IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 05 .12.2008 CORAM: THE HONOURABLE MRS. JUSTICE PRABHA SRIDEVAN AND THE HONOURABLE MR.JUSTICE K.K. SASIDHARAN T.C.(A) Nos.391 and 392 of 2004 Commissioner of Income Tax Erode. ..Appellant in both cases -Vs.- K.Thangamani ..Respondent in both cases Prayer:- Tax Case Appeals against the order of the Income Tax Appellate Tribunal Madras "A" Bench dated 25.10.2002 in ITA No.304/M/94 and 95/M/92 for the Assessment Years 1987-88, 1988-89 respectively against the orders of the Commissioner of Income Tax (Appeals) Coimbatore in ITA.NO.563-C/93-94 dated 8.12.1993 and ITA.No.2-C/91-92 dated 31.10.91 respectively and against the assessment order of the Assistant Commissioner of Income Tax , Spl. Investigation Circle, Erode dated 16.8.93 for the Assesment year 1987-88 and 1988-89 respectively in PAN/GIR.No.49-517-PX-8742. For Appellant : Mr.N.Murali Kumaran Standing Counsel for Income Tax Department For Respondent : Mr.T.S.V.Krishnan J U D G M E N T K.K.SASIDHARAN, J These tax cases are at the instance of the revenue and the following substantial question of law is raised for our consideration:- "1. Whether in the facts and circumstances of the case, the Tribunal was right in holding that the refunds collected illegally by production of bogus TDS certificates by the assessee could under no circumstances be the income of the assessee? https://hcservices.ecourts.gov.in/hcservices/ 2. Whether in the facts and circumstances of the case, the Tribunal was right in holding that amounts earned fraudulently cannot be treated as income and taxed?" Factual Matrix:- 2. The asessment relates to the years 1987-88 and 1988-89. The assessee is engaged in tax consultancy and audit work. In a search conducted in the residential premises as well as in the office of the assessee on 14.3.1989, certain incriminating documents were seized. From the documents so seized by the Income Tax Department, it was revealed that the assessee had been claiming and receiving income tax refunds by filing bogus TDS certificates along with return of income prepared by him even in the names of non-existent persons. The assessee has filed his return of income for the assessment year 1987-88 originally on 30.11.1987 reporting an income of Rs.29,700/-. However on the basis of the information available after the search of his premises, the assessment was reopened under Section 147 of the Income Tax Act and after considering the explanation submitted by the assessee, a sum of Rs.7,29,424/- was arrived at by the department, being the T.D.S. Certificate en-cashed by the assessee during the previous year and the same was treated as "professional income" during the said previous year. 3. With respect to the assessment year 1988-89, the assessee has filed the return of income on 27.1.1989 admitting an income of Rs.32,870/-. The assessment was completed by the Assessing Officer by treating the deposits made by the assessee during the previous year relevant to the assessment year by determining a sum of Rs.60,09,366/- as his income from "undisclosed source" as well as by taking into consideration of the bogus claim made by him. 4. The assessment order for the year 1987-88 and 1988-89 were challenged by the assessee before the Commissioner (Appeals). The main objection was with regard to inclusion of a sum of Rs.7,29,424/- in the income of the assessee. The Commissioner found that the assessee himself admitted before the investigating officers as well as before the Income Tax authorities about the fraudulent practice adopted by him for preparation of false TDS certificates and returns and obtaining refunds from the department. However the Commissioner was of the opinion that the refunds supposed to have been received by the assessee could be worked out only to the extent of 60% of the total refunds and on a consideration of the facts and circumstances of the case, the income of the assessee on account of the refunds received by him during the assessment year 1987-88 was reduced to Rs.4,37,000/- and the same was substituted in the place of Rs.7,29,424/-. The Commissioner also directed inclusion of the said amount under "Residuary" head instead of "Profession". With respect to the assessment year 1988-89, the Commissioner (Appeals) estimated the income from refund of false TDS claim at Rs.14,36,758/- and accordingly the appeal was partly allowed. https://hcservices.ecourts.gov.in/hcservices/ 5. Aggrieved by the order of the Commissioner (Appeals), both the revenue as well as assessee filed appeals before the Income Tax Appellate Tribunal. 6. The Income Tax Appellate Tribunal rendered a clear factual finding to the effect that the assessee indulged in filing bogus T.D.S. certificates and made unjust enrichment and the income tax officials were also involved in the said transaction. However the Tribunal was of the view that the amount of refund received by the assessee by fraudulent means cannot be assessed as income inasmuch as the department committed one more wrong by treating it as the income of the assessee. Accordingly, by holding that the entire refunds collected illegally by the assessee could under no circumstances be his income, allowed the appeal preferred by the assessee and dismissed the appeal filed by the revenue. Accordingly, the revenue is now before us. CONTENTION:- 7. The learned Standing Counsel for the revenue contended that the Tribunal was of the opinion that the assessee had indulged in making illegal claim from the department and as such the Tribunal should have treated the refunds received by the assessee as his income. The learned counsel by placing reliance on the decisions in MOHAMED ABDUL KAREEM & CO. v. COMMR. OF INC.TAX [1948)16 ITR 412] and COMMISSIONER OF INCOME TAX v. S.C.KOTHARI [(1968) 69 ITR 1] submitted that even if the income was not earned in a legal manner, still such income is taxable and it is not the concern of the Income Tax Department as to how the assessee earned his income. 