no opportunity need be given and no specific order need be passed, etc. It was held in the circumstances that the interest payable on the arrears of cess under Section 3(3) is, in reality, part and parcel of the liability to pay cess.

The question is, whether it can be inferred from this decision of the Supreme Court that it has been laid down as law that the penalty imposed for non-compliance with the statutory provisions, in whatsoever form or manner, cannot be allowed as deduction ; particularly if such an imposition is not automatic, the statute contains separate provisions for charging of interest and there is discretion in the authority empowered to impose penalty not to do so on sufficient cause for default/lapse being shown. If converse of a proposition laid down by the Supreme Court is also to be taken as a proposition of law, the department, we must say, has to succeed. However, we find when confronted with a somewhat similar situation in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1, the Supreme Court itself, referring to its earlier decision in the case of CIT v. Maheshwari Devi Jute Mills Ltd. [1965] 57 ITR 36 which the Calcutta High Court felt squarely covered the issue, reversed the High Court's decision observing that it is not a universally true proposition that what may be a capital receipt in the hands of the payee, must necessarily be capital expenditure in relation to the payer. The High Court was, thus, not justified in assuming the converse of the proposition laid down in Maheshwari Devi Jute Mills' Ltd.'s case (supra) as a proposition of law laid down by the Supreme Court. The Court, of course, further observed that the said case had proceeded on the basis that loom-hours were a capital asset.

In view of the above discussion, we are inclined to accept the submissions made by S/Shri Trivedi and Patil that it is not desirable to spell out from the Supreme Court's decision in Mahalakshmi Sugar Mills Co.'s case (supra), a converse proposition, viz., that penalty under Section 3(5) or for that matter penalty imposed under any other provision is not to be allowed as deduction ; particularly, in cases where it is not automatic, an opportunity is to be given before imposing it and it may not be imposed if sufficient cause is shown for the default or lapse.

12. That our understanding of the above three decisions is correct, is evident also from the fact that all High Courts, which had occasion to consider the question of allowance as deduction regarding (i) damages for non-fulfilment of business contracts, (ii) the amount paid for non-fulfilment of export/import obligations, and (iii) compensation paid for deviation from the original sanction of the plan for a building and accepting the revised plan of construction, etc., have held such payments to be allowable as deduction. The important and latest cases in this regard are South India Viscose Ltd. v. CIT [1982] . 135 ITR 206 (Mad.), CIT v. Reliable Water Supply Service of India (P.) Ltd. [1980] 124 ITR 199 '(All.), CIT v. Vasantha Mills Ltd. [1979] 120 ITR 321 (Mad.), CIT v. Surya Prabha Mills (P.) Ltd. [1980] 123 ITR 654 (Mad.), CIT v. Maneklal Harilal Spg. & Mfg. Co. Ltd. [1983] 141 ITR 129 (Guj.), CIT v. J.K. Cotton Spg. & Wvg. Mill Co. [1980] 123 ITR 911 (AIL), CIT v. Rajkumar Mills Ltd. [1982] 135 ITR 811 (MP.)and CIT v.Chemicals & Fibres of India Ltd. [1983] 142 ITR 413 (Bom.).

The decision of the Delhi High Court in the case of Loke Nath & Co.

(supra) is, to our mind, a solitary case, where the penalty of Rs. 4 lakhs was paid by the assessee as deposit fee for regularising construction of a building constructed in violation of the plan sanctioned originally.

13. In view of the legal position understood by us, as above, we have no difficulty in holding that the interest paid in the case of Champion Engg. Works (P.) Ltd., for non-payment of the provident fund contribution and the contributions under the Insurance Act are allowable as deductions. The issue regarding the deduction of the interest paid for non-payment of the contribution (supra) is squarely covered by the decision of the Supreme Court in the case of Mahalakshmi Sugar Mills Co. (supra). It will stand on the same footing as the contribution itself. There being no dispute that the provident fund contribution as well as the contribution under the Insurance Act are allowable as deductions in the hands of the assessee, we have no difficulty in holding that the interest thereon as well is to be allowed as a deduction.

Therefore, we refer to the other provisions, under which penalties under the Bombay Sales Tax Act, and the damages under the Provident Fund Act are paid by the assessee and in the case of interveners before us.

36. Imposition of penalty in certain cases and bar to prosecution,--** ** ** (2) If, while assessing or reassessing the amount of tax due from a dealer under any provisions of this Act or while passing any order in any appeal or revision proceedings, it appears to the Commissioner that such dealer-- (c) has concealed the particulars of any transaction or knowingly furnished inaccurate particulars of any transaction liable to tax, the Commissioner may, after giving the dealer an opportunity of being heard, by order in writing, impose upon the dealer by way of penalty, in addition to any tax assessed or reassessed or found due in the appeal or revision proceedings, as the case may be, a sum not exceeding one and one-half times the amount of the tax.

