# THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH CHAND LUNIA (D) THR. LRS. & ANR

- **Citation:** [2023] 7 S.C.R. 85
- **Court:** Supreme Court of India
- **Decided:** 2023-04-24
- **Case number:** Civil Appeal Nos. 7689-90 of 2022
- **Bench:** M. R. Shah, M. M. Sundresh
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/the-commissioner-of-income-tax-jaipur-v-prakash-chand-lunia-d-thr-lrs-anr-37524
- **Pages:** 49

## Headnote

Income Tax Act, 1961 - Explanation to s.37(1) - 'any
expenditure' in s.37 - Expenditure/loss incurred for any purpose
which is an offence or prohibited by law, not deductible in terms of
Explanation 1 to s.37 - High Court relying upon the decision of
Supreme Court in Piara Singh case allowed the loss of confiscation
of silver bars as a business loss - Sustainability of - Held: Not
sustainable - Explanation to s.37(1) provides that any expenditure
incurred by the assessee for any purpose which is an offence or
prohibited by law is not an allowable business expense - In the
present case, the main business of the assessee was dealing in silver
- His business cannot be said to be smuggling of the silver bars as
was the case in Piara Singh - Assessee was carrying on an otherwise
legitimate silver business and in attempt to make larger profits, he
indulged into smuggling of silver, which was an infraction of law -
High Court erred in relying upon the Piara Singh case - Impugned
judgment set aside - Order of the assessing officer, CIT(A) and
ITAT rejecting theclaim of the respondent-assessee to treat the silver
bars confiscated by the customs authorities as business loss restored
- Per M.M. Sundresh. J (Supplementing)'any expenditure' mentioned
in s.37 takes in its sweep loss occasioned in the course of business,
being incidental to it - Thus, any loss incurred by way of an
expenditure by an assessee for any purpose which is an offence or
which is prohibited by law is not deductible in terms of Explanation
1 to s.37 - A penalty or a confiscation is a proceeding in rem, and
therefore, a loss in pursuance to the same is not available for
deduction regardless of the nature of business, as a penalty or
confiscation cannot be said to be incidental to any business -
Decisions in Piara Singh and Dr. T.A. Quereshi do not lay down
correct law in light of the decision in Haji Aziz and the insertion of
Explanation 1 to s.37 - Impugned judgment set aside - Finance
(No.2) Act 1998 - Income Tax Act, 1922 - ss.10(1), (2).
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SUPREME COURT REPORTS
[2023] 7 S.C.R.
Allowing the appeals, the Court
HELD: 1.1 The provisions of Section 37(1) under the Act
has been amended by Finance (No.2) Act, 1998 by introducing
Explanation 1 thereto w.e.f. 01.04.1962 wherein any expenditure
incurred by the assessee for any purpose which is an offence or
prohibited by law is not an allowable business expense. It is true
that in the present case the respondent - assessee did not claim
value of silver bars confiscation as business expenses thus claimed
as business loss. However, the amendment to Section 37 might
have some bearing on the issue involved. [Para 6.1][98-C-D]
1.2 On going through the impugned judgment and order
passed by the High Court, it appears that the High Court has
simply relied upon the decision of this Court in the case of Piara
Singh. The High Court has materially erred in relying upon the
decision of this Court in the case of Piara Singh. [Para 6.2][98-E]
CIT, Patiala vs. Piara Singh 124 ITR 4 - held
inapplicable.
1.3 In the present case the ownership of the confiscated
silver bars of the assessee now cannot be disputed and even the
assessee is not disputing the same. Even on that also there are
concurrent findings by all the authorities below and including the
customs authorities. Therefore, the next question which is posed
for consideration before this Court is whether the assessee can
claim the business loss of the value of the silver bar confiscated
and whether the decision of this Court in the case of Piara Singh
would be applicable? To answer to the aforesaid question, it can
be seen that in the present case the main business of the
assessee is dealing in silver. His business cannot be said to be
smuggling of the silver bars as was the case in the case of Piara
Singh. In the assessee's case he was carrying on an otherwise
legitimate silver business and in attempt to make larger profits,
he indulged into smuggling of silver, whi

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 [2023] 7 S.C.R. 85
85
THE COMMISSIONER OF INCOME TAX JAIPUR
v.
PRAKASH CHAND LUNIA (D) THR. LRS. & ANR.
(Civil Appeal Nos. 7689-90 of 2022)
APRIL 24, 2023
[M. R. SHAH AND M. M. SUNDRESH, JJ.]
