Andhra HC (Pre-Telangana)
Bijjala Shivalingam vs Commissioner Of Income-Tax on 13 September, 2001
Equivalent citations: [2002]253ITR105(AP), [2001]119TAXMAN803(AP)
JUDGMENT S.R. Nayak, J.
1. The Income-tax Appellate Tribunal, Hyderabad Bench "B" (for short "the Tribunal"), has referred the following questions stated to arise out of the order of the Tribunal passed in I.T.A. No. 1131/Hyd of 1987, dated August 9,1990, for the assessment year 1983-84 at the instance of the assessee under Section 256(1) of the Income-tax Act, 1961 (for short "the Act").
"1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the assessee is not entitled to deduction of Rs. 3,30,400 being the value of gold biscuits and other small jewellery confiscated as business loss in computing his total income ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in holding that the assessee is not carrying on any smuggling or illegal business in gold when it was a case of the Department that the assessee is carrying on smuggling and illegal business in gold ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in stating that the assessee was not entitled for deduction of the value of confiscated gold merely because the smuggled gold was recovered from his residential house ?
4. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in not remitting the appeal back to the file of the Commissioner of Income-tax (Appeals) for considering the remaining grounds taken by the assessee in the appeal filed by him instead of merely allowing the appeal filed by the Department ?"
2. The petitioner is the assessee and he is carrying on business as a retail dealer in silver and silver articles. The assessee has no licence to deal in gold or gold ornaments. The assessee filed his return of income for the year 1983-84 on July 25, 1983, disclosing his total income at Rs. 27,165. The assessee subsequently filed a revised return of income on October 24, 1985, disclosing total income at Rs. 28,980. In the meanwhile, the Central Excise authorities had conducted a search at the residential premises of the assessee on May 5, 1982, and seized gold biscuits and jewellery articles valued at Rs. 3,30,400 (value of 1,955.900 gms. of gold biscuits Rs. 3,25,000 and value of 38.900 gms. of gold jewellery Rs. 5,400) and cash amounting to Rs. 2,20,000 in Indian currency. On receipt of this information, the Commissioner of Income-tax, Andhra Pradesh-I, Hyderabad, issued a warrant of requisition under Section 132A of the Income-tax Act, 1961 (for short "the Act"), to the authorised officer to requisition the said gold and jewellery articles and also cash in Indian currency from the Assistant Collector (Preventive), Central Excise and Customs Department, Hyderabad. The Income-tax Department was informed that the entire gold and jewellery articles seized from the petitioner-assessee were confiscated by the Central Excise Department under the Customs Act and the rules framed thereunder and it also levied a penalty of Rs. 1,50,000 on the assessee thus leaving the balance of confiscated cash at Rs. 70,000. The said sum of Rs. 70,000 was requisitioned in favour of the Income-tax Department. The value of the gold biscuits and gold jewellery at Rs. 3,30,400 was treated by the Income-tax Officer as the income of the assessee from undisclosed sources, and accordingly, an addition of Rs. 3,30,400 was made under Section 69A of the Act and, accordingly, the said sum of Rs. 3,30,400 was assessed as income in the hands of the petitioner-assessee. On being aggrieved by the said action of the Income-tax Officer, the assessee filed an appeal before the Commissioner of Income-tax (Appeals) contending that the addition of Rs. 3,30,400 as his income by the Income-tax Officer is not sustainable. The Commissioner of Income-tax (Appeals) held that the authorities of the Central Excise Department have found that the assessee was dealing with gold illegally without proper license. So opining and placing reliance on the judgment of the apex court in CIT v. Piara Singh the Commissioner of Income-tax (Appeals) allowed the appeal of the assessee. Aggrieved by the said order of the Commissioner of Income-tax (Appeals), the Revenue preferred an appeal to the Tribunal. The Tribunal taking into account the admission of the assessee that he was not carrying on any business in gold and gold ornaments and the confiscated gold does not belong to him and the fact that the gold was seized from the residential premises of the assessee and not from his shop and, therefore, it did not form part of the closing stock, held that the petitioner is not entitled to deduction. In that view of the matter, the Tribunal set aside the order made by the Commissioner of Income-tax (Appeals) and restored the addition made by the Income-tax Officer.
