Income Tax Appellate Tribunal - Jaipur
Income-Tax Officer vs Vijay Kumar Khandelwal on 1 February, 1994
Equivalent citations: [1994]50ITD405(JP)
ORDER
M.A.A. Khan, Judicial Member
1. This is an appeal against DC (A)'s order dated 24-2-1992 deleting an addition of Rs. 36,900 made under Section 69Aoi the Income-tax Act, 1961 (the Act).
2. The assessee, an Individual, declared his income at Rs. 7,934 from salary and at Rs. 5,000 from property. The Assessing Officer, however, noted that on 29-9 1988 a gold biscuit weighing 10 tolas was seized from the possession of the assessee by the Superintendent, Central Excise & Customs Department, Alwar and on being examined by the officers of the said Department the assessee could not satisfactorily explain the source of acquisition of the same. Consequently the Assessing Officer delivered the copy of his (assessee's) said statement dated 29-9-1988 to the assessee and required him to explain the source of acquisition of the gold biscuit. By his reply dated 26-8-1991 the assessee contended that the statement before the Customs & Excise-Authorities was made by him under duress. He appears to have denied also the ownership and possession of the said biscuit. It further appears that it was also pleaded by him that the said biscuit had delivered to him in 1982 by his grand father. The Assessing Officer did not accept the contention of the assessee and made an addition of Rs. 36,900 being the value of the investment made in acquisition of the gold biscuit by the assessee. The assessee carried the matter to DC(A) in appeal.
3. Before the learned DC(A) it was urged on behalf of the assessee that the biscuit did not belong to the assessee and the conclusions of the ITO were based on presumption only. In the alternative it was also urged that the gold was confiscated as a result of which the assessee suffered an identical loss. Therefore, the assessee was entitled to the allowance of the identical loss. Reliance in this behalf was made on Supreme Court decision in the case of CIT v. Piara Singh (1980] 124 ITR 40. The learned DC (A) accepted the alternate contention of the assessee and deleted the addition. Hence this appeal.
4. It was urged by the learned Departmental Representative that the ratio of the decision in the case of Piara Singh (supra) was not at all applicable to the case in hand inasmuch as that in the instant case the assessee was admittedly earning income from salary and property and not from any smuggling business as was the admitted position in the case of Piara Singh (supra). In reply the learned Counsel for the assessee submitted that in the fact and circumstances of the case the conduct of the assessee may be read as disclosing an adventure in the nature of business or trade and consequently the loss claimed be allowed as incidental to such activity. I find force in the submissions made on behalf of Revenue.
5. In Piara Singh's case (supra) the facts were that the respondent Piara Singh was apprehended in September, 1958, by the Indian Police while crossing the Indo-Pakistan border into Pakistan. A sum of Rs. 65,500 in currency note was recovered from his person. On interrogation he stated that he was taking the currency notes to Pakistan to enable him to purchase gold in that country with a view to smuggling it into India. The Collector of Central Excise & Land Customs ordered the confiscation of currency notes. The ITO made an addition of Rs. 65,500 to the total income of the respondent as his income from undisclosed sources and such addition was confirmed in appeal by the AAC. In second appeal it was urged before the Tribunal that if the respondent was regarded as engaged in the business of smuggling gold he was entitled to a deduction under Section 10(7) of the IT Act, 1922 of the entire sum of Rs. 65,500 as a loss incurred in the said business on the confiscation of the currency notes. The Tribunal upheld the claim for deduction. The Tribunal proceeded on the basis that the assessee was carrying on a regular smuggling activity which consisted of taking currency notes out of India and exchanging them with gold in Pakistan which was later smuggled into India. On reference the High Court agreed with the views of the Tribunal.