Income Tax Act, 1961 - Explanation to s.37(1) - 'any
expenditure' in s.37 - Expenditure/loss incurred for any purpose
which is an offence or prohibited by law, not deductible in terms of
Explanation 1 to s.37 - High Court relying upon the decision of
Supreme Court in Piara Singh case allowed the loss of confiscation
of silver bars as a business loss - Sustainability of - Held: Not
sustainable - Explanation to s.37(1) provides that any expenditure
incurred by the assessee for any purpose which is an offence or
prohibited by law is not an allowable business expense - In the
present case, the main business of the assessee was dealing in silver
- His business cannot be said to be smuggling of the silver bars as
was the case in Piara Singh - Assessee was carrying on an otherwise
legitimate silver business and in attempt to make larger profits, he
indulged into smuggling of silver, which was an infraction of law -
High Court erred in relying upon the Piara Singh case - Impugned
judgment set aside - Order of the assessing officer, CIT(A) and
ITAT rejecting theclaim of the respondent-assessee to treat the silver
bars confiscated by the customs authorities as business loss restored
- Per M.M. Sundresh. J (Supplementing)'any expenditure' mentioned
in s.37 takes in its sweep loss occasioned in the course of business,
being incidental to it - Thus, any loss incurred by way of an
expenditure by an assessee for any purpose which is an offence or
which is prohibited by law is not deductible in terms of Explanation
1 to s.37 - A penalty or a confiscation is a proceeding in rem, and
therefore, a loss in pursuance to the same is not available for
deduction regardless of the nature of business, as a penalty or
confiscation cannot be said to be incidental to any business -
Decisions in Piara Singh and Dr. T.A. Quereshi do not lay down
correct law in light of the decision in Haji Aziz and the insertion of
Explanation 1 to s.37 - Impugned judgment set aside - Finance
(No.2) Act 1998 - Income Tax Act, 1922 - ss.10(1), (2).
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[2023] 7 S.C.R.
Allowing the appeals, the Court
HELD: 1.1 The provisions of Section 37(1) under the Act
has been amended by Finance (No.2) Act, 1998 by introducing
Explanation 1 thereto w.e.f. 01.04.1962 wherein any expenditure
incurred by the assessee for any purpose which is an offence or
prohibited by law is not an allowable business expense. It is true
that in the present case the respondent - assessee did not claim
value of silver bars confiscation as business expenses thus claimed
as business loss. However, the amendment to Section 37 might
have some bearing on the issue involved. [Para 6.1][98-C-D]
1.2 On going through the impugned judgment and order
passed by the High Court, it appears that the High Court has
simply relied upon the decision of this Court in the case of Piara
Singh. The High Court has materially erred in relying upon the
decision of this Court in the case of Piara Singh. [Para 6.2][98-E]
CIT, Patiala vs. Piara Singh 124 ITR 4 - held
inapplicable.
1.3 In the present case the ownership of the confiscated
silver bars of the assessee now cannot be disputed and even the
assessee is not disputing the same. Even on that also there are
concurrent findings by all the authorities below and including the
customs authorities. Therefore, the next question which is posed
for consideration before this Court is whether the assessee can
claim the business loss of the value of the silver bar confiscated
and whether the decision of this Court in the case of Piara Singh
would be applicable? To answer to the aforesaid question, it can
be seen that in the present case the main business of the
assessee is dealing in silver. His business cannot be said to be
smuggling of the silver bars as was the case in the case of Piara
Singh. In the assessee's case he was carrying on an otherwise
legitimate silver business and in attempt to make larger profits,
he indulged into smuggling of silver, which was an infraction of
Civil law. In that view of the matter the decision of this Court in
the case of Piara Singh which has been relied upon by the High
Court while passing the impugned judgment and order and it has
been relied upon by the assessee shall not be applicable to the
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facts of the case. On hand or the other hand the decision of this
Court in the case of Haji Aziz and the decisions of the Andhra
Pradesh High Court and the Bombay High Court which were
pressed into service by the Revenue in Piara Singh would be
applicable with full force. [Paras 6.7, 6.8][99-H; 100-A-D]
Haji Aziz & Abdul Shakoor Bros. v. CIT, AIR 1961 SC
663 : [1961] SCR 651 - relied on.
Soni Hinduji Kushalji & Co. vs. CIT, (1973) 89 ITR
112(AP); JS Parkar v. VB Palekar, (1974) 94 ITR 616
(Bom) - approved.
1.4 In view of the above and for the reason stated above
and looking to the business of the assessee namely silver business
and was not in the business of smuggling silver, the decision of
this Court in the case of Piara Singh shall not be applicable and
therefore the impugned judgment and order passed by the High
Court quashing and setting aside the order passed by the
Assessing Officer, CIT(A) and the ITAT rejecting the claim of
the Assessee to treat the silver bars confiscated by the customs
authorities as business loss and consequently value allowing the
same as business loss is unsustainable and the same deserves to
be quashed and set side. [Para 7][100-E-F]
CIT Patiala vs. Piara Singh, 1980 Supp SCC 166 :
[1980] SCR 1122 - held inapplicable.
Chuharmal v. CIT, (1988) 3 SCC 588 : [1988] 3 SCR
788; CIT v. K Chinnathamban, (2007) 7 SCC 390 :
[2007] 8 SCR 496; TA Quereshi (Dr.) v. CIT, (2007) 2
SCC 759 : [2006] 10 Suppl. SCR 311; Apex
Laboratories (P) Ltd. v. CIT, (2022) 7 SCC 98 -
referred to.
