1. This appeal arises out of Income-tax Reference No. 543 of 1977 (see [1980] 121 ITR 747), where the four questions that were referred to the Allahabad High Court by the Income-tax Appellate Tribunal (hereinafter referred to as "the Tribunal"), have been answered by the High Court against the assessee and in favour of the Revenue. In so far as questions Nos. 1, 3 and 4 are concerned, the High Court has mentioned that learned counsel for the assessee had conceded, that questions Nos. 1 and 3 were covered by the decision of the Full Bench of the said High Court in Saraya Sugar Mills (P.) Ltd. v. CIT and that question No. 4 was covered by the decision in CIT v. Geeta Ram Kali Ram , decided on August 23, 1979.
2. We have heard Shri Mahajan, learned counsel appearing for the appellant/assesses in support of the appeal, and Shri G. C. Sharma, the learned senior counsel appearing for the Revenue. In so far as questions Nos. 2 and 4 are concerned Shri Mahajan has not been able to show any infirmity in the impugned judgment of the High Court. As regards questions Nos. 1 and 3, Shri Mahajan, placing reliance on the decision of this court in Prakash Cotton Mills P. Ltd. v. CIT, submitted that the said questions may be permitted for consideration to the High Court in view of the said judgment. Questions Nos. 1 and 3 were as under (page 748 of [1980] 121 ITR) :
(i) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing deduction of the liability of Rs. 34,131 incurred by the assessee for the payment of damages under Section 14B of the Employees' Provident Funds Act, 1952 ?
(iii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the penalty of Rs. 7,667 levied on the assessee under the Central Sales Tax Act could not be allowed as a deduction while computing the income of the assessee ?
3. Question No. 1 was referred at the instance of the Revenue while question No. 3 was referred at the instance of the assessee.
4. In Prakash Cotton Mills Pvt. Ltd.'s case , this court has considered the question whether the interest paid for delayed payment of sales tax under the Bombay Sales Tax Act, 1959, and damages paid for delayed payment of contribution under the Employees' State Insurance Act were permissible deduction under Section 37(1) of the Income tax Act, 1961 (hereinafter referred to as "the Act"). This court has held that 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. Act, 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. In that case, this court has approved the judgment of the Andhra Pradesh High Court in CIT v. Hyderabad Allwyn Metal Works Ltd. , where the court was dealing with the deduction of the amount paid by way of damages under Section 14B of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952. It was held that the said amount comprises both the elements of penal levy as well as compensatory payment and that it will be for the authority under the Act to decide with reference to the provisions of the Employees' Provident Funds Act, 1952 and the reasons given in the order imposing and quantifying the damages to determine what proportion should be treated as penal and what proportion as compensatory and that the entire sum can neither be considered as mere penalty nor as mere interest.
5. In view of the said decision in Prakash Cotton Mills P. Ltd.'s case , question No. 1 requires to be examined in accordance with the principles laid down by the Andhra Pradesh High Court in CIT v. Hyderabad Allwyn Metal Works Ltd. which have been approved by this court. Since the question has not been examined in this light, it becomes necessary to remit the said question to the High Court for consideration.
6. As regards question No. 3 we find from the judgment of the Tribunal that the penalty that was imposed was not on account of any delayed payment of Central Sales Tax but was for contravention of the provisions of the Central Sales Tax Act. There is nothing on the record to show that the amount of penalty had a compensatory element in it. In the circumstances, we do not find any infirmity in the answer given by the High Court to question No. 3.
7. The appeal is, therefore, partly allowed to the extent that the matter is remitted to the High Court to consider question No. 1 referred by the Tribunal in accordance with the principles laid down by this court in Prakash Cotton Mills Pvt. Ltd.'s case and if for the purpose of such consideration the High Court considers it necessary it may ask the Tribunal to submit a supplementary statement of case. The appeal is disposed of accordingly with no costs.