HIGH COURT OF BOMBAY
Where the assessee, who is carrying on a lawful business in gold, has committed infraction of law in smuggling gold into the country, loss caused to the assessee pursuant to the confiscation of contraband gold cannot be said to be a trade or commercial loss connected with or incidental to the assessee’s business and consequently, deemed income of the assessee under section 69A cannot be set off against loss due to confiscation of the foreign marked gold bars on the basis of which addition is made in the assessee’s assessment order.
Mahendra D. Jain
ITA NO. 5 OF 2001
September 8, 2008
HIGH COURT OF BOMBAY
Mahendra D. Jain
ITA NO. 5 OF 2001
September 8, 2008
1. In the present appeal, the appellant (assessee) has impugned before this Court the order passed by the Appellate Tribunal dated 27th July, 2000 pertaining to the Assessment Year 1992-93. The substantial question of law on which the appeal is admitted by this Court is as follows:
"Whether the deemed income under section 69A can be set off against the loss due to the confiscation of the very same foreign marked gold bars on the basis of which addition is made.?"
4. In the case of Piara Singh (supra), the respondent Piara Singh was carrying on smuggling activities. Piara Singh was apprehended by Indian Police while crossing Indo 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 smuggle it into India. The Collector of Central Excise and Land Customs ordered confiscation of the currency notes. The ITO took the proceedings under the Income Tax Act, 1922 for assessing the assessee's income and determining his tax liability. He came to the finding that the amount of Rs.65,500/-constitutes the income of the assessee from the undisclosed source. An appeal by the assessee was dismissed by the AAC. Second appeal was filed before the Appellate Tribunal and the Tribunal upheld the claim for deduction. The Tribunal proceeded on the basis that the assessee was carrying on a regular smuggling activity which consisted of taking the currency notes out of India and exchanging them with gold in Pakistan which was later smuggled in India. At the instance of 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 Indian Income Tax Act, 1922?"
The High Court answered the question in the affirmative and thereafter an appeal was preferred by the revenue before the Hon'ble Supreme Court.
5. The Hon'ble Supreme Court was pleased to uphold the order of the High Court. The Hon'ble Supreme Court, inter alia, took a view that carriage of currency notes across the border forms an essential part of the smuggling operation. If the activity of smuggling is 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 consequent confiscation of the currency notes. It is an incident predictable in the course of carrying on the activity as any other feature of it. The confiscation of currency notes is loss occasioned in pursuing the business; it is a loss in much the way as if the currency notes have been stolen or dropped on the way while carrying on the business. Applying the principle laid down by the Hon'ble Supreme Court in Badridas Daga Vs. CIT (1958) 34 ITR 10, the Hon'ble Supreme Court held that confiscation of currency notes is loss which springs directly from the carrying on of the business and is incidental to it.
6. In Piara Singh's case (supra) the revenue also cited before the Hon'ble Supreme Court the case of Soni Hinduji Kushalji and Co. Vs. CIT (1973) 89 ITR 112 (AP). In that case the assessee was carrying on a lawful business in gold, silver and jewellery. The gold of the value of Rs.56,978/- belonging to the Assessee was seized by the Customs Officials. In the assessment to the income tax, the assessee claimed the amount as a deduction stating that it represented trading and commercial loss of the firm. The Income Tax Officer rejected the claim on the ground that it did not relate to the business carried on by the assessee and that the assessee was not entitled to deduction of the said amount. The appeals preferred by the Assessee to the ACC and Appellate Tribunal were also dismissed. On a reference to the High Court, it was held that to be entitled to deduction the loss must be one that springs directly from the business or trade which the assessee carries on or is incidental to the business that he carries on and not every sort or kind of loss which has absolutely no nexus or connection with his trade or business. It was held that loss sustained by confiscation of smuggled goods is absolutely foreign to the vocation or business of the assessee's firm. It is a loss incurred in some character other than that of a trader. Confiscation of the gold being result of the proceedings in rem falls completely outside the trade or business of the assessee that was carried on. Confiscation of contraband goods is one of the penalty proceedings in Sea Customs Act and the penalty is enforced against the goods irrespective of the fact whether the offender is known or not traced. Infraction or violation of the law is not a normal incident of a trade or business and, therefore, penalty by way of confiscation of the contraband gold is not a commercial loss so as to be allowed as permissible deduct ion. The High Court, therefore, decided against the assessee and in favour of the revenue. The Hon'ble Supreme Court in Piara Singh's case (supra) was pleased to explain the decision in the case of Soni Hinduji Kushalji and Co. (supra) in the following terms.
"Assessee's claim to the deduction of the value of the gold confiscated by the Customs Authorities was found unsustainable by the Court. Decision in that case can be explained on the ground that the assessee was carrying on lawful business in gold, silver and jewellery and committed infraction of law in smuggling gold in to the country."