Per M.M. Sundresh, J. (Supplementing)
1.1 Explanation-I makes a declaration to remove any
possible doubts to reckon a loss suffered in the form of
expenditure for any purpose which is an offence or one that is
prohibited by law. There is no difficulty in holding that this
explanation is clarificatory in nature. Applying the principle of
literal interpretation with the intendment being very clear, giving
THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH
CHAND LUNIA (D) THR. LRS. & ANR.
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SUPREME COURT REPORTS
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no room for further doubts, coupled with the fact that there is no
challenge to it, the meaning appears to be rather very clear. It
seeks to prohibit a deduction of any expenditure incurred by an
assessee for any purpose which is an offence or which is prohibited
by law. Due regard will have to be given to the words 'any
expenditure' and 'any purpose'. The reiteration being a legislative
clarification of the main provision is required to be taken note of,
as such, the power of judicial review over an explanation, which
has been introduced to explain and remove the doubts of the
main provision, is rather limited. [Para 12][103-G-H; 104-A-B]
1.2 Though the provision speaks of expenditure while not
making a specific reference to loss, one has to press into service
the accepted commercial practice and trading principles. If one
is to treat the expenditure as a genus, a loss would become a
specie. All losses would become expenditures but not vice versa.
A commercial loss in trade arising out of a business being carried
on and incidental to it would be a deductible loss. There is a
similarity in the test qua a loss as laid down by this Court, and
expenditure under Section 37 of the Act. Perhaps, there is a
distinction when it comes to the accounting treatment of the two
concepts. Thus, there is no difficulty in holding that the word
'any expenditure' mentioned in Section 37 of the Act takes in its
sweep loss occasioned in the course of business, as well.
Therefore, I agree with the view of my learned brother that
Section 37 of the Act and Explanation 1 will have a bearing in the
present case. [Para 13][104-C-E]
Badridas Daga v. CIT, [1959] SCR 690 - relied on.
1.3 A little bit of interplay between Section 115BBE and
Section 37(1) of the Act might throw more light on both the
provisions. If a loss in pursuance to an offence or prohibited
business cannot be brought under Section 115BBE of the Act for
income assessed under 68, 69 and 69A to 69D of the Act, which
deals with unexplained income, expenditure etc., it can never be
said that the same would be brought under Section 37(1) of the
Act, despite the fact that the objective behind both the provisions
are overlapping with some connection. Section 115BBE being a
subsequent legislation, the true meaning of Section 37(1) can be
understood on that basis. [Para 17][106-A-C]
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1.4 Conclusions:
I. The word 'any expenditure' mentioned in Section 37 of
the Act takes in its sweep loss occasioned in the course of
business, being incidental to it.
II. As a consequence, any loss incurred by way of an
expenditure by an assessee for any purpose which is an offence
or which is prohibited by law is not deductible in terms of
Explanation 1 to Section 37 of the Act.
III. Such an expenditure/loss incurred for any purpose
which is an offence shall not be deemed to have been incurred
for the purpose of business or profession or incidental to it, and
hence, no deduction can be made.
IV. A penalty or a confiscation is a proceeding in rem, and
therefore, a loss in pursuance to the same is not available for
deduction regardless of the nature of business, as a penalty or
confiscation cannot be said to be incidental to any business.
V. The decisions of this Court in Piara Singh and Dr. T.A.
Quereshi do not lay down correct law in light of the decision of
this Court in Haji Aziz and the insertion of Explanation 1 to Section
37. [Para 26][132-F-H; 133-A-C]
Commissioner of Income Tax vs. Piara Singh, 1980 Supp
SCC 166 : [1980] SCR 1122; Dr. T.A. Quereshi v.
Commissioner of Income Tax, Bhopal (2007) 2 SCC 759
: [2006] 10 Suppl. SCR 311 - held not correct law.
CIT v. S.C. Kothari, 1972 (4) SCC 402: [1972] 1 SCR
950 - held inapplicable.
Haji Aziz & Abdul Shakoor Bros. v. CIT, [1961] 2 SCR
651 - relied on.
Soni Hinduji Kushalji & Co. vs. CIT, (1973) 89 ITR
112(AP); JS Parkar v. VB Palekar, (1974) 94 ITR 616
(Bom) - approved.
Maqbool Hussain v. State of Bombay etc. [1953] SCR
730 - referred to.
THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH
CHAND LUNIA (D) THR. LRS. & ANR.
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Case Law Reference
In the judgment of M. R. Shah J.
[1961] SCR 651
relied on
Para 3.1
[1988] 3 SCR 788
referred to
Para 3.3
[2007] 8 SCR 496
referred to
Para 3.3
[2006] 10 Suppl. SCR 311
referred to
Para 3.4
(2022) 7 SCC 98
referred to
Para 3.4
[1980] SCR 1122
held inapplicable
Para 6
In the judgment of M.M. Sundresh, J.
