Civil Appeal No 2752 of 1972
Appeal by Certificate from the Judgment and Order dated the 5th November 1970 of the Punjab and Haryana High Court in Income Tax Reference No 38 of 1969
G A Shah  Miss A Subhashini for the appellant
Naunit Lal  Mr Kailash Yasudev for respondent
The Judgment of the Court was delivered by PATHAK J
Is a smuggler who is taxed on his income from smuggling under the Income Tax Act 1922 entitled to a deduction under Section 101 of the Act on account of the confiscation of currency notes employed in the smuggling activity 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 65500 in currency notes 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 and Land Customs ordered the confiscation of the currency notes
The Income Tax Officer now took proceedings under the Indian Income Tax Act 1922 for assessing the assessee s income and determining his tax liability
He came to the finding that out of Rs 65500 an amount of Rs 60500 constituted the income of the assessee from undisclosed sources
An appeal by the assessee was dismissed by the Appellate Assistant Commissioner
In second appeal before the Income Tax Appellate Tribunal the assessee represented that if he was regarded as engaged in the business of smuggling gold he was entitled to a deduction under Section 101 of the Income Tax Act of the entire sum of Rs 65500 as a loss incurred in the business on the confiscation of the currency notes
The Appellate Tribunal upheld the 1124 claim to deduction
It 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 for gold in Pakistan which was later smuggled into India
At the instance of the Revenue a reference was made to the High Court of Punjab and Haryana on the following question Whether on the facts and in the circumstances of the case the loss of Rs 65500 arising from the confiscation of the currency notes was an allowable deduction under section 101 of the Income tax Act 1922 The High Court answered the question in the affirmative
And now this appeal by the Revenue
In our Judgment the High Court is right
The Income Tax authorities found that the assessee was carrying on the business of smuggling They held that he was therefore liable to income tax on 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 Custom 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 Badridas Daga vs Commissioner of Income tax the deduction must be allowed
In Commissioner of Income tax Gujarat vs SC Kothari this Court held that for the purpose of Section 101 of the Income Tax Act 1922 a loss incurred in carrying on an illegal business must be 1125 deducted before the true figure of profits brought to tax can be computed
Grover J speaking for the Court observed 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 101 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
 Reliance was placed by the Revenue on Haji Aziz and Abdul Shakoor Bros vs Commissioner of Income tax Bombay City II
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 102 xv of the Income Tax Act was rejected on the ground that the amount was paid by way 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 vs Commissioner of Income tax 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 section Parkar vs V B Palekar and Others 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 1126 of the law and as it had not fallen on the assessee as a trader or business man 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 65500  and accordingly we affirm the view taken by the High Court on the question of law referred to it
The appeal fails and is dismissed with costs
SR Appeal dismissed


Summary:
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 65500 in currency notes 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 and Land Customs ordered the confiscation of the currency notes
In the proceedings initiated by the Income Tax Officer he found that Rs 60500 constituted the income of the assessee from undisclosed sources
An appeal by the assessee was dismissed by the Appellate Assistant Commissioner
In second appeal before the Income Tax Appellate Tribunal the assessee represented that if he was regarded as engaged in the business of smuggling gold he was entitled to a deduction under section 101 of the Income Tax Act 1922 of the entire sum of Rs 65500 as a loss incurred in the business on the confiscation of the currency notes
The Tribunal upheld the claim to deduction
It 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
The High Court on a reference at the instance of the Revenue answered the reference against the Revenue
Hence the appeal
Allowing the appeal the Court
 HELD 1
The assessee is entitled to the deduction of Rs 65500 under section 101 of the Income Tax Act 1922
1124 C 1126 B 2
The assessee was carrying on the business of smuggling and therefore was liable to income tax on income from that business
The currency notes carried by the assessee 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 1123 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 Badridas Daga vs Commissioner of Income Tax the deduction must be allowed
1124 D E Badridas Daga vs Commissioner of Income Tax  Commissioner of Income Tax Gujarat vs section C Kothari  applied
Haji Aziz and Abdul Shakoor Bros vs Commissioner of Income Tax Bombay City II  Sari Hinduji Khushalji 7 Co vs Commr
of Income Tax AP  J section Parkar vs V B Palekar and Ors
 distinguished and explained