7. In Piara Singh's case attention of the Hon'ble Supreme Court was also invited to the case in J.S.Parkar Vs.V.B.Palekar (1974) 94 ITR 616 (Bom) 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 the gold confiscated by the Customs Authorities in smuggling operation was not entitled to deduction against the estimated and assessed income from an undisclosed source. It was observed that loss arose by reason of an infraction of the law and as it had not fallen on the assessee as a trader or business man, the deduction could not be allowed. The Hon'ble Supreme Court disapproved the decision given in J.S.Parkar's case (supra) by Bombay High Court in the following terms.
"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."
The Hon'ble Supreme Court was thereafter pleased to hold that the assessee (Piara Singh) was entitled to deduction of Rs.65,500/- and the appeal filed by the revenue was dismissed with costs.
8. As set out hereinabove, in the case in hand the assessee was doing lawful business in gold. Admittedly his business pertains to making of ornaments from the gold provided by client of the assessee and business income of the assessee admittedly comprised of the labour charges received on making and polishing gold ornaments. It is, therefore, clear in the instant case that the assessee who is carrying on a lawful business in gold has committed infraction of law in smuggling gold into the country. Therefore, loss caused to the assessee pursuant to the confiscation of contraband gold cannot be said to be a trade or commercial loss connected with or incidental to the assessee's business. The facts of the present case, therefore, can be distinguished from the facts in Piara Singh's case where the Tribunal proceeded on the basis that the assessee was carrying on a regular smuggling activity. The said Piara Singh was not doing any other business. The facts in the present case are similar to the facts in the case of Soni Hinduji Kushalji and Co. (supra) where the Hon'ble Supreme Court has explained that the assessee's claim to the deduction of the value of gold confiscated by the Customs Authorities was found unsustainable because the assessee was carrying on a lawful business in gold, silver and jewellery and committed infraction of law in smuggling gold into the country. In the instant case on similar grounds we hold that the assessee's claim to the deduction of value of gold confiscated by the Customs Authorities is unsustainable.
10. It also needs to be noted that this Court in the case of CIT Vs. Anil M.Gehi (Bom) has dealt with in great detail the decision in Piara Singh's case (supra) and have also set out how the Hon'ble Supreme Court has explained the decision in Soni Hinduji Kushalji and Co. (supra). This Court has also categorically stated in Anil Gehi's case (supra) that "it may be noted that it was not the case of the revenue that the assessee was carrying on any other business, lawful or otherwise, for which the foreign currency was being illegally transported out of the country. The confiscation of foreign currency equivalent to Rs.4,56,000/- was, therefore, loss of stock-in-trade of the assessee." We are, therefore, of the view that the decision in the case of CIT Vs. Anil M. Gehi (supra) will not be of any assistance to the assessee in the present case.
12. The Advocate for the Assessee also submitted before us that once the value of the gold is treated as a deemed income of the assessee under section 69A of the I.T. Act, it is obvious that the said income is treated as business income and, therefore, entitled to the deduction on the ground of business loss. We cannot agree with this contention advanced by the Advocate for the assessee. The meaning of the word/phrase "income" used in section 69A of the I.T. Act came up for interpretation before the Hon'ble Apex Court in the case of Chuharmal Vs. Commissioner of Income Tax, M.P. reported in 172 ITR 250 (SC). The Hon'ble Supreme Court explained/held that section 69A of the Act was inserted in the Finance Act 1964 and it came into force with effect from 1st April, 1964. The expression "income" as used in section 69A of the Act has wide meaning which means anything which came in or resulted in gain. The word "income" used in Section 69A, therefore, cannot be read only as business income as suggested by the Advocate for the Assessee. The revenue has correctly treated the value of gold as income of the assessee from undisclosed source and the same is not entitled to deduction on the ground of business loss.
13. The Advocate for the Assessee also submitted that even previously one Raju had given him gold bars and he had made ornaments from the said gold bars and handed over the same to Raju for which the assessee had received labour charges of Rs.12,000/- which was offered for tax as income for the impugned Assessment Year. This factual allegation of the assessee cannot be of any help to the assessee. As far as the sevefigold bars are concerned, it is already established/held that the assessee is the owner of the said gold and its value is added on account of income from undisclosed source of the assessee. The assessee tried to impugn before this Court the finding that the assessee is not the owner of the gold and the addition of Rs.2,96,100- under sec.69A is bad in law and liable to be deleted. However, this contention of the assessee was rejected at the stage of admission of the above appeal and the appeal is only admitted on the question of law set out in para 1 above.
14. We are at pains to note that though the above matter before us was for final hearing, the Advocate for the department except for making a submission in a single sentence, viz. "that the assessee has denied that he is a smuggler" has not made any other submission before us.
15. In view of the aforesaid, in our considered view the deemed income of the assessee under sec.69A of the Act cannot be set off against loss due to confiscation of the foreign marked gold bars on the basis of which addition is made in the assessee's assessment order. In view thereof, we answer the above question of law in the negative i.e. in favour of the revenue and against the assessee. The appeal of the assessee is, therefore, dismissed. However, there will be no order as to costs.