[1980] SCR 1122
held not correct law
Para 6
[1959] SCR 690
relied on
Para 13
[1961] 2 SCR 651
relied on
Para 20
[1972] 1 SCR 950
held inapplicable
Para 21
[1953] SCR 730
referred to
Para 22.1
[2006] 10 Suppl. SCR 311
held not correct law
Para 25
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos.76897690 of 2022.
From the Judgment and Order dated 22.11.2016 of the High Court
of Judicature for Rajasthan at Jaipur in DBITA No.96 of 2003 and
DBITR No.6 of 1996.
Balbir Singh, ASG, A. K. Shrivastava, Sr. Adv., Rupesh Kumar,
Shyam Gopal, S. A. Haseeb, Divyansh H. Rathi, Ms. Monica Benjamin,
Ms. Sunita Sharma, Raj Bahadur Yadav, Advs. for the Appellant.
Arijit Prasad, Sr. Adv., Ms. Supriya Juneja, Paritosh Gupta, Aditya
Singla, Ms. A. Sahitya Veena, Advs. for the Respondents.
The Judgment of the Court was delivered by
M. R. SHAH, J.
1. Feeling aggrieved and dissatisfied with the impugned judgment
and order dated 22.11.2016 passed by the High Court of Judicature for
Rajasthan at Jaipur passed in DBITA No.96/2003 and DBITR No.6/
1996 by which the High Court has allowed the said appeals, the Revenue
has preferred the present appeals.
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2. The facts leading to the present appeals in nutshell are as under:
2.1 A search was conducted by the Directorate of Revenue
Intelligence (DRI) officers at the premises situated at A-11, 12, Sector -
VII, NOIDA taken on rent by the assessee, Shri Prakash Chand Lunia.
The DRI recovered 144 slabs of silver from the premises and two silver
ingots from the business premises of the assessee at 1397, Chandni
Chowk, Delhi. The assessee was arrested under Section 104 of the
Customs Act for committing offence punishable under Section 135 of
the Customs Act. The Collector, Customs held that the assessee Shri
Prakash Chand Lunia is the owner of silver/bullion and the transaction
thereof was not recorded in the books of accounts. The Collector of
Customs, New Delhi ordered confiscation of the said 146 slabs of silver
weighing 4641.962 Kilograms valued at Rs.3.06 Crores. The Collector
Customs further imposed a personal penalty of Rs.25 Lakhs on Sh.
Prakash Chand Lunia under Section 112 of the Customs Act. The
Collector held that the silver under reference was of smuggled nature.
2.2 During the course of the assessment proceedings the Assessing
Officer observed that the assessee was not able to explain the nature
and source of acquisition of silver of which he is held to be the owner,
therefore the deeming provisions of Section 69A of the Income Tax Act,
1961 (hereinafter referred to as 'the Act, 1961) would be applicable.
The investment in this regard was not found recorded in the books of
accounts of the assessee that were produced before the then Assessing
Officer. Accordingly, the Assessing Officer passed an assessment Order
and made an addition of Rs.3,06,36,909/- under Section 69A of the Act,
1961. In appeals preferred by the Assessee against the assessment order,
the CIT(A) dismissed the appeal of the assessee. Feeling aggrieved the
assessee preferred the appeal before the ITAT. The ITAT, Jaipur also
upheld the order of the CIT(A) so far as Section 69A is concerned,
however, partly allowed the appeal of the assessee. As regards some
other minor additions, the ITAT set aside some minor other additions and
remanded the matter to the AO for fresh examination. The AO reexamined the issue and addition was made. The CIT(A) also upheld the
order of the AO. The Assessee preferred the appeal against the fresh
order passed by the CIT(A) before the ITAT. The ITAT, in the second
round as well upheld the order of the authorities below. A reference was
made by the ITAT to the High Court with the following questions of law:
THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH
CHAND LUNIA (D) THR. LRS. & ANR. [M. R. SHAH, J.]
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(i)
"Whether on the facts and in the circumstances of the case,
the Tribunal after construing and interpreting the provisions
contained in section 69A of the Income Tax Act, 1961 was
right in law, in holding that the assessee was the owner of
the 144 silver bars found at premises no A 11 & 12 , Sector
- VII, Noida and two silver bars found at premises of M/s
Lunia & Co Delhi and in sustaining addition of
Rs.3,06,36,909/- being unexplained investment in the hands
of the assessee under Section 69A of the Act?
(ii)
If the answer to the above question is in affirmative then,
whether, on the facts and in the circumstances of the case,
the Tribunal was right in law in distinguishing the ratio laid
down by their Lordships of the Supreme Court in the case
of Piara Singh v/s CIT, 124 ITR 41 and thereby not allowing
the loss on account of confiscation of silver bars?"
