Mahendra Jain Vs. ITO

-1- IN THE HIGH COURT OF JUDICATURE AT BOMBAY O.O.C.J. Income Tax Appeal No.5 of 2001 Shri Mahendra D.Jain ) having his residence C/o ) Indu M.Jain, Amardeep ) Shopping Centre, Station ) Road, Govandi (East) ) Mumbai 400 088 ) ..Appellant vs. 1. The Income Tax Officer) Ward 9(7), Mumbai ) having his office at ) Piramal Chambers, 4th ) floor, Mumbai 400 012 ) 2. Commissioner of Income) Tax City -IV, Mumbai ) having his office at ) Piramal Chambers, 4th ) floor, Mumbai 400 012 ) 3. Union of India ) through Ministry of ) Finance North Block, ) Central Secretariat, ) New Delhi ) ..Respondents Mr.K.Gopal for appellant. Mr.N.A.Kazi for respondents Judgment reserved on 7th August,2008 Judgment Pronounced on:5th Sept.2008 CORAM: Dr.S.RADHAKRISHNAN & S.J.KATHAWALLA JJ. 8th September, 2008 J U D G M E N T: (Per S.J.KATHAWALLA J.) 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.?" 2. The relevant facts arising in the present appeal are as under: i) Assessee is a goldsmith carrying on his business from room no. 7, 1st floor, Hendre Building, Sayani Road, Mumbai 400 025. The assessee possesses a certificate to carry on business as goldsmith issued under the Gold Control Act, 1968. Under the said certificate assessee is expressly prohibited from carrying on the business of buying and selling gold ornaments. The assessee, therefore, is admittedly in the business of making gold ornaments from the gold supplied to him by his clients. The business income of the assessee, therefore, admittedly comprises only of labour charges received on making and polishing gold ornaments. ii) The business premises of the assessee were searched by the officers of DRI on 24th April, 1991 when seven foreign marked gold bars were recovered and seized. The value of the gold bars was determined at Rs.2,96,100/- The statement of the assessee was recorded under section 108 of the Customs Act, 1962 in DRI office on 24th April, 1991. In the said statement, the assessee has categorically stated that he was getting orders for gold ornaments on job work basis where gold would be supplied to him by his client and he would make ornaments as per their requirements/design in his capacity as a goldsmith. The assessee has also stated that the gold bars were handed over to him by one Raju from Bangalore for making jewellery upon payment of labour charges. iii) By and under an order dated 30th July, 1992, the Additional Collector of Customs confiscated the said gold bars and further imposed penalty of Rs.10,000/- under section 112(b) of the Customs Act, 1962.l The assessee did not prefer any appeal from the said order passed by the Additional Collector of Customs on 30th July, 1992. iv) The assessee filed his return of income for the relevant assessment year i.e.1992-93 on 15th March, 1993. The status of the assessee shown in the said return is that of an individual. Under the caption "profit and gain of business or profession" the assessee has stated "labour charges recd. on making and polishing ornaments" and the amount shown towards the same is Rs.19,605/- The assessee has also shown some income from other sources and after claiming certain deductions under Chapter VI-A under sec.80-L has declared his net taxable income as Rs.25,460/- The assessment was completed under section 143(3) of the Income Tax Act, 1961 on 10th November, 1993 and income of the assessee was assessed at Rs.3,21,560/- This is because the value of gold bars have been treated as income of the appellant under sec.69A on the presumption that the assessee is the owner of the said gold bars. The Assessing Officer has, therefore, made addition on account of income from undisclosed source of Rs.2,96,100/- v) The order of the Assessing Officer dated 10th November, 1993 was impugned by the assessee before the CIT(A)-XXVII contending that the said gold bars do not belong to the assessee. However, the contention of the assessee was not accepted by CIT(A) and the appeal of the assessee stood dismissed by an order of CIT(A) dated 29th February, 1996. vi) The assessee, therefore, preferred an appeal before the Appellate Tribunal impugning the order of CIT(A) dated 29th February, 1996 and, inter alia, contended that no reason exists to presume that the assessee is the owner of the said gold bars. The assessee during the course of hearing also brought to the notice of the Tribunal that the Chief Metropolitan Magistrate has by order dated 27th June, 1996 acquitted the assessee on the ground that prosecution has miserably failed to prove that the accused was in any way concerned with the seven gold bars seized by the officers of DRI. The assessee before the Appellate Tribunal for the first time made an alternative plea, namely, that even assuming that the said amount is addable