Case: Prakash Cotton Mills Private Limited Vs. The Commissioner Of Income Tax(Central)

The appellant is a company carrying on the business in the manufacture of textile goods. It is the assessee. In the income-tax return of the assessee for the Assessment Year 1966-67 (the previous accounting year being from 1st July, 1964 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 also the sum of Rs3, 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 to the item of expenditure of Rs.3, 865, he disallowed Rs.2, 500 treating it as exclusive expenditure incurred on its Directors. Appeals preferred beforethe A.A.C. and the Income-tax Appellate Tribunal (Tribunal) questioning the disallowance of 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 th em referred for decision by the High Court, also did not meet with 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, questioning the aforesaid orders made by the authorities and the High Court. Reference sought to be obtained from the Tribunal for decision by the High Court, was on the following. Whether the sum of Rs.19, 635 debited in the interest account paid by way of interest for delayed payment of sales tax and Employees State Insurance contribution could be said to have not been incurred, wholly and exclusively for the purpose of business?  2. Whether an 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-tax Act, 1961?  3. Whether on the facts and in the circumstances, t he 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 allowable 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 assessee-company.?

Reasoning:
are covered by First Question indicated at the outset. So also, questions 34 are covered by Second Question indicated at the outset. Indeed, after hearing counsel for the parties we were inclined to think that the said questions ought to be remitted to the High Court forits opinion under Section 256 of the I.T. Act. In the normal course, we 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 25 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 questions ourselves and 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:Section 37(1) of the I.T. Act corresponds to Section 10(2)(XV) of Predecessor Indian Income-Tax Act of 1922 (the I.T. Act of 1922), is undisputedThe decision of this Court, in Mahalakshmi Sugar Mills Company (supra) and the decision of the Division Bench of the Andhra Pradesh High Court in HyderabadMetal Works Ltd. (supra) with the views of which we are in complete agreem ent, 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 (reparatory) in character as would entitle such assessee to claim it as an allowable expenditure under Section 37(1) of the I.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 I.T . Act, the assessing authority is required to examine the Scheme of the provisions of the relevant statute providing for payment ofsuch 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 I.T. Act, where ever such examination reveals the concerned impost to be purely compensatory in nature. Where ever such impost is found to be of a composite nature, that is, 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 compensatory in nature and refuse to give deduction to that component which is penal in natureThe facts of the case under our consideration disclose that the I.T.O. and the Appellate authorities have refused to allow the claims made by the assessee under Section 37(1) of the I.T. Act, without any examination of the Scheme of the provisions of the BST Act, to find whet her 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 37(1) of the I.T. 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 assessees claims for deduction of interest and damages under Section 37(1) of the I.T. Act. First Question is answered accordinglySecond Question: Miscellaneous expenses claimed by the assessee as deductible expenditure allowable under Section 37(2) of the I.T. Act related to a sum of Rs.3, 865 incurred by the Directors of the assessee-company for entertainment at the Diners Club and C.C.I., 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 I.T. 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 expense s of the Directors of the assessee-company. The A.A.C. in dealing with the said claim for deduction in the appeal of the assessee filed before him, held the entire expenses claimed as deductible expenditure under Section 37(2) of the I.T. Act could not be regarded as having been laid out or expended wholly and exclusively for the purpose of the business of the assessee. He, therefore,refused to interfere with the order of the I.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 entertainment expenses of the assessee being a matter to be decided by the fact finding authorities 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 their concurrent finding o n consideration of the relevant material. Hence, the question under consideration is devoid of merit and is answered against the assesseeSecond Question: Miscellaneous expenses claimed by the assessee as deductible expenditure allowable under Section 37(2) of the I.T. Act related to a sum of Rs.3, 865 incurred by the Directors of the assessee-company for entertainment at the Diners Club and C.C.I., 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 I.T. 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 expense s of the Directors of the assessee-company. The A.A.C. in dealing with the said claim for deduction in the appeal of the assessee filed before him, held the entire expenses claimed as deductible expenditure under Section 37(2) of the I.T. Act could not be regarded as having been laid out or expended wholly and exclusively for the purpose of the business of the assessee. He, therefore,refused to interfere with the order of the I.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 entertainment expenses of the assessee being a matter to be decided by the fact finding authorities 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 their concurrent finding o n consideration of the relevant material. Hence, the question under consideration is devoid of merit and is answered against the assessee