Law: Income Tax Act, 1961

Section: 37

(a) Income-tax-----Business expenditure---Statutory impost---Method of allowance---Scheme of statute to be studied to find whether impost is compensatory or penal or composite---Deduction to be allowed where wholly compensatory---When composite only that part which is compensatory to be allowed. (b) Income-tax---Business expenditure---Damages paid for delayed payment of employees contributions to Employees Provident Fund---Comprises both elements of penal levy as well as compensatory payment---Authority under Act with reference to provisions of Employees Provident Funds Act to determine what proportion is compensatory and what proportion is penal--¬Entire sum cannot be considered as mere penalty nor as mere interest--¬Question not examined in this light---Matter remanded---Indian Employees Provident Funds Act, 1952, S.14-B---Indian Income Tax Act, 1961, S.37--¬[C.I.T. v. Swadeshi Cotton Mills Co. Ltd. (1980) 121 ITR 747 reversed in part]. (c) Income-tax---Business expenditure---Imposition of penalty not for delayed payment of sales tax, but for contravention of provisions of Central Sales Tax Act---No compensatory element in amount of penalty---Not deductible---Indian Income Tax Act, 1961, S.37. 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 Income Tax Act, 1961, 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 out 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 concerned impost 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 compensatory in nature and refuse to give deduction to that component which is penal in nature. On the question whether the…

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