to the income of the Assessee under the provisions of section 69A of the I.T.Act, 1961, as the gold was confiscated and never returned by the Customs Authorities the same be treated as loss which sprang from carrying of business and was incidental to it and this deduction has to be allowed. The assessee relied before the Tribunal on the decision in the case of Commissioner of Income Tax, Patiala Vs.Piara Singh reported in 124 ITR 40 (S.C.). vii) The Tribunal by its order dated 27th July, 2000 dismissed the appeal of the assessee. As regards the assessee’s argument that the Assessing Officer had erred in adding the sum of Rs.2,96,100/- as income from undisclosed sources and CIT further erred in upholding the action on the part of the Assessing Officer, the Tribunal gave its finding that CIT(A) had correctly held that the Assessing Officer was right in adding the sum of Rs.2,96,100/- under the provisions of section 69-A, being the value of contraband gold recovered from the premises of the assessee. viii) As regards the alternative submission of the assessee that the value of the gold seized and confiscated should be allowed as business loss was also rejected by the Tribunal in the following terms. "17. The alternative submission of the learned AR that the value of gold seized and confiscated should be allowed as business loss is also not acceptable as it is nowhere contended by the assessee that the assessee was carrying on illegal activity of dealing in contraband gold. Such business loss in this way is allowable only if the assessee is admittedly carrying on such illegal activities. The ratio of Honourable Supreme Court decision in the case of Piara Singh (supra) is not applicable to the facts of the present case as in the said case the loss occurred to assessee in regard to confiscation of currency notes, which was occasioned in pursuing the business of smuggling was held to be a loss sprang directly from the carrying on the business and was incidental to it. Thus, it was held to be allowable. In the present case, the assessee was carrying on a lawful business of goldsmith and keeping and possessing of imported gold bars, (contraband item) which was an illegal activity and loss arising out of illegal activity is not an allowable deduction out of business income of the assessee. Therefore, the assessee also fails on this count." ix) The assessee being aggrieved by the order of the Tribunal dated 27th February, 2000 preferred the above appeal and challenged the findings of the Tribunal including Tribunal’s confirmation pertaining to the addition of Rs.2,96,100/- under sec.69A of the I.T.Act, 1961. However, this Court at the time of admission, admitted the appeal only on the question set out in para 1 above. The grounds raised by the assessee in the above appeal in support of the said question on which the appeal is admitted is ground (F) and is reproduced hereunder. "Without prejudice to above, the Appellant submits that the Appellate Tribunal is not justified for not considering the alternative plea of the Appellant that the value of the confiscated gold bars be allowed as business loss. The Appellant states that presuming that the seized and confiscated gold belong to the appellant, then the value of the same ought to have been allowed as business loss in the hands of the Appellant. Therefore, the confirmation of addition of Rs.2,96,100/- is uncalled for and the same may be allowed as business loss." 3. We have heard at length the submissions of the Advocates appearing for the assessee. We have not received any assistance from the Advocate for the Department. The Advocate for the assessee has placed very strong reliance on the decision which was also relied upon by him before the Tribunal i.e. the decision of the Hon’ble Apex Court in the case of Commissioner of Income Tax, Patiala Vs. Piara Singh reported in (1980) 124 ITR 40 (SC). It is, therefore, necessary for us to set out the facts and discussion found in the said judgment at some length. 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 deduction. 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. 