3. Sri Y. Ratnakar, learned counsel appearing for the petitioner, would contend that all the Central Excise authorities and the Customs, Excise and Gold (Control) Appellate Tribunal, South Regional Bench at Madras (for short "the CEGAT"), have held that the seized gold belongs to the petitioner; according to the Revenue, the assessee was carrying on illegal business in gold and this stand of the Department is reflected in the show-cause notices issued to the petitioner-assessee; the Income-tax Officer also stated in the assessment order that he is in agreement with the Central Excise authorities who have held that the assessee is carrying on smuggling business; the Commissioner of Income-tax (Appeals) also after referring to the orders of the Central Excise authorities opined that the assessee was carrying on smuggling of gold. Learned counsel would point out that it was never the case of the Income-tax Department that the assessee was not carrying on smuggling business and, therefore, the reasons given by the Tribunal to allow the appeal of the Revenue and to set aside the order of the Commissioner of Income-tax (Appeals) are totally illegal and unjustified. In support of the contention, learned counsel would place reliance on the judgment of the Supreme Court in Piara Singh's case , and the judgments of the Punjab and Haryana High Court in CIT v. Ram Chander and Parkash Chand Sushil Kumar v. CIT .
4. Sri S. R. Ashok, learned senior standing counsel appearing for the Income-tax Department, on the other hand, would contend that, in the instant case, the Income-tax Officer, has invoked the power under Section 69A of the Act to add a sum of Rs. 3,30,400 to the income in the hands of the assessee and once Section 69A is invoked, the assessee is not entitled to deduction. Learned standing counsel would point out that there is a clear finding that the confiscated gold was recovered from the residential premises of the assessee and not from the business premises. Learned standing counsel would also contend that in terms of Section 37 of the Act only an expenditure laid out or expended wholly and exclusively for the purposes of the business or profession is entitled to be allowed in computing the income chargeable under the head "Profits and gains of business or profession" and, therefore, the value of the gold and jewellery seized and confiscated by the Central Excise Department cannot be treated as expenditure expended by the assessee for the purposes of his business, because even according to the assessee he was not a dealer in gold and gold ornaments. Lastly and alternatively, learned senior standing counsel placing reliance on the judgment of the Supreme Court in Maddi Venkataraman and Co. (P.) Ltd. v. CIT , would contend that under no circumstance, the value of the gold biscuits and the gold ornaments confiscated by the Central Excise authorities valued at Rs. 3,30,400 can be allowed to be deducted from the income of the assessee even assuming that he lost the gold in the course of his illegal activities inasmuch as the petitioner-assessee had indulged in transactions in violation of the provisions of the Central Excise Act and the Customs Act. Learned standing counsel would maintain that evasion or contravention of law cannot be treated to be a trade or business pursuit so as to bring it under the purview of Section 37 of the Act.
5. The only question that arises for decision is whether the value of the gold biscuits and the gold jewellery confiscated by the Central Excise authorities would constitute an admissible deduction ?
6. In terms of Section 37 of the Act, only an expenditure laid out or expended by the assessee wholly or exclusively for the purposes of the business or profession is entitled to be allowed as deduction in computing the income charged under the head "Profits and gains of business or profession". Therefore, the basic question to be considered is whether the value of the gold biscuits and the gold jewellery seized by the Central Excise authorities valued at Rs. 3,30,400 can be considered to be an expenditure on the part of the petitioner-assessee laid out or expended by him wholly or exclusively for the purposes of his business or profession. In answering this question, it is appropriate to notice the undisputed facts at the threshold.
7. First, the confiscated gold biscuits and gold jewellery were seized from the residential premises of the petitioner-assessee. Secondly, the books of account maintained by the petitioner-assessee do not reflect acquisition of any gold much less the confiscated gold. Thirdly, the petitioner-assessee, before all the authorities of the Central Excise Department as well as before the CEGAT contended that the confiscated gold biscuits and gold jewellery do not belong to him and that they were kept in an almirah kept in his house by his brother, Sri B. Srinivasa Rao by name, and he never carried on any business as dealer in gold, lawfully or without licence. If these factors are kept in mind, by no stretch of imagination, it could be stated that the value of the confiscated gold should be treated as an expenditure on the part of the petitioner-assessee in the course of his business or profession, which he admittedly disowned. In that view of the matter, the decisions relied on by learned counsel for the petitioner-assessee (CIT v. Piara Singh ; CIT v. Ram Chander and Parkash Chand Sushil Kumar v. CIT are of no help to the petitioner-assessee.