Explanation (1): Where a dealer furnishing returns has been assessed by the Commissioner under Sub-section (3) or (4) of Section 33, or assessed under Sub-section (3) of Section 41 or reassessed under Clause (b) of Subsection (1) of Section 35, or in whose case an order has been passed under Section 55 or Clause (a) of Sub-section (1) of Section 57, and the total amount of tax paid by the dealer for any year is found to be less than eight per cent of the amount of tax as so assessed or reassessed or found due in appeal or revision, then, for the purpose of Clause (c), he shall be deemed to have concealed the turnover, or knowingly furnished inaccurate turnover liable to tax, unless he proves to the satisfaction of the Commissioner that the payment of a lesser amount of tax was not due to gross or wilful neglect on his part.

(3) If a dealer does not, without reasonable cause, pay tax within the time he is required by or under the provisions of this Act to pay it, the Commissioner may, after giving the dealer an opportunity of being heard, by an order in writing, impose upon the dealer by way of penalty, in addition to the amount of tax, a sum equal to-- (a) one and one-half per cent of amount of tax for each month for the first three months, after the last date by which the dealer should have paid that tax, and (b) two per cent of the amount of tax for each month thereafter, during the time the dealer continues to make default in the payment of tax: Provided that, the Commissioner or any appellate or revisional authority, may remit the whole or any part of the penalty payable in respect of any period.

14B. Power to recover damages.--Where an employer makes default in the payment of any contribution to the Fund, the Family Pension 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 damage, the employer shall be given a reasonable opportunity of being heard.

Penalty imposed under Section 36(3) is to be considered in the background that the Bombay Sales Tax Act contains no other provision providing for charging of interest for non-payment of sales tax in time and the fact that the Maharashtra Sales Tax Tribunal, which is the second appellate authority like the Tribunal under the Income-tax Act under the Maharashtra Sales Tax Act, 1959, has itself held, as is evident from the copies of the two orders filed before us, that the penalty levied under Section 36(3) of the said Act is nothing but interest for depriving the Government of its legitimate dues.

The Karnataka High Court has in the case of CIT v. Mandya National Paper Mills Ltd. [1984] 150 1TR 26 held that the penalty payable under Section 13(2) of the Karnataka Sales Tax Act, 1957, for delay in payment of tax is a statutory liability and it is not for the infraction of any law.

The Gujarat High Court has taken similar view in the case of Mukhi Stores (supra). It has been held that the word 'default' in the context of the Bombay Sales Tax Act is applicable to the State of Gujarat, means just non-payment of tax on time and it does not necessarily involve the idea of deliberate or intentional non-payment.

The Madras High Court also held in the case of N.A. Mohd. Abdul Rahim (supra) that the proper way of looking at the amount imposed as penalty under Section 24(3) of the Madras General Sales Tax Act, is to treat the same as a liquidated sum for damages for the period for which the State is kept out of the money to which it is entitled.

14. It is true that the provisions of Section 36(3) are somewhat different from the corresponding provisions under the Gujarat, Madras and Karnataka Sales Tax Acts. Unlike the other Acts, the Bombay Sales Tax Act provides for (i) giving an opportunity before the penalty is levied, (ii) passing an order imposing such penalty, and (iii) not to pass an order imposing penalty if good and sufficient cause is shown for non-payment of sales tax in time. The other feature, namely, the power under which the authority empowered to impose penalty has power to remit the whole or a part of the penalty in appropriate cases, is common to all the Acts. The Karnataka High Court has recently in the case of S. Govindaraju (supra) held that even though there is no specific provision for giving an opportunity before charging interest under Sections 139(8)(a) and 217(1A) of the Income-tax Act, it is only reasonable that an opportunity should be given before charging interest under these sections. To our mind, these distinguishing features do not detract us from the fact that what is leviable is penalty for non-payment of tax within the time allowed by the statute. These distinguishing features pertain to procedure and are not material. For the sake of propriety, we are not referring to all the orders of the Tribunal relied upon on behalf of the assessee for the purpose.

However, the Madras Bench 'D' in the case of Anglo French Textiles Ltd. (supra) has discussed the question at length. It has been held that the penalty paid for non-payment of sales tax and damages paid for non-payment of provident fund contributions in time are allowable deductions.

