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Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Whether interest paid due to late remittance of funds to Employees' Provident Fund Trust is deductible under section 37 - Held, yes FACTS The assessee failed to pay the contribution under the provisions of the Employees' Provident Fund Act to the concerned trust. Consequently, the company had to pay interest thereon. This interest was claimed as a deduction by the assessee under section 37. The ITO rejected the claim holding that the payment was a penalty and therefore not deductible. The Tribunal however allowed the assessee's claim. On reference : HELD The payment in question by the assessee was as interest. This payment was obviously under section 7Q of the Employees' Provident Fund and Miscellaneous Provisions Act, 1952, under which the liability to pay interest on the delayed payment fastens itself. The liability of the employer thereon is to pay simple interest as the very provision states. There are other provisions under the said Act to penalise the employer for the delayed payment. In such social welfare legislations, it is usual to find similar provisions-one for the payment of interest for delayed payment and the other to penalise the contributor for the delay. The latter is to enforce as a matter of deterrent against frequent delays, while the former is to compensate the receiver of the contribution of the payments in view of the delay involved. The two concepts are distinct and separate. The compensatory payment has been held to be deductible, because it is an accretion to the main payment. In view of aforesaid, the Tribunal was justified in directing the ITO to allow the deduction in respect of payment of interest in question. Note : The case was decided in favour of the assessee. CASES REFERRED TO Mahalakshmi Sugar Mills Ltd. v. CIT [1980] 123 ITR 429 (SC), and CIT v. Mandya National Paper Mills Ltd. [1984] 150 ITR 26(Kar.). G. Chandrashekar and Shivaprakash for the Applicant. E.R. Indrakumar for the Respondent. JUDGMENT K. Shivashankar Bhat, J.- The questions that are referred to us under the provisions of the Income-tax Act, 1961, read thus : "1.Whether, on the…

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