2.3 While the reference was pending before the High Court, penalty
proceedings were initiated against the assessee. An order under Section
271 (i) (c) of the Act came to be confirmed by both the CIT (A) and the
ITAT. Accordingly, the assessee filed an appeal under Section 260A of
the Act against the Penalty order, before the High Court. The High
Court while deciding both the cases together, qua the first question,
decided in favour of the Revenue and the rental premises of the assessee,
the same is to be added to his income as a natural consequence. However,
with regard to the second question, the High Court held that loss of
confiscation by the DRI official of Customs Department is business
loss. While holding the High Court has relied upon the decision of this
Court in the case of CIT, Patiala vs. Piara Singh reported in 124
ITR 41. The impugned judgment and order passed by the High Court is
the subject matter of the present appeal.
3. Shri Balbir Singh, learned ASG has appeared on behalf of the
Revenue and Shri Arijit Prasad, learned Senior Advocate has appeared
on behalf of the assessee.
3.1 Shri Balbir Singh, learned ASG appearing on behalf of the
Revenue has vehemently submitted that in the facts and circumstances
of the case and while dealing with the relevant provisions of the Act,
1961, the High Court has materially erred in relying upon the decision of
this Court in the case of Piara Singh (supra). It is submitted that as
such the AO, CIT(A) and ITAT have correctly distinguished the judgment
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in case of the Piara Singh (supra) as the same pertained to an assessee
who was engaged in the business of smuggling of currency notes and
for whom confiscation of the currency notes was a loss occasioned in
pursuing his business, i.e., a loss which sprung directly from carrying on
of his business and was incidental to it. It is submitted that due to this,
the assessee in the aforesaid case was held entitled to deduction under
Section 10(1) of Income Tax Act, 1922. It is submitted that however in
para 7 of the aforesaid judgment which refers to three cases where an
exception to the aforesaid rule was noted by the Court. It is submitted
that in the said decision this Court noted earlier decisions of this Court as
well as the Andhra Pradesh High Court and the Bombay High Court. It
is submitted that in the case of Haji Aziz & Abdul Shakoor Bros. v.
CIT, AIR 1961 SC 663, the assessee's claim for deduction of fine paid
by him for release of his dates confiscated by customs authorities, was
rejected on the ground that the amount paid by way of penalty for breach
of law was not a normal course of business carried on by it. In the other
two cases, customs authorities had confiscated gold from assessees
otherwise engaged in legitimate businesses. It is submitted that in two
relied upon cases of Andhra Pradesh High Court and the Bombay High
Court the assessees claimed the value of gold seized as a trading/business
loss which is identical to the Respondent-Assessee's claim in the facts
of the present SLP. It is submitted that therefore the decision of this
Court in Haji Aziz & Abdul Shakoor Bros. v. CIT, AIR 1961 SC 663,
of the Andhra Pradesh High Court in the case of Soni Hinduji Kushalji
& Co. vs. CIT, (1973) 89 ITR 112(AP) and of the Bombay High
Court in the case of JS Parkar v. VB Palekar, (1974) 94 ITR 616
(Bom) shall be applicable with full force to the facts of the case on
hand.
3.2 It is submitted that the Andhra Pradesh High Court observed
in para 10 of the judgment in case of Soni Hinduji Kushalji (supra)
that when a claim for deduction is made, the loss must be one that springs
directly from or is incidental to the business which the assessee carries
on and not every sort or kind of loss which has absolutely no nexus or
connection with his business. In paras 11 and 12, the High Court relied
on various judgments to state that confiscation of contraband gold is an
action in rem and not a proceeding in personam and thus, a proceeding
in rem in the strict sense of the term is an action taken directly against
the property (i.e., smuggled gold) and even if the offender is not known,
customs authorities have power to confiscate the contraband gold. In
THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH
CHAND LUNIA (D) THR. LRS. & ANR. [M. R. SHAH, J.]
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view of the aforesaid, the Court stated that confiscation of contraband
gold by customs authorities cannot be said to be a trading or commercial
loss connected with or incidental to assessee's business. The High Court
further relied on Haji Aziz (supra) and various other judgments to state
that such confiscation of smuggled/contraband goods which results in
infraction of law and has no incidence/connection to the business of
assessee, cannot be allowed as a business loss. Thus, the aforesaid case
which has been referred to and distinguished in Piara Singh (supra),
squarely applies to the facts of the present case herein. Similarly, the
case of JS Parkar (supra) would also be applicable to the present case
as in the former case, the assessee not only claimed the value of the
gold confiscated as a trading loss but also set off of the said loss against
his assumed and assessed income from undisclosed sources. Furthermore,
the value of gold was sought to be taxed U/s.69/69A by the tax authorities.
However, in this case also the Bombay High Court rejected the contention
that Section 110 of the Evidence Act (where a person found in possession
of anything, the onus of proving that he was not the owner is on the
person who affirmed that he was not owner) was inapplicable to taxation
proceedings and agreed that tax authorities had rightly inferred assessee
to be owner of seized gold based on circumstantial evidence and assessee
was not entitled to claim value of such gold as a trading loss.