8. The learned counsel appearing on behalf of the assessee contended that the department was not justified in assessing the income, when admittedly it was the case of the revenue that the income was earned only by getting the refunds on fraudulent TDS certificates. The learned counsel also relied on the decision of the Division Bench of this Court dated 19.7.1972 in TC Nos.314 and 326 of 1966 (CIT v. A.R. ADAIKAPPA CHETTIAR & ANR.). CONSIDERATION:- 9. There is no factual dispute with regard to the search conducted by the department in the business as well as residential premises of the assessee under Section 132 of the Income Tax Act on 14.3.1989 and the incriminating documents seized during such search. During the course of search operations, the assessee admitted to have prepared bogus TDS certificates along with bogus returns and got it encashed. It is also evident from the records that the investigation conducted by the Central Bureau of Investigation also revealed the refund received from the Income Tax department by producing bogus TDS certificates prepared by the assessee. 10. The entire refund received from the department were considered as the income of the assessee and he was assessed accordingly. In fact, in the order passed by the Commissioner (Appeals) there was a clear factual finding with regard to the modus https://hcservices.ecourts.gov.in/hcservices/ operandi as well as justification for taxing the income at the hands of the assessee, even though the same was obtained in an unlawful manner. The following observations of the Commissioner (Appeals) makes the position more clear. "While evidence is there from the appellant's own admission before the C.B.I. and officers of the department that he has claimed refunds by fraud in respect of taxes never deducted at source, there is no proper evidence to correlate the entire investments from out of such refunds. The appellant is an Income Tax practitioner. His practice as such is not unlawful. But in the course of such practice he has apparently resorted to professional misconduct and received some illegitimate refunds. If the illegal amounts of this nature are invested in productive investments there will be no difficulty in assessing the income from out of such investments. The difficulty arises only in attributing the income quality to refunds obtained by fraud. Even then it is a moot question whether the refunds so obtained in a professional practice but by employing unlawful means with a continuity could be treated as income. In Canadian Minister of Finance v. Smith (1927) AC 193 it was observed that "the burglar and the swindler are also liable to tax as honest businessman is and in addition they may also reap their deserts elsewhere". As against the whole world except the true owner the embezzler is the legal owner. His complete dominion over the funds to the extent of his ability to dispose of every pie is of undoubted economic and realisable value. The appellant has collected such refunds not only during the assessment year 1988-89 but also in the earlier and subsequent assessment years. This kind of continuity and recurrence in obtaining such refunds will constitute a source giving the receipts the character of income. It is of course not possible to attribute the source the quality of a business or profession. The income from such refunds could only be regarded as an income under a residuary head. Though https://hcservices.ecourts.gov.in/hcservices/ the appellant has denied that he has obtained illegal refunds he has not substantiated with any acceptable evidence that such refunds were claimed by the respective persons who filed the T.D.S. Claims before the department. He has not produced any of the parties on whose behalf he is supposed to have rendered professional service for getting refunds. Since he has acted on their behalf it is up to him to produce the parties for examination by the department and prove that the appellant has nothing to do with the refunds claimed by his clients though illegal. He has on the contrary admitted having opened several bank accounts in the names of various persons who have claimed refunds and also obtained the refunds himself." 11. The Tribunal concurred with the factual finding arrived at by the Assessing officer as well as the Commissioner (Appeals) and commented upon the conduct of the assessee as "tax practitioner" in strong words. The Tribunal found that claim of refund by filing bogus T.D.S. certificates were illegal and an economic offence and the departmental officials also colluded with the assessee, but however was of the opinion that the money earned by the assessee by making use of the fraudulent TDS certificates remained as money stolen from the income tax department. The Tribunal also categorically held that there was no dispute about the factum of fraud committed by the assessee and further observed that the department would be justified in recovering the amount from the assessee as recovery of stolen property. It was also observed by the Tribunal that any person, who steals money may not be the owner of the money because it would belong to the original owner which, in the instant case is the department, which has been hoodwinked by the assessee. After recording the factual finding, very strangely the Tribunal set aside the order of the Assessing Officer as well as Commissioner (Appeals) by holding that the department by treating it as the income of the assessee earned by illegal methods, was committing one more wrong by treating the income as earned by the assessee. The Tribunal was of the further opinion that the department was asking for a share of the booty in the form of taxes to the Government. Therefore the Tribunal held that the entire refund collected illegally by the assessee could under no circumstances be the income of the assessee. The finding recorded by the Tribunal is clearly unsustainable in law. When the Tribunal found that the assessee had indulged in fabricating TDS certificates and got it refunded from the department, it should not have come to the conclusion that such income is not taxable. 