Moreover, the Madhya Pradesh High Court in its recent decision in the case of Simplex Structural Works (supra) has held that if the amount of penalty is such an expenditure which the assessee would have been required to incur, even if he had not broken the law, such an expenditure cannot, in the true sense, be termed as penalty for an infraction of the law. The assessee, in that case, had obtained the benefit of a concessional rate of tax by declaring that the goods were purchased for a particular puspose. Eventually, the goods were utilised for other purposes. Penalty was imposed under Section 10(d), read with Section 10A, of the Central Sales Tax Act, 1956, for utilising the goods for a different purpose. This amounted to difference between the tax payable at the full rate and the tax payable at the concessional rate. The Court held that the real nature of the penalty was to recover the balance amount of sales tax which ought to have been paid by the assessee at the time of the purchase of the goods. It was further held that the penalty paid was not for any breach of law.

14A. On going through the orders of the Regional Provident Fund Commissioner reducing the damages to 20 per cent and in allowing the assessee to make the payment of provident fund contributions in twelve monthly instalments, we are satisfied that Champion Engg. Works (P.) Ltd. was really passing through financial stringency which was not of its own making and, therefore, its case regarding the damages paid under Section 14B will squarely fall within the ratio of the Bombay High Court's decision in the case of Pannalal Narottamdas & Co.

(supra). The facts placed before us with regard to the penalty paid under Section 36(3) also indicate that the assessee was helpless in not making the payment of sales tax in time. Therefore, it can be accepted that the assessee therein was not at fault in not making the payment of sales tax in time. Here again, the ratio of the Bombay High Court's decision in the case of Pannalal Narottamdas & Co. (supra) applies. As regards the penalty imposed under Section 36(2)(c) in the case of the assessee, penalty has, no doubt, been imposed because of the deeming provisions which place the burden on the assessee to prove that it did not conceal particulars of sales, etc. All the same, the penalty having been confirmed by the authorities empowered to administer sales tax law and the assessee having not been able to make out a case that it had to suffer the penalty for no fault of its own, we hold that this is a case of penalty where the assessee cannot be absolved from the fault. The case of penalty under Section 36(2)(c) falls within the ratio of the decision of the Supreme Court in the case of Haji Aziz & Abdul Shakoor Bros, (supra), as stated by the Bombay High Court itself.

15. Before concluding, we would like to observe that we were taken through a number of High Courts and Supreme Court decisions, where it was held that the penalty imposed under Section 36(3) of the Bombay Sales Tax Act and the damages paid under the Provident Fund Act are for offences or acting in violation of statutory provisions. Attention was invited to a decision of the Andhra Pradesh High Court in the case of Maddi Venkataratnam & Co. (P.) Ltd. (supra) and the decision of the Madhya Pradesh High Court in the case of CIT v. Malwa Vanaspati & Chemical Co. Ltd. [1982] 135 ITR 221, where the penalties imposed in those cases were held to be not allowable as deductions. On carefully going through these decisions, however, we find that the assessees, in all these cases, were found as a fact to have conducted in a manner which was prohibited by law. There was no findin g that the penalty was suffered in spite of the assessee acting in good faith and in the capacity of a trader. Accordingly, we are inclined to hold that these decisions are distinguishable.

16. Having regard to the above discussion, we hold that the interest paid, whether under the Provident Fund Act or under the Insurance Act, for nonpayment of contribution under those Acts are allowable as deductions on the basis of the decision of the Supreme Court in the case of Mahalakshmi Sugar Mills Co. (supra). Penalty under Section 36(3) of the Bombay Sales Tax Act and damages under Section 14B of the Provident Fund Act are also allowable as deductions as (i) the levies in both the cases are in the nature of interest, and (ii) the assessees are not found to be at fault in not making the payment in time. As regards the penalty imposed under Section 36(2)(c), we have found that it is a penalty for concealment and that concealment is concealment whether it is because of the deeming provisions or otherwise and further because the assessee was not able to show that the penalty under Section 36(2)(c) has been visited on it in spite of its having acted in good faith and in the capacity of a trader. Therefore, penalty imposed and paid under Section 36(2)(c) alone has got to be disallowed.

17. In short, our decision is that interest charged for non-payment of sales tax, sugar cess, provident fund contribution, ESI contribution, etc., is not and cannot be equated with penalty for infraction of law.

Such an interest is, therefore, always allowable as deduction. As regards penalty imposed and paid for non-payment of such levies, the manner in which the imposition of penalty is treated by the authorities under the statutes, under which the penalty is imposed, constitutes a relevant factor for considering whether the penalty so imposed is penalty or mere interest/ damage/compensation for delay in making payment of legitimate dues. However, the acid test in all these cases will be whether the penalty/ damage has been suffered by the assessee in spite of its acting in good faith and in its capacity as a trader, i.e., whether the assessee has been helpless in not making the payment of the levies within the time fixed by the statute or whether the delay in payment is as a result of the assessee's own fault. Thus, the allowability of penalty/damages as deduction will depend upon the facts and circumstances obtaining in each case.


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