8. In Piara Singh's case , the respondent therein, who was carrying on smuggling activity, was apprehended by the Indian police, while crossing the border into Pakistan, and a sum of Rs. 65,000 in currency notes was recovered from his person. On interrogation he stated that he was taking the currency notes to Pakistan to purchase gold there and smuggle it into India. The customs authorities confiscated the currency notes, but the income-tax authorities found that the assessee was carrying on the business of smuggling and getting income from that business and such income was assessed to tax. In the premise of those facts, the question that arose for consideration before the apex court was whether the assessee was entitled to deduction under Section 10 of the Indian Income-tax Act, 1922, of the loss of Rs. 65,000 arising by the confiscation of the currency notes. The apex court held that the carriage of the currency notes across the border was an essential part of the smuggling operation and detection by the customs authorities and consequent confiscation was a necessary incident and constituted a normal feature of such an operation. The apex court has opined that the confiscation of the currency notes was a loss occasioned in pursuing the business of smug gling ; it was 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 and, therefore, it was a loss which sprang directly from the carrying on of the business and incidental to it and its deduction had to be allowed under Section 10 of the Indian Income-tax Act, 1922.
9. In Shri Ram Chander's case , the respondent therein, who was the assesses was apprehended on March 20, 1974, by the customs authorities near the village Ismalla on the Delhi-Rohtak Road, while he was going to Rohtak on a scooter. As a result of the search of the scooter, a specially designed cavity in the foot-board near the foot-brake covered with rubber mat was discovered and from its search, ten gold bars weighing ten tolas each bearing Swiss markings were recovered. The explanation offered by the assessee that the said gold bars were delivered to him by one Champat Rai of Rohtak for delivering the same to one Lal Chand was not accepted and the customs authorities forfeited the said gold valued at Rs. 65,000. During the assessment proceedings relating to the assessment year 1974-75, the assessing authority added Rs. 65,000 to the returned income of the assessee as the latter had failed to explain the source of investment in the acquisition of the said gold bars. Having failed before the Appellate Assistant Commissioner, the assessee went in second appeal before the Tribunal who accepted the same and allowed Rs. 65,000 as trading loss. On an application filed by the Commissioner of Income-tax, the following question arising out of the order of the Tribunal has been referred to the Punjab and Haryana High Court under Section 256(1) of the Act (page 690) :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the assessee is entitled to the deduction of the value of the gold bars seized from him as trading loss ?"
10. In the premise of the above noticed facts, the Punjab and Haryana High Court, placing reliance on the judgment of the apex court in Piara Singh's case and its own judgment in CIT v. Piara Singh [1972] 83 ITR 678, which was affirmed by the Supreme Court in Piara Singh's case , answered the question in the negative, i.e., in favour of the assessee and against the Revenue.
11. In Parkash Chand Sushii Kumar's case , the asses-see-firm was carrying on sarafa business. Mr. Sushil Kumar, one of the partners of the assessee-firm, was caught red-handed by the Customs Department on February 10,1971, at Lakhanpur Check Post with 20 gold biscuits weighing 200 tolas, which were recovered from his attache case while he was travelling from Pathankot in the bus bound for Jammu. Ultimately, the gold biscuits were confiscated by the Customs Department by order dated March 25, 1977, and a penalty of Rs. 2 lakhs was imposed on the person from whose possession the gold was recovered. Before the Income-tax Officer, the assessee claimed deduction of the value of the gold as trading loss under Section 37 of the Act, but in view of the confiscation order passed by the Customs Department, the Income-tax Officer disallowed the claim of the assessee. The value of the gold biscuits was treated by the Income-tax Officer as the income of the assessee from undisclosed sources and an addition of Rs. 42,000 was made under Section 69A of the Act. The assessee's appeal before the Appellate Assistant Commissioner failed as also before the Tribunal. At the instance of the assessee, the following question was referred to the Punjab and Haryana High Court under Section 256(1) of the Act (page 28) :
"Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the addition under Section 69A of the Income-tax Act on account of value of gold biscuits Rs. 42,000 seized by the customs authorities cannot be allowed deduction as a business loss ?"
12. The Punjab and Haryana High Court, placing reliance on its own judgments in Piara Singh's case [1972] 83 ITR 678 and Shri Ram Chander's case and the judgment of the Supreme Court in Piara Singh's case , answered the above question in favour of the assessee and held that the Tribunal was not right in holding that the addition of the amount under Section 69A of the Act on account of the value of the gold biscuits of Rs. 42,000 seized by the customs authorities cannot be allowed deduction as business loss.