3.3 Shri Balbir Singh, learned ASG has further relied upon the
decisions of this Court in the case of Chuharmal v. CIT, (1988) 3 SCC
588 and CIT v. K Chinnathamban, (2007) 7 SCC 390, on onus of
proving ownership being on the person who denies ownership and who
is in possession. It is submitted that ownership of confiscated silver fell
on the Respondent-Assessee in the present case which he failed to
discharge and which accordingly rendered the tax authorities' concurrent
findings on his ownership to be valid. It is submitted that when the assessee
has been unable to deny possession and ownership and in fact admitted
the same before the Settlement Commission as well as the High Court,
and further claimed the value of confiscated silver as a trading loss
before AO, CIT(A) and ITAT, to alternatively argue to the contrary and
deny ownership in order to state that Section 69A cannot be applied in
his case may not be accepted.
3.4 It is submitted by learned ASG that assessee shall also not be
permitted to claim such loss as a business expenditure in view of the
express prohibition under Explanation 1 to Section 37(1) of the Act which
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was added w.e.f.01.04.1962. Reliance is placed on the decisions of this
Court in the case of TA Quereshi (Dr.) v. CIT, (2007) 2 SCC 759 as
well as Apex Laboratories (P) Ltd. v. CIT, (2022) 7 SCC 98. It is
submitted that Explanation 1 to Section 37(1) of the Act expressly
disallows any expenditure incurred by an assessee for any purpose which
is an offence or is prohibited by law, which may be claimed as an
expenditure incurred for the purpose of business/profession.
3.5 It is submitted that in the case of TA Quereshi (supra), this
Court clarified that the facts of the said case pertained to business loss
and not business expenditure. It is submitted that in the said case, ITAT
found the assessee engaged in the business of manufacturing and selling
heroin and thus, this Court held that assessee's claim of business loss
was allowable as he was in the business of heroin. It is submitted that
the case of Apex Laboratories (supra) distinguishes the judgment in
TA Quereshi (supra) and states that the case relating to the assessee
bribing doctors, did not deal with business loss but business expenditure
which was disallowable under Explanation 1 to Section 37(1). It is
submitted that thus either way, neither can the Respondent-Assessee
claim business loss due to him not being in the smuggling business nor
can he claim business expenditure as the same is prohibited under
Explanation 1 to Section 37(1).
3.6 Making above submissions and relying upon the above
submissions, it is prayed to allow the present appeals and restore the
ITAT orders.
4. Shri Arijit Prasad, learned Senior Advocate appearing on behalf
of the assessee has vehemently submitted that in the present case the
respondent - assessee is engaged in the business of purchase and sale
of silver. Total sales of Rs.1,46,07,314/- of Silver was declared by the
respondent - assessee with a gross profit of Rs.1,32,712/- for the
assessment year in question. Search was conducted by the officers of
DRI when unaccounted 146 slabs of silver was recovered. The Collector
of Customs ordered absolute confiscation of the said 146 slabs of silver
valued at Rs.3,06,036,909/- was proposed to be added as deemed income
under Section 69A of the Act. The respondent - assessee disputed being
the owner of the slabs. In the alternative, the respondent also requested
that 146 silver slabs having been absolutely confiscated by the Customs
Department, the value of such tradable silver slabs should be allowed as
loss. However, the Assessing Officer made the addition of
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Rs.3,06,036,909/- as income under Section 69A of the Act being a value
of 146 silver bars seized from the possession of the respondent. The
said order of addition came to be confirmed upto ITAT, however by the
impugned judgment and order the High Court has answered the reference
in favour of the assessee by holding that when the value of material is
added to the income of the respondent, as a natural consequence, the
loss by confiscation of the said material is required to be allowed as
business loss. It is submitted that it is through that before the High Court,
the assessee did not press the argument regarding the ownership of the
silver slabs and therefore, the said question was not answered by the
High Court.
4.1 It is submitted that therefore present case is one where set
off is claimed of the value of the 146 silver slabs as loss on account of
absolute confiscation rather than claim of expenditure of any penalty
and/or fine imposed for infraction of law.
4.2 It is submitted that as such the issue in the present appeals is
fairly covered in favour of the assessee in view of the decision of this
Court in the case of TA Quereshi (Dr.) (supra). In the said decision, it
is held that the judgment of the High Court applying Section 37 of the
Act to the case of business loss on account of absolute confiscation of
the goods was erroneous. It is submitted that the submission of the
assessee therein that Section 37 of the Act related to business expenditure
whereas case of absolute confiscation was one of business loss has
been accepted.
4.3 It is submitted that in the present case, upon search, 146 silver
slabs were found to be in possession of the assessee. The value of the
said silver slabs was determined to be Rs. 3,06,036,909/- and the same
was added to the computation of income of the assessee under Section
69A of the Act as undisclosed valuable article which was not recorded
in the books of account of the assessee.