6. When the matter ultimately came before the Supreme Court in appeal in Piara Singh's case (supra) at the instance of Revenue, their Lordships addressed themselves to the following question, namely, Is a smuggler, who is taxed on his income from smuggling under the IT Act, 1922 entitled to a deduction under Section 10(1) of the Act on account of the confiscation of currency notes employed in the smuggling activity?
and then applying the principle laid down in Badridas Daga v. CIT [1958] 34 ITR 10 (SC) and quoting with approval Grover J. in CIT v. S.C. Kothari [1971] 82 ITR 794 (SC) observed that In our judgment, the High Court is right. The IT authorities found that the assessee was carrying on the business of smuggling. They held that he was, therefore, liable to income-tax on the income from that business. On the basis that such income was taxable, the question is whether the confiscation of the currency notes entitles the assessee to the deduction claimed. The currency notes carried by the assessee across the border constituted the means for acquiring gold in Pakistan, which gold he subsequently sold in India at a profit. The currency notes were necessary for acquiring the gold. The carriage of currency notes across the border was an essential part of the smuggling operation. If the activity of smuggling can be regarded as a business, those who are carrying on that business must be deemed to be aware that a necessary incident involved in the business is detection by the customs authorities and the consequent confiscation of the currency notes. It is an incident as predictable in the course of carrying on the activity as any other feature of it. Having regard to the nature of the activity possible detection by the customs authorities constitutes a normal feature integrated into all that is implied and involved in it. The confiscation of the currency notes is a loss occasioned in pursuing the business; it is a loss in much the same way as if the currency notes had been stolen or dropped on the way while carrying on the business. It is a loss which springs directly from the carrying on of the business and is incidental to it. Applying the principle laid down by this Court in Badri Das Daga v. CIT [ 1958] 34 ITR 10, the deduction must be allowed.
if the business is illegal, neither the profits earned nor the losses incurred would be enforceable in law. But, that does not take the profits out of the taxing statute. Similarly, the taint, of illegality of the business cannot detract from the losses being taken into account for computation of the amount which can be subjected to tax as 'profits' under Section 10(1) of the Act of 1922. The tax collector cannot be heard to say that he will bring the gross receipts to tax. He can only tax profits of a trade or business. That cannot be done without deducting the losses and the legitimate expenses of the business.
7. Explaining the legal position in such other similar cases their Lordships further observed at page 43 that Reliance was placed by the revenue on Hqji Aziz and Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350 (SC). In that case, however, the assessee carried on the lawful business of importing dates from abroad and selling them in India. The import of dates by steamer was prohibited. Nonetheless he imported dates from Iraq by steamer, and the consignments were confiscated by the customs authorities. But the dates were released subsequently on payment of fine. The assessee's claim to deduction under Section 10(2)(xv) of the Indian IT Act, 1922, was rejected on the ground that the amount was paid byway of penalty for a breach of the law. An infraction of the law was not a normal incident of business carried on by the assessee, and the penalty was rightly held to fall on the assessee in some character other than that of a trader. Reference was made by the revenue to Soni Hinduji Kushalji &, Co. v. CJT [1973] 89 ITR 112(AP). The assessee's claim to the deduction of the value of gold confiscated by the customs authorities was found unsustainable by the court. The decision in that case can be explained on the ground that the assessee was carrying on a lawful business in gold, silver and jewellery and committed an infraction of the law in smuggling gold into the country. Our attention has also been invited to J.S. Parkar v. V.B. Palekar [1974] 94 ITR 616 (Bom.), where on a difference of opinion between two learned judges of the Bombay High Court, a third learned judge agreed with the view that the value of gold confiscated by the customs authorities in smuggling operations was not entitled to deduction against the estimated and assessed income from an undisclosed source. It was observed that the loss arose by reason of an infraction of the law and as it had not fallen on the assessee as a trader or businessman a deduction could not be allowed. Apparently, the true significance of the distinction between an infraction of the law committed in the carrying on of a lawful business and an infraction of the law committed in a business inherently unlawful and constituting a normal incident of it was not pointedly placed before the High Court in that case.
We hold that the assessee is entitled to the deduction of Rs. 65,500 and accordingly we affirm the view taken by the High Court on the question of law referred to it.