13. It is very pertinent to notice that in Piara Singh's case ; Shri Ram Chander's case and Parkash Chand Sushil Kumar's case , the assessees were admittedly indulging in smuggling of gold. In Piara Singh's case decided by the apex court, the assessee, Mr. Piara Singh, admitted that he was taking the currency notes to Pakistan to purchase gold there and smuggle it into India. In Shri Ram Chander's case , the assessee admitted that the seized gold bars were delivered to him by one Mr. Cham-path Rai of Rohtak for delivering the same to one Lalchand. In other words, the assessee admitted his smuggling activity. Similarly, in Parkash Chand Sushil Kumar's case , it is apparent from the judgment that Mr. Sushil Kumar, one of the partners of the assessee-firm was carrying on smuggling of gold. In the context of the position admitted by the assessees themselves and also having regard to the findings recorded by the authorities under the Customs Act, the Supreme Court and the Punjab and Haryana High Court, allowed deduction under Section 37 of the Act as business or trading loss. The ratio of the above decisions of the Supreme Court and the Punjab and Haryana High Court is not applicable to the fact-situation of this case. We say this because, even according to the assessee himself he was not carrying on any smuggling activity. In his examination before the Customs and Central Excise authorities, the assessee in clear terms denied that he indulged in gold smuggling activities. In addition to that, it is a matter of record that according to the petitioner-assessee, the seized gold biscuits and gold jewellery do not belong to him, but that they were kept in an almirah by his brother, Sri B. Srinivasa Rao by name. In terms of the ratio of the judgment in Piara Singh's case , deduction is permissible only if the assessee is indulging in illegal trade or business in gold and not otherwise. Further, it is also relevant to note that the gold biscuits and the gold jewellery were seized from the residential premises of the petitioner-assessee and not from the business premises. From this circumstance, an inference can be drawn that the seized gold biscuits and gold jewellery do not form part of the closing stock of his alleged illegal activity of smuggling of gold.
14. Sub-section (1) of Section 37 reads-
"37. General.--(1) Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'.
Explanation.--For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure."
15. It is not unimaginative or unusual that there may be other expenses in earning the profits and gains of a business or profession or vocation which may not be proper deductions under Sections 30 to 36 of the Act. It was, therefore, to meet this requirement that necessary provisions were made under Section 10(2)(xv) of the Indian Income-tax Act, 1922, and the same provision has been re-enacted in Section 37(1) of the Act. That is why this provision is generally called a "residuary provision". It is true that the residuary nature of the provision in Section 37(1) of the Act will have to be given its full play as held by the courts in CIT v. High Land Produce Co. Ltd. ; Tata Iron and Steel Co. Ltd. v. D.V. Bapat, ITO ; Chenab Forest Co. v. CIT and CIT v. Aspinivall and Co. (Travancore) Ltd. . However, in order to claim deduction of expenditure under Section 37(1) of the Act, four conditions, viz., (i) the expenditure in question is not in the nature described under the specific provisions of Sections 30 to 36 ; (ii) the expenditure is not in the nature of capital expenditure ; (iii) it is not a personal expenditure ; and (iv) the expenditure has been laid out or expended wholly or exclusively for the purposes of business or profession, should be satisfied as held by the courts in Indian Molasses Co. (P.) Ltd. v. CIT ; CIT v. Indian Molasses Co. (P.) Ltd. [1970] 78 ITR 474 (SC); Sassoon J. David and Co. (P.) Ltd. v. CIT ; Madhav Prasad Jatia v. CIT and CIT v. Panipat Woollen and General Mills Co. Ltd. . In other words, unless all the above four conditions co-exist, the claim for deduction of expenditure under Section 37(1) of the Act cannot be allowed. It is clear that the conditions at (i), (ii) and (iii) above are negative conditions whereas the condition at (iv) is a positive condition. Expenditure, in order to be eligible for deduction, should satisfy the negative conditions as well as the positive condition.
16. By keeping in view the admitted facts of this case and the above necessary conditions for allowance under Section 37(1) of the Act, it cannot be said that the value of the gold biscuits and gold jewellery, Rs. 3,30,400 was laid out or expended by the petitioner-assessee wholly or exclusively for the purposes of his business or profession. At the most, the value of the confiscated gold, Rs. 3,30,400 may be a loss, but undoubtedly not an expenditure. A distinction has to be made between an "expenditure" and a "loss". Because, both of them are not one and the same. Disbursement or expenditure of a trader or a businessman is something which comes out of his pocket whereas a loss is something different. Loss is not a thing which he expends or disburses. That is a thing which comes upon him ab extra, as opined by Finlay J., in Alien v. Farquharson Brothers and Co. [1932] 17 TC 59 (KB), which opinion was quoted with approval by the apex court in CWT v. Kothari (S.C.) . Expenditure must arise out of a voluntary act on the part of the assessee whereas loss is entirely involuntary. In taking this view, we are also fortified by the judgment of the Bombay High Court in Lord's Diary Farm Ltd. v. CIT , with which we are in respectful agreement. In that view of the matter, we do not find any legal flaw in the opinion of the learned Tribunal.
17. In the result and for the foregoing reasons, we answer the questions referred to us in favour of the Revenue and against the assessee. The referred case is accordingly disposed of with no order as to costs.