12. Section 2(24) of the Income Tax Act gives an inclusive definition to the word "income". The expression "income" is very https://hcservices.ecourts.gov.in/hcservices/ wide and the object of the Income Tax Act being one to tax income it has to be given an extended meaning. Any kind of income earned by the assessee attracts income tax at the point of earning and tax law is not concerned about the ultimate event as to how the income was expended. Of course statutory exemptions and deductions as permitted by relevant provisions of the Income Tax Act could be availed of by a tax payer. However the fact remains that Income Tax Act makes an obligation to pay tax on all income received. 13. The taxability of income earned by the assessee by resorting to unlawful means came up for consideration before a Division Bench of this court in MOHAMED ABDUL KAREEM & CO. v. COMMR. OF INC.TAX [1948)16 ITR 412]. In the said case several persons formed into a partnership agreeing that all the arrack shops leased in the names of those persons should be run by the partnership. The application submitted for registration of the said partnership was rejected on the ground that the formation of a partnership with regard to Arrack and Toddy shops were prohibited by Abkari Law without the prior permission of the District Collector. However the Income Tax Officer assessed each firm in the status of an "association of persons". This was objected to by the assesee on the ground that since there was no lawful partnership, the assessment could be made only upon each individual lessee and not upon the entire body of lessees as an association. The contention of the assessee that the association formed for unlawful purpose has no legal existence and cannot be recognised as an assessable unit under the taxing statute, was negatived by the Division Bench and in the said factual context, it was observed thus:- "So long as it is an association which produces income, profits or gains it is assessable to tax by force of Section 3. It is unnecessary in order to constitute an association that there should be any mutual rights or obligations among the members enforceable in a Court of law. So long as the object of the association is to carry on for gain a business which is not unlawful – the object in the present case being to sell arrack or toddy, as the case may be, under the authority of a licence duly granted by the Government – the supervening circumstance of the formation of a partnership in contravention of the abkari law does not render the income, profits and gains of the association immune from taxation." 14. In COMMISSIONER OF INCOME TAX v. S.C.KOTHARI [(1968) 69 ITR 1] the issue before a Division Bench of the Gujarat High Court was regarding taxability of income derived from an illegal trade and taking into account the English case laws on the point, the Division https://hcservices.ecourts.gov.in/hcservices/ Bench speaking through Mr.Justice P.N.Bhagwati (as His Lordship then was) held thus: "That immediately takes us to a consideration of the second question. This question raises a point of considerable importance to the revenue and broadly stated the point is whether a loss arising in an unlawful business is liable tobe taken into account in computing the business income of the assessee under Section 10 of he Income Tax Act,1922. Now it is well settled in England that the Income-tax Act is not restricted in its application to lawful business only. Once it is found that the transaction in question is trade, manufacture, adventure or concern in the nature of trade within the meaning of the Income-tax Act, the words of the section are not to be cut down by the consideration that the trade is tainted with illegality. The taint of illegality or wrong-doing associated with income, profits and gains is immaterial for the purpose of taxation. Even if a trade is illegal, it is still a trade within the meaning of the Income-tax Act, and its income, profits and gains are chargeable with income-tax." 15. In S.C.Kothari's case cited supra the decision of the Court of Sessions, Scotland in Lindsay vs. Commissioner of Inland Revenue [(1932) 18 Tax Case 43] was also relied on by the Division Bench. In the said case, a partnership for bootlegging was entered into between three persons with an intention to transport whisky into the United States, but in breach of law of Great Britain as well as United States and the issue before the Court of Sessions was about the nature of income and its taxability, and the point was decided in favour of the revenue by adding ill-gotten wealth in the tax net and in the said context Lord Sands observed thus:- "The tax is imposed upon profits of trade. Crime, such as house-breaking, is not trade and therefore the proceeds are not caught by the tax. It does not follow, however, that there cannot be a business answering to the description of trade, albeit it is tainted with illegality. Trafficking in drugs, for example, is of the nature of trade, albeit such trafficking may in the circumstances be illegal. I respectfully adopt the dictum of Lord Haldane, in delivering the judgment of the Privy Council in the case of Smith, that once the character https://hcservices.ecourts.gov.in/hcservices/ of business has been ascertained as being of the nature of trade, the person who carries it on cannot found upon elements of illegality to avoid the tax." 16. The views expressed by Lord Sands was approved by Lord Morison in the following words:- "The burglar and the swindler, who carry on a trade or business for profit, are as liable to tax as an honest business man, and, in addition they get their deserts elsewhere." 