COMMISSIONER OF INCOME TAX, PATIALA

PIARASINGH

May 8, 1980

[P. N. BHAGWATI, V. D. TULZAPURKAR AND R. S. PATHAK, JJ.]

Losses in business-Deduction under section 10(1) of the Income Tax Act, . 1922.....:./s a smuggler who is taxed on his income from smuggling under the Income Tax Act, 1922 entitled to a deduction under section 10(1) of the Act on account of the confiscation of currency notes e1nployetl in the smuggling activity.

The respondent Piara Singh was apprehended in September 1958 by the Indian Police while crossing the Inda-Pakistan border into Pakistan. A sum

o~ Rs. 65,500/r in currency notes was recovered from his person. On interrogation he stated that he was taking the currency notes to Pakistan to enilble 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 D currency notes.

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In the proceedings initiated by the Income Tax -Officer, ho found that Rs. 60,500/- constituted the income of tlle assesscc 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 smuggli!lll gold he was entitled to il deduction under section 10( 1) of the Income Tsx Act, 1922 of the entire sum of Rs. 65,500/, as a loss incurred in tho business on the confiscation of the currency notes. The Tribunal upheld the claim to dedliction. It proceededon 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 appca:J.

Allowing the appeal, the Court.

HEID : I. The assessee is entitled to the deduction of Rs. 65,500 ;, under section 10(1) of the Income T&x Act, 1922. [1124 C, 1126 BJ

2. The assessce was Oarrying on the business of smuggling a.nd, 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 rrying on that busine§s must be deemed to be aware that a necessary incident involved in the business is detection by the Customs authorities tnd 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 il Having regard to the nature of the activity possible detection by the Cus!oma authoritiCS> constitutes a normal feature integrated into all !hat is implied and involved in ir. The confiscation of the currency notea is a loss OOCll8ion<d in pursuinJ the business; it is a Joss in much th• oam1 'fV•Y as if tho currency

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C.I.T, V., PIARA SINGH (Pathak, ].) 1123

nbtet bad been stolen or dropped on the way while carrying on the bll!iness.

A It is a lqss 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 v. Commissioner of Income Tax the deduction must be allowed. '

[1124 D-B]

Bodridas Daga v. Commissioner of Income Tax, [1958] 34 !TR 10; Commissioner of Income Tax, Gujarat v. S. C. Kothari [1971] 82 lTR 194; applied.

Haji Az; iz and Abdul Shakoor Bros. v. Commi.r.sioner of Income Tax, Bombay City IT, [1961] 41 ITR 350, Sari Hinduji K/wshalji & Co. v. Commr . of Income Tax, A.P. (1973] 8' ITR 112; J. S. Parkar v. V. B.

Palekar an<t Ors. [1974] 94 !TR 616; distinguished and explained.

CivlL APPELLATE JURISDICTION : 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

PA'THAK, J. Is a smuggler, who is taxed on his income from smuggling under the Income Tax Act, 1922, entitled to a deduction under Section 10(1) of the Act on account of the confiscation of currency notes employed in the smuggling activity ?

The respondent, Piara Singh, was apprehendei:J in September, 1958 by the Indian Police while crossing the Inda-Pakistan border into Pakistan.

A sum of Rs. 65,500/- 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 'thtj. currency notes.

The Income Tax Officer now took proceedings under the Indian Income Tax Act, 1922 for assessing t11e assessee's income and determining his tax liability. He came to'the finding that out of Rs. 65,500/- G an amount of Rs~ 60,500/- constituted the income of the assessee from undisclosed sources. An appeal by the assessee was dismissed by the Appellate Assistant Commissioner. In second api\ea! before the Income Tax Appellate Tribunal the assessee represented that if be was reprded as engaged in the business of smuggling gold he was entitled to a deduction iinder Section 10 (1) of the Income Tax Act of the H entire sum of Rs. 65,500/- as a loss incurred in the business on the confiscation of the currency notes. The Appellate Tribunal upheld the

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MRB~E COURT REPORTS [1980) 3 s.c.R.

.&. cllloii!l tQi QedtiQn. lt pr~®d on the basis that. t~ ses~ cauying oa a regular smuggling activity which consisted: of tllltiiJg 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. 65,500/- arising from the confiscation of the currency notes was an allowable deduction under section 10 ( 1) of the Income-tax Act, 1922 ?"

The High Court answered the question in the affirmative. c 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 mxable, the D question is whether the confiscation of the currency notes entitles the assessee to the deduction claimed. The currency notes clirried by the assessee across the border constit.uted 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 E 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 t41) F COl; lrSe of cmrying on the activity as any other feature of it. Having regard to the nature of the activity possi\)le detection by the Custo,111s 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 sMD.e way as if the currency notes had been stolen or dropped on the G 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 v. Commissioner of Income-tax(') the deduction must be allowed.

In Commissioner of Income-tax, Gujarat v. S.C. Kothari(') this Co1,1It held that for the purpose of Section 1 Q ( 1 ) of the Inc0tne Tax H At, 1922 a loss incurred in carrying on an illegal business wust be .

(I) (l9S8) 34 I. T. R. 10.

(2) (1971) BZ I. T. R. 794

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tJ.t v .. ' iilAilA SINGH (f>atJiak, J.) .

deducted before the true figure of profits brought to tax caa A Wlllputed.

Grover, J., speaking for the Court, observed :

M the business is illegal, neither the profits earned HOr the lesses mourred woold be enforceable . in law. But, tl!at dCJes 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 llilJ.ount Which <.-.ill be subjected to tax as ''t>rofits" 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 .. e11penses of the business."

Reliance was placed by the Revenue on Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax, Bombay City fl(') In that case, however, the assessee carried on the lawful business of importing dates from abroad and selling them in India.

Thei import of dates by steamer was prohibited.

Nonetheless he imported dates from Iraq by steamer, and the eonsignments were confiscated by the customs authorities. But the dates were released subsequently on payment of fine. The assessee's claim to deduction under

s. 10(2) (xv) of the Ineome Tax Act was rejected on the ground that the amount was Nid 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 w, as made by the Revenue to Soni Hinduji Kushalji & Co. v. Commissioner of Income-tax, A.P( 2). The assessee's claim to the deduction of the value of gold confiscated by the. customs authorities was ound unsustainable by the court. The decision in that case can b~ 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 h1 smuggling gold into the country. Our attention has also been invited to J. S. Parkar v.

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 'ource. It was observed that the Joss arose by reason of an infraction

(J) (1961) 41 I. T. R. 350.

(2) (1973) 89 I. T. R. 112 .

(3) (1974) 941. T. R. 616.

SUPREME COURT REPORTS [1980] 3 s.c.R.

A of the Jaw 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 B in that case.

We hold that the assessee is entitled to the deduction of Rs. 65,500/-, 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.

S.R.

Appeal dismissed.

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