TAX CASE No.03 OF 1999 (Reference against the statement of case of Sri Laxmi Prasad, Motihari Vs. The Commissioner of Income Tax, Muzaffarpur which has been drawn on 17th of December, 1998 by Income Tax Act Appellate Tribunal, Patna Bench Patna In R.A. No. 21/Pat/1992) -------------------------- SRI LAXMI PRASAD …… (Appellant) Versus THE COMMISSIONER OF INCOME TAX …… (Respondents) For the Appellant:- 1. Mr. K.N. Prasad 2. Mr. K.C.K. Sinha For the Respondents:- Mr. Harshwardhan Prasad, Sr. Standing Counsel Mrs. Archana Sinha, Jr. Standing Counsel P R E S E N T THE HON’BLE MR.JUSTICE CHANDRAMAULI KUMAR PRASAD THE HON'BLE DR. JUSTICE RAVI RANJAN Prasad & Ranjan,J.J. This case has come before us on a reference made by the Patna Bench of the Income Tax Tribunal Assessee is an individual and he has submitted his return as such. He was intercepted by the - 2 - Custom Authorities while he was en-route to Patna and on his personal search, gold bars of foreign origin weighing 599.200 Grams valued at Rs.1,38,000/- were recovered from him. There were seized by the Custom Authorities and the assessee was arrested. Before the Assessing Officer father and son did not deny the ownership of the gold bars, but in the written explanation filed by the assessee’s counsel it was pointed out that the gold bars did not belong to him and in case it is held to be belonging to him, the deduction should be allowed as the same has been seized by the Customs Authorities. The Assessing Officer did not accept the contention on its finding that the assessee is not carrying on the business of smuggling. It also added a sum of Rs.1, 38,000/- , the value of the gold as unexplained investment. On appeal by the assessee, the Commissioner of Income Tax (Appeal) noticed that the assessee earlier on 4.8.1989 was apprehended while carrying gold bars and on that basis came to the conclusion that he is engaged in business of gold biscuits’ smuggling. On its finding he held that the confiscation of gold was a loss incurred in the course of business and as such the value of the gold i.e. Rs. 1, - 3 - 38,000/- is fit to allowed as a business loss. Revenue carried the matter in second appeal before the Income Tax Tribunal (hereinafter referred to as the Tribunal). There were differences of opinion amongst the members constituting the Tribunal. The Accountant member concurred with the finding of the Commissioner of Income Tax (Appeal) and held that confiscation of gold was a loss incurred in the course of business of smuggling and a sum of Rs. 1,38,000/- was allowable as business loss. Commissioner also held that the amount added as income from other sources deserves to be set off. The Judicial member did not concur with the Account member and as provided, the matter was refereed to the third member. The third member on consideration of the materials on record as also taking into account, the plea of the assessee in his admission that he was acting as carrier of gold bars on behalf of the Ram Jee Prasad of Motihari, held that it cannot be said that he is engaged in smuggling activities by himself. In the words of the third member “this categorical stand taken by the assessee in the three different situations on different occasions, in his opinion, put a seal - 4 - on the fate of his claim that he was engaged in smuggling activities by himself.” The third member also observed that the claim of the assessee that he was entitled to set off Rs. 1,38,000/- being loss incurred by him in carrying on the smuggling activities stand fully belied and falls flat to the ground because he was only a carrier and used as a conduit pipe for the transaction. On these facts the Tribunal has referred the following questions:- “1. Whether on the facts and in the circumstances of the case the finding of the Tribunal that the assessee was the “owner” of the primary gold and therefore, its value thereof Rs. 1,38,000/- should be included in the assessee’s income under Section 69A of the Act, is justified when the assessee was only a carrier ? 2. Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in determining that the assessee was not entitled to set off the loss arising on the confiscation of the gold bars against the income brought to tax in respect of such gold bars under Section 69A of the Income Tax Act, 1961?” - 5 - Mr. K.N. Prasad, appearing on behalf of the assessee submits that the finding recorded by the tribunal that the assessee is the owner of the gold bars, when he was only a carrier is erroneous in law and, therefore, the value thereof is not fit to be included in the assessee’s income under Section 69A of the Income Tax Act (hereinafter referred to as the Act). He submits that owner of the gold bars shall be the person, who has right to own that property. Mr. Harshwardhan Prasad appearing on behalf of the Revenue, however submits for the purpose of Section 69A of the Act, assessee shall be the owner of the gold bars. Section 69A of the Act, which is relevant for the purpose reads as follows:- unexplained money, etc. “69A:- Where in any financial year the assessee is found to be the owner of any bullion, jewellery or valuable article is not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of acquisition of the money, bullion, jewellery or other valuable article, or the explanation - 6 - offered by him is not, in the opinion of the Assessing Officer, satisfactory, the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the assessee for such financial year.” In my opinion the word “owner” in Section 69A of the Act would be a person who is in possession of the property lawfully. It is nobody’s case that the assessee was not in lawful possession of the gold bar. In respect of movable property a person in actual physical control of the property has necessarily to be held as the owner of the property for the purpose of Section 69A of the Act. In the facts of the present case, for the purpose of Section 69A of the Act, the assessee shall be the owner thereof. In that view of the matter, we are of the opinion that the tribunal is right in holding that the assessee is the owner of the primary gold. Accordingly, our answer to the first question is in the affirmative and it is held that the assessee is the owner of the primary gold. One appreciates the beauty of Income Tax Law, when Mr. Prasad, appearing on behalf of the assessee - 7 - contends that he is a smuggler and when income derived from illegal activities is taxable for the same reason loss in carrying out illegal activities has to be treated as a business loss. In support of the submission reliance has been placed on a decision of the Supreme Court in the case of Commissioner of Income-Tax, Patiala Vrs. Piara Singh, 124 ,I.T.R. 40 and our attention has been drawn to the following passage from the said judgment:- “In our judgment, the High Court is right. The I.T. authorities found that the assessee was carrying on the business of smuggling. They held that he was, therefore, liable to income-tax on the income from that business. On that 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 be 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.” Another decision on which reliance has been - 8 - placed is the judgment of Madhya Pradesh High Court in the case of Shri Vishnu Kumar Soni Vrs. Commissioner of Income-Tax ,155 I.T.R, 34 in which it has been held as follows:- “ If the business is illegal, neither the profits earned nor the losses incurred would be enforceable in law. But, that does not take the profits out of the taxing statute. Similarly, the taint of illegality of the business cannot detract from the losses being taken into account for computation of the amount which can be subjected to tax as “profits” under Section 10(1) of the Act of 1922. The tax collector cannot be heard to say that he will bring the gross receipts to tax. He can only tax profits of a trade or business. That cannot be done without deducting the losses and the legitimate expenses of the business’.” In this view of the matter, therefore, in our opinion, the Tribunal was not right in not allowing Rs. 40,000/- as loss in business.” Yet another decision on which reliance is placed is the decision of the Karnataka High Court, in the case of C. Krishnalal Jain Vrs. Commissioner of Income- Tax, 163 ,I.T.R. 747 and our attention has been drawn to the - 9 - following passage:- In view of the decision of the Supreme Court in Piara Singh’s case (1980) 124 ITR 40, the assessee’s claim for set off cannot be denied at all. He was dealing in smuggled gold and 4 ½ pellets of gold were seized from him and confiscated. The value of the confiscated gold should be considered as a business loss which springs directly from carrying on of his activities of smuggling. Reliance has also been placed on the decision of the Allahabad High Court in the case of Ram Saran Nar Singh Prasad Versus Commissioner Of Income-Tax, 249 I.T.R. 241. “In the case of C. Krishnalal Jain V. CIT (1987) 163 ITR 747 (Kar) wherein the assessee was carrying on business of dealing in smuggled gold and the gold was confiscated by the customs authorities, it was held that the loss occasioned due to the confiscation of gold is a loss springing directly from carrying on the business and the assessee would be entitled to set–off the loss against the income of such gold. We do not see any reason to differ from the view taken in these decisions. In view of the above, our answer, to the - 10 - question referred, is in affirmative, i.e., in favour of the assessee and against the department.” Mr. Harshwardhan Prasad, appearing on behalf of the Revenue, however submits that income derived from illegal activities is taxable, but the natural corollary of the same is not that loss in carrying out illegal activities is to be reckoned as business loss. Having appreciating the rival submission, we do not find any substance in the stand taken on behalf of the assessee and the decisions relied on are clearly distinguishable. Income derived from illegal activities is taxable, but any expenditure incurred by an assessee in business which is prohibited by law shall not be deemed to have been incurred for the purpose of business. One has to bear in mind distinction between infraction of law committed in carrying of a lawful business than carrying on a business inherently illegal. In the present case on fact it has been found that the assessee was carrying on the business of smuggling. However, it is not the case of - 11 - assessee that while carrying on a business some infraction of law had occasioned and that had led to the confiscation of gold bars. Here the assessee was carrying gold bars which was inherently unlawful and in this background it cannot be said that the loss incurred by him is a business loss. Finance (No.2) Act, 1998, inserted explanation in Section 37(1) of the Act, with effect from 1.4.1962, same reads as follows:- General 37. (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 professions”. [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.] x x x x x x The Supreme Court did not and could not have considered the effect of explanation inserted by Finance - 12 - (No.2) Act, 1998 w.e.f. 1.4.1962 in the case of Piara Singh (Supra) as the amendment has come later on, though with retrospective effect. Same is the position so far as the decisions of Madhya Pradesh High Court in the case of Shri Vishnu Kumar Soni (Supra) and that of Karnataka High Court in the case of C. Krishnalal Jain (Supra). Allahabad High Court in the case of Ram Sharan Nar Singh Prasad (Supra) while rendering its opinion has relied on the aforesaid judgments of the Supreme Court, M.P. High Court and Karnataka High Court, which as observed earlier did not had the occasion to consider the effect of insertion of explanation in section 37 of the Act. It has also not considered the effect of explanation. Further in the said case assessee was not carrying out the business, which is inherently illegal. He was found to be deriving income from business of Saraffa, utensils and money lending. For all these reasons the authority of the Supreme Court and the decisions of other High Courts are clearly distinguishable. Accordingly, our answer to the second - 13 - question is in the affirmative and it is held that the tribunal was justified in determining that the assessee was not entitled to set off the loss arising on the confiscation of the gold bars against the income brought to tax in respect of such gold bars under Section 69A of the Act. Our opinion be transmitted to the Patna Bench to the Income Tax Tribunal. Tax case stands disposed of accordingly. Patna High Court, Dated, 28th July,2008 N.A.F.R./P.K. (Chandramauli Kr. Prasad,J.) (Dr. Ravi Ranjan,J.)