4.4 It is submitted that however as the respondent - assessee
was engaged in the business of trading of silver and the said silver slabs
were in possession of the assessee for the purpose of trading, absolute
confiscation of the said silver slabs would result in loss of stock in trade
and the value thereof would be available as deduction as business/trading
loss. It is submitted that therefore the decision of this Court in the case
of T.A. Quereshi (Supra) shall be clearly applicable.
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4.5 It is submitted that in the case of T.A. Quereshi (Supra) this
Court has drawn a distinction between claim of deduction as expenditure
of penalty/fine as against claim of business loss on account of confiscation
of goods which are unaccounted stock in trade. It is submitted that in
case of claim of deduction as expenditure of any fine and/or penalty, the
Courts have held that such deduction would not be available to the
assessee as it would defeat the very purpose behind such penal action.
Whereas, in case of claim of set off as business loss, the unaccounted
goods though added to the income of assessee but is not available to the
assessee for his trade. It is submitted that while extending the benefit of
such set off, this Court in the case of Piara Singh (supra) and T.A.
Quereshi (Supra) have held that the assessee shall be entitled to the
set off as business loss.
4.6 It is submitted that unlike a case of imposition of redemption
fine where the confiscated goods are released on payment of such
amount, absolute confiscation of the goods results in the said goods
vesting with the Central Government. In such cases, though the value of
the goods is added to the income of the assessee, but the assessee has
no option of redeeming the goods for its onward trade. Thus, there is an
evident distinction between a case where deduction is sought of any
penalty and/or fine as allowable expenditure and a case where business
loss is claimed on account of absolute confiscation of the goods which
results in loss of stock in trade. It is submitted that present one is a case
where the set off is claimed as business loss on account of absolute
confiscation of the silver bars and not of any penalty and/or fine. The
judgments cited during the course of hearing by the Petitioner are
therefore rendered on distinct and distinguishable facts and would not
be applicable to the facts of the present case.
4.7 It is submitted that the said distinction has also been statutorily
recognized. As highlighted by the appellant, Section 37 which deals with
allowance and deduction of expenditure, was amended vide Finance
Act, 1998 w.e.f. 01.04.1962 whereby Explanation 1 was added to clarify
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. In contrast
thereto, consciously no such restriction has been brought in law with
regard to set off of the value of the unaccounted stock in trade which
have been absolutely confiscated.
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4.8 Making above submissions it is prayed to dismiss the present
appeals.
5. Heard learned counsel for the respective parties at length.
6. The short question which is posed for consideration before this
Court is whether the High Court has erred in law in allowing the
respondent - assessee the loss of confiscation of silver bars by DRI
officials as a business loss, relying upon the decision of this Court in the
case of CIT Patiala vs. Piara Singh, 1980 Supp SCC 166?
6.1 While considering the aforesaid question, at the outset, it is
required to be noted that the provisions of Section 37(1) under the Act
has been amended by Finance (No.2) Act, 1998 by introducing
Explanation 1 thereto w.e.f. 01.04.1962 wherein any expenditure incurred
by the assessee for any purpose which is an offence or prohibited by
law is not an allowable business expense. It is true that in the present
case the respondent - assessee did not claim value of silver bars
confiscation as business expenses thus claimed as business loss. However,
the amendment to Section 37 might have some bearing on the issue
involved.
6.2 On going through the impugned judgment and order passed
by the High Court, it appears that the High Court has simply relied upon
the decision of this Court in the case of Piara Singh (supra). Having
gone through the decision of this Court in the case of Piara Singh
(supra), we are of the opinion that the High Court has materially erred
in relying upon the decision of this Court in the case of Piara Singh
(supra).
6.3 In the case of Piara Singh (supra) the assessee was found
to be in the business of smuggling of currency notes and to that it was
found that confiscation of currency notes was a loss occasioned in
pursuing his business i.e. a loss which sprung directly from carrying on
of his business and was incidental to it. Due to this, the assessee in the
said case held entitled to deduction under Section 10(1) of the Income
Tax Act, 1922. In view of the above fact situation this Court in the case
of Piara Singh (supra) distinguished the decisions of this Court in the
case of Haji Aziz & Abdul Shakoor Bros. reported in AIR 1961 SC
663, and the decision in the case of Soni Hinduji Kushalji & Co. vs.
CIT, (1973) 89 ITR 112(AP) and not agreed with the decision of the
Bombay High Court in the case of J.S. Parkar vs. VB Palekar, (1974
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94 ITR 616 (Bom). It is to be noted that in all the aforesaid three cases
which were relied upon by the Revenue in the case of Piara Singh
(supra) were found to be involved in legitimate businesses and not
smuggling business but however they were found to have smuggled goods
contrary to law which resulted in an infraction of law and resultant
confiscation by customs authorities.
6.4 In the case of Haji Aziz (supra) the assessee claimed for
deduction of fine paid by him for release of his dates confiscated by
customs authorities was rejected on the ground that the amount paid by
way of penalty for breach of law was not a normal business carried out
by it. In the case of Soni Hinduji Kushalji (supra) and JS Parkar
(supra), the customs authorities had confiscated gold from assessees
otherwise engaged in legitimate businesses. In the aforesaid two cases
the assessee claimed the value of gold seized as a trading/business loss.