17. In Mohamad Abdul Kareem's case cited supra, the Division Bench relied on the decision in Mann vs. Nash [(1932) 16 Tax Case 523)]. In the said case the assessee was carrying on business of providing automatic machines. Since the use of such automatic machines were held to be illegal the assessee contended that a portion of profit derived from such illegal business shall be excluded from tax as it was earned by resorting to illegal means. While holding that the income was liable to be assessed under the tax laws, Rowlatt, J observed thus:- "The great mainstay of Mr.Field's argument, quiet rightly from his point of view, was the case of Duggan, decided in the Irish Free State, and that decision of the Supreme Court seems to have gone upon this principle that no construction could be admitted which recognised that the State should come forward and seem to take a profit from what the State prohibited, because the State ought to have prevented it; and it was argued, if I may venture to say so, in a somewhat rhetorical style: Does the State keep its revenue eye open and its eye of justice closed? I must say, I do not feel the force of that Observation at all. Would it have made any difference, I ventured to ask in the argument, if the State had kept both its eyes open and prosecuted the man for the lottery and taxed him for the profits at the same time? That would at any rate have protected the State from the reflections which were made upon it in the words I have quoted. But, in truth, it seems to me that all that consideration is misconceived. The Revenue representing the State, is merely looking at an accomplished fact. It is not condoning it; it has not taken part in it; it merely finds profits made from what appears to be a trade, and the Revenue laws happen to say that the profits made from trade have to be taxed, and they say: "Give https://hcservices.ecourts.gov.in/hcservices/ us the tax". It is not to the purpose in my judgment to say: 'But the same State that you represent has said they are unlawful': that is immaterial altogether and I do not see that there is any contact between the two propositions. It was said in the Irish case that alleganus suam turpitudinem non est audiendus. I cannot see that the State are alleging their own turpitude; it is the appellant who is alleging his own turpitude. The State says: ' t is a business'; the appellant says: 'It is an unlawful one'; he is alleging his own turpitude. It is said again: 'Is the State coming forward to take a share of unlawful gains?' It is mere rhetoric. The State is doing nothing of the kind; they are taxing the individual with reference to certain facts. They are not partners; they are not principals in the illegality or sharers in the illegality. They are merely taxing a man in respect of those resources. It think it is only rhetoric to say that they are sharing in his profits, and a piece of rhetoric which is perfectly useless for the solution of the question which I have to decide." 18. The learned counsel for the assessee relied on a decision of a Division Bench of this court in T.C.Nos.314 & 326 of 1966 dated 19th July, 1972 (COMMISSIONER OF INCOME TAX v. A.R. ADAIKAPPA CHETTIAR & ANR.) and contended that even embezzled money does not constitute taxable income to the embezzler although he had used it for his own purposes. The issue in the said case was as to whether the use of the company's car by the assessee for their private purpose could be treated as the benefit obtained for the company within the meaning of Section 2(24)(iv) of the Income Tax Act. While answering the said issue by confirming the finding of the Tribunal, the Division Bench relied on the principle laid down in IRC v. WILCOX (90 L.Ed. 752) to the effect that wrongful acquisition of funds by an embezzler cannot be included in the statutory phrase " gains or profits and income derived from any source whatever". However the issue regarding taxability of income earned through unlawful means was not the subject matter before the Division Bench in the said case. The judgment of the Division Bench in A.R. ADAIKAPPA CHETTIAR was taken up by the department in appeal and the Supreme Court in COMMISSIONER OF INCOME TAX v. A.R. ADAIKAPPA CHETTIAR (2001(10) SCC 500) while disposing the civil appeal observed that it was really unnecessary for the High Court to go https://hcservices.ecourts.gov.in/hcservices/ into and express opinion on the question whether any benefit obtained unauthorisedly, falls within the said sub clause or not. In view of the observation of the Supreme Court we are of the view that the decision referred to by the learned counsel for the assessee has no application to the facts of the present case. 19. In COMMISSIONER OF INCOME TAX v. PIARA SINGH (1980 SUPP. SCC 166) , the Substantial question of law before the Supreme Court was as to whether the loss which arose from the confiscation of the currency notes was an allowable deduction under Section 10(1) of the Income Tax Act, 1922 and while upholding the judgment of the High Court and dismissing the appeal filed by the revenue, the Hon'ble Supreme Court observed thus:- "5. 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 Customs