K. SHIVASHANKAR BHAT, J. ( 1 ) THE question referred under the provisions of Section 256 (2) of the Income tax Act, 1961, reads as follows : "whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that amount paid under Section 14-B of the Employees' Provident Funds Act as damages for default in making payment of provident fund contributions cannot be construed to be penal in nature and the same is an admissible expenditure ?" ( 2 ) THE nature of the amount levied and collected under Section 14-B of the Employees' provident Fund and Miscellaneous Provisions Act, has been considered by the Supreme Court in organo Chemicals Industries v. Union of India 1979 - II - LLJ - 416. At page 422, Mr. Justice krishna Iyer, observed thus : "18. I am clearly of the view that 'damages', as imposed by Section 14-B, includes a punitive sum quantified according to the circumstances of the case. In 'exemplary damages' this aggravating elements is prominent. Constitutionally speaking, such a penal levy included in damages is perfectly within the area of implied powers and the Legislature may, while enforcing collections, legitimately and reasonably provide for recovery of additional sums in the shape of penalty so as to see that avoidance is obviated. Such a penal levy can take the form of damages because the reparation for the injury suffered by the default is more than the narrow computation of interest on the contribution. " again, Mr. Justice Sen conveyed the same idea idea at page 429 thus : "46. The traditional view of damages as meaning actual loss, does not take into account the social content of a provision like Section 14-B contained in a socio-economic measure like the act in question. The word 'damages' has different shades of meaning. It must take its colour and content from its context, and it cannot be read in isolation, nor can Section 14-B be read out of context. The very object of the legislation would be frustrated if the word 'damages' appearing in section 14-B of the Act was not construed to mean penal damages. The imposition of damages under Section 14-B serves a two fold purpose. It results in damnification and also serves as a deterrent. The very object of the legislation would be frustrated if the word 'damages' appearing in section 14-B of the Act was not construed to mean penal damages. The imposition of damages under Section 14-B serves a two fold purpose. It results in damnification and also serves as a deterrent. The predominant object is to penalize so that an employer may be thwarted or deterred from making any further defaults. " further, at page 429, he observes : "the object and purpose of the Section is to authorise the Regional Provident Fund commissioner to impose exemplary or punitive damages and thereby prevent employers from making defaults. The provision for imposition of damages at twenty-five per cent, ofthe amount of arrear, however, did not prove to be effective. Accordingly, by Act 40 of 1973, the words. 'not exceeding the amount of arrear' were substituted for the words 'twenty-five per cent'. " ( 3 ) THUS, there can be no doubt that the levy under Section 14-B is predominantly a penal levy imposed by the Commissioner depending upon the circumstance of each case. There is no compulsion that, in each and every case of default, there should be a levy under Section 14-B and a judicial discretion has been conferred on the statutory authorities. ( 4 ) IF the levy is a penal levy, there can be no doubt that the same cannot be claimed as a deduction for the purpose of computing the taxable income under Section 37 of the Income-tax act. ( 5 ) IN Income-tax Referred Case No. 146 of 1986 (CIT v. Bharat Printers, (1992) 198 ITR 601), decided on September 6, 1991, we have considered the principles applicable in detail. The decision of the Supreme Court in Haji Aziz and Abdul Shakoor Bros. v. CIT, (1961) 41 ITR 350, was referred to and relied upon for the conclusion arrived at by us therein. That was a case of penal levy under the provisions of the Central Sales Tax Act which was held as a non-deductible expenditure. ( 6 ) MR. Raghavendra Rao, learned counsel for the Revenue, brought to our notice that a Full bench of the Allahabad High Court has taken a similar view in respect of the levy under Section 14-B of the Provident Funds Act; the same is reported in Saraya Sugar Mills (P.) Ltd. v. CIT (1979) 116 ITR 387. ( 6 ) MR. Raghavendra Rao, learned counsel for the Revenue, brought to our notice that a Full bench of the Allahabad High Court has taken a similar view in respect of the levy under Section 14-B of the Provident Funds Act; the same is reported in Saraya Sugar Mills (P.) Ltd. v. CIT (1979) 116 ITR 387. ( 7 ) CONSEQUENTLY, the question referred is answered in the negative and against the assessee. Reference answered accordingly.