9. The Advocate for the Assessee also took us through the decision in the case of Commissioner of Income Tax Vs.Anil M.Gehi (2006) 284 ITR 338 (Bom). In that case the assessee was engaged in smuggling and while proceeding to Hong Kong he was apprehended by the Customs Authorities at Bombay Air Port and foreign currency equivalent to Rs.4,56,980/- was seized from his custody. The Additional Collector of Customs by his order confiscated the foreign currency seized and also imposed fine on the assessee for contravening the Foreign Exchange Regulation Act. The Income Tax Officer treated the amount of Rs.4,56,986/- as assessable income but rejected the claim to deduct the loss. The Tribunal directed that the confiscated foreign currency of Rs.4,56,980/- be allowed as a loss to the assessee. On a reference to the High Court by the Revenue, the revenue contended that the assessee did not admit and in fact disputed that he was in the business of smuggling. It was held by this Court that the assessee was treated as a smuggler and his subsequent detention under the COFEPOSA Act confirmed that he was treated as a smuggler and foreign currency recovered was the amount involved in smuggling activity and confiscation of the amount was, therefore, business loss suffered by the assessee in conducting his business of smuggling. It was held that revenue while bringing to tax a sum of Rs.4,56,980/- as income of the assessee under sec.69A could not deprive the assessee of the benefit of treating the said amount as a business loss. It was contended by the Advocate for the assessee before us that even in this case the assessee had not admitted that he was smuggler and despite his express denial the Tribunal as well as the Court came to a finding that he was involved in smuggling business/activity and, therefore, entitled to the benefit of treating the amount of Rs.4,56,980/- as business loss. The Advocate for the assessee further contended that there is no reason as to why in the instant case such deduction should not be allowed as business loss. It is pertinent to note that this argument will not be of assistance to the assessee because in the instant case we are of the view that the assessee is not entitled to any deduction for loss of gold as the assessee as set out herein was carrying on lawful business in gold and committed infraction of law in smuggling gold into the country. The loss caused to the assessee, therefore, is not a loss which springs directly from the carrying on of his business or is incidental to it. 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. 11. The Advocate for the assessee also cited the decision in the case of Dr.T.A.Quereshi Vs. Commissioner of Income Tax reported in (2006) 287 ITR 547 (SC) where the assessee, a medical practitioner, claimed deduction of the value of heroin seized from his gross income. The department denied the allegation. However, on appeal, the Appellate Tribunal held that the heroin was part of the assessee’s stock in trade and allowed the deductions of the estimated value of heroin seized from the gross income as a business loss. On appeal, it was held by the High Court that the rigour of the explanation to section 37 of the Income Tax Act was fully satisfied as possession of heroin was an offence and it was disgraceful for a doctor to indulge in activities against humanity and hence question of claiming deduction of the value of the seized articles did not arise. On appeal to the Hon’ble Supreme Court, the decision of the High Court was reversed and it was held (i) that the explanation to section 37 had no relevance as this was not a case of business expenditure but was one of business loss. The business loss was allowable on ordinary commercial principles in computing the profits. Once, it was found that heroin seized forms part of the stock in trade of the assessee, it followed that the seizure and confiscation of such stock in trade had to be allowed as a business loss; (ii) that even though the assessee was committing a highly immoral act in illegally manufacturing and selling heroin the case had to be decided on legal principles and not on one’s own moral views. We are of the view, that the decision of the Hon’ble Supreme Court in Dr.T.A.Quereshi’s case (supra) will not be of any assistance to the assessee in the present case because in that case the Tribunal had reached a finding of fact that the assessee was in the business of manufacture and sale of heroin and the heroin seized was the assessee’s stock in trade. In the instant case, as stated earlier, the assessee is admittedly in the business of manufacturing/making ornaments from the gold given to him by his clients and his business income constituted making charges that he receives from his client. He has made a categorical statement before the Customs Authorities that the gold is always given to him by his client and even his licence specifies that he cannot buy or sell gold. As set out earlier, in our view, in the instant case the activity of smuggling gold into country is, therefore, an infraction of law and certainly cannot form the stock in trade of the assessee. 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 sec.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 seve gold 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 inlaw 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. (S.J.KATHAWALLA J.) (Dr.S.RADHAKRISHNAN J.)