8. It may be appreciated that Piara Singh's case (supra) had proceeded on the footing that the said assessee was carrying on a regular smuggling activity which consisted of taking currency notes out of India and exchanging them with gold in Pakistan which was later smuggled into India. As observed by their Lordships the IT authorities had found that the assessee was carrying on the business of smuggling. It was for that reason that their Lordships approved Grover J.'s view in S.C. Kolhari's case (supra) that a loss incurred in carrying on an illegal business must be deducted before the true figure of profits from such business which are sought to be brought to tax can be computed. Their Lordships further clarified the principle laid down in the case of Hqji Aziz & Abdul Shakoor & Bros. v. CAT [1961] 41 ITR 350 (SC) and held that in carrying on his lawful business by the assessee in that case infraction of law was not a normal incident of his business and penalty for infraction of law fell on him in some character other than a trader. This principle was further explained by approving Andhra Pradesh High Court's view in Soni Hinduji Kushalji & Co.v. CIT [1973] 89 ITR 112 that while carrying on a lawful business in gold, silver and jewellery infraction of law was committed by smuggling gold into the country and loss was occasioned thereby, the loss so caused would not be an allowable deduction at the assessment proceedings.
9. To sum up, the ratio decidendi of the decision of the Hon'ble Supreme Court in Piara Singh's case (supra) is that in order to qualify as an allowable deduction the loss must spring directly from the carrying on of the business and must be incidental to it. It must occasion in pursuing the business. If the business is illegal, the mere taint of illegality of the business would not detract from the loss being taken into account for computation of the amount which can be subjected to tax as "profits". But if the business is lawful and the loss in occasioned by committing an infraction of law, which would not be a normal incident of such business, the loss so occasioned would not be an allowable deduction.
10. Judged in the light of the principles emerging from Piara Singh's case (supra) the position of the case in hand comes to this that herein the assessee was earning income from salary and property and carried on no business in gold whether lawful or unlawful, the assessee was found in possesson of ten tolas of gold in the form of a biscuit and on being asked he could not, according to the IT authorities, explain the sources of investment in acquisition thereof. Here it may be observed that the assessee was found in possession of the gold biscuit at the shop of M/s. Kailash Chand Saraf, Alwar where he had allegedly gone to know about the purity of gold in the biscuit. At the assessment proceedings, the assessee took the plea that the gold biscuit had been given to him in 1982 by his grand father but such a plea could not be substantiated. The same plea appears to have been reiterated before the learned DC (Appeals) who does not appear to have dealt with it and, therefore, it shall be inferred that he had rejected such a plea. It may be observed that the assessee had filed neither a cross appeal nor a cross objection against DC (Appeals)'s not deciding his said plea in express terms and implied rejection thereof. Thus at no stage of the proceedings it was pleaded that the assessee had been carrying on any business in gold, silver or jewellery whether lawful or unlawful and that the loss on confiscation of the gold biscuit was suffered by him as a trader in the course of carrying on such business activity and was incidental to his said business.
11. At this stage I would like to mention that in the course of hearing the learned Counsel urged that the case of the assessee be regarded as an adventure in the nature of business. I, however, find that such is not the case of Revenue and at no stage of the assessment proceedings the assessee has come out with such a plea. Before the Customs & Central Excise Authorities he appears to have stated that he was in the business of silver also but he resiled from such a statement. Moreover, he has given no such version at. any stage of the assessment proceedings. He never declared any income from the said alleged business activity. Nor do I find any material on my record to take such a view. The case of the assessee seems to be that the gold biscuit had been given in 1982 by his grand father and he had gone to the shop of M/s. Kailash Chand Saraf to get the same tested for purity. It was never his case that he had ever thought of entering into an adventure in the nature of trade. I do not find any material in support of such a plea. I, therefore, find no force in this argument advanced on behalf of the assessee.
12. To sum up I hold that the loss on confiscation of the gold biscuit by the Customs & Central Excise Authorities was not suffered by the assessee in the course of carrying on any business activity - whether lawful or unlawful and it was not incidental to any business. The same was not, therefore, allowable as a deduction. The facts in the instant case being clearly distinguishable from those obtaining in Piara Singh's case (supra) the ratio decidendi and benefit of that case is not available to the assessee. Since the assessee could not satisfactorily explain the source of investment in the acquisition of 10 tolas of gold, addition of the estimated value thereof at Rs. 36,900 was rightly made by Assessing Officer under Section 69A and the same is hereby restored.
13. In the result, the appeal is allowed.