It was held that the assessees are not entitled to the deductions as claimed
as business loss.
6.5 In the case of Soni Hinduji (supra), the Andhra Pradesh
High Court held that when a claim for deduction is made, the loss must
be one that springs directly from or is incidental to the business which
the assessee carries on and not every sort or kind of loss which has
absolutely no nexus or connection with his business. It was observed
that confiscation of contraband gold was an action in rem and not a
proceeding in personam and thus, a proceeding in rem in the strict sense
of the term is an action taken directly against the property (i.e. smuggled
gold) and even if the offender is not known, the customs authorities
have power to confiscate the contraband gold.
6.6 In the case of JS Parkar (supra), the assessee not only
claimed the value of the gold confiscated as a trading loss but also set
off of the said loss against his assumed and assessed income from
undisclosed sources. The value of gold was sought to be taxed under
Section 69/69A of the Act by the tax authorities. However, the Bombay
High Court held the assessee to be the owner of the smuggled confiscated
gold and the assessee was not entitled to claim value of such gold as a
trading loss.
6.7 In the present case the ownership of the confiscated silver
bars of the assessee now cannot be disputed and even the assessee is
not disputing the same. Even on that also there are concurrent findings
by all the authorities below and including the customs authorities.
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Therefore, the next question which is posed for consideration before
this Court is whether the assessee can claim the business loss of the
value of the silver bar confiscated and whether the decision of this Court
in the case of Piara Singh (supra) would be applicable?
6.8 To answer to the aforesaid question, it can be seen that in the
present case the main business of the assessee is dealing in silver. His
business cannot be said to be smuggling of the silver bars as was the
case in the case of Piara Singh (supra). As observed hereinabove in
the assessee's case he was carrying on an otherwise legitimate silver
business and in attempt to make larger profits, he indulged into smuggling
of silver, which was an infraction of law. In that view of the matter the
decision of this Court in the case of Piara Singh (supra) which has
been relied upon by the High Court while passing the impugned judgment
and order and it has been relied upon by the assessee shall not be
applicable to the facts of the case. On hand or the other hand the decision
of this Court in the case of Haji Aziz (1961) 41 ITR 350 (SC) and the
decisions of the Andhra Pradesh High Court and the Bombay High Court
which were pressed into service by the Revenue in Piara Singh (supra)
would be applicable with full force.
7. In view of the above and for the reason stated above and looking
to the business of the assessee namely silver business and was not in the
business of smuggling silver, the decision of this Court in the case of
Piara Singh (supra) shall not be applicable and therefore the impugned
judgment and order passed by the High Court quashing and setting aside
the order passed by the Assessing Officer, CIT(A) and the ITAT rejecting
the claim of the Assessee to treat the silver bars confiscated by the
customs authorities as business loss and consequently value allowing
the same as business loss is unsustainable and the same deserves to be
quashed and set side.
8.1 In view of the above and for the reason stated above present
appeals succeed. The impugned judgment and order passed by the High
Court is hereby quashed and set aside and the order passed by the
assessing officer, CIT(A) and the ITAT are hereby restored.
Present appeals are accordingly allowed. No costs.
M. M. SUNDRESH, J.
1. The present appeal is filed by the Revenue, challenging the
decision of the Division Bench of the Rajasthan High Court at Jaipur,
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drawing a distinction between a claim for deduction of a loss incurred in
an illegal business, as against a claim of a loss qua a legitimate business,
though an illegality is attached to it. The aforesaid issue is to be tested on
an offence committed leading to either a penalty or confiscation.
2. Heard Mr. Balbir Singh, learned Additional Solicitor General,
Mr. AK Shrivastava, learned seniorcounsel for the Appellant and Mr.
Arjit Prasad, learned senior counsel for the Respondents.
3. I have gone through the well-merited judgment rendered by my
learned brother, Justice M.R. Shah. While concurring with the ultimate
conclusion arrived at in overturning the decision of the High Court, I
would like to give my own reasoning on the aforesaid aspect. The facts
being narrated with utmost clarity by my learned brother, only those
which are required in support of the reasoning are being recorded.
4. The Director of Revenue Intelligence set out a search at the
business premises of the Respondent/assessee. The recovery yielded
silver slabs/silver ingots. The assessee was in the business of making
jewellery.
5. The Respondent/assessee filed his return for the Assessment
Year 1989-1990 followed by a petition before the Income Tax Settlement
Commission.The Collector of Customs videorder dated 18.12.1990
ordered confiscation of goods and imposed penalty. It was done on the
premise that the goods were smuggled by the assessee. A claim was
made by the assessee that the loss on account of confiscation would be
allowable as trading loss being incidental to the business, and hence,
deductible. This argument was duly rejected as he was neither doing the
business of smuggling, nor he owned the silver.