Supreme Court of India
THE COMMISSIONER OF INCOME TAX JAIPURversusPRAKASH CHAND LUNIA (D) THR. LRS. & ANR.
- Citation
- 2023 INSC 416
- Decided
- 24 April 2023
- Disposal
- Appeal(s) allowed
- Bench
- M R SHAH
Holding
Explanation 1 to Section 37(1) of the Income‑Tax Act disallows any deduction for expenditure incurred for an offence or prohibited purpose, so the loss from confiscated silver is non‑deductible.
Summary
The assessee, Prakash Chand Lunia, who dealt in silver, was found to have smuggled 146 slabs of silver which were confiscated by customs and a penalty imposed. He claimed the value of the confiscated silver as a business loss under Section 37(1) of the Income‑Tax Act, relying on the High Court's application of the Piara Singh decision. The Revenue appealed, arguing that Explanation 1 to Section 37(1), inserted by the Finance (No.2) Act 1998, bars any deduction for expenditure incurred for an offence or prohibited purpose, including loss from confiscation. The Supreme Court held that the loss is not deductible because it arises from an illegal act and is a proceeding in rem, and that Piara Singh is inapplicable. Consequently, the Revenue's appeal was allowed, the High Court judgment set aside, and the orders of the Assessing Officer, CIT(A) and ITAT were restored.
Issues considered
- The loss arising from confiscation of smuggled silver can be claimed as a business loss under Section 37(1) and Explanation 1.
- Whether the decision in CIT v. Piara Singh is applicable to the present facts.
- Interaction of Explanation 1 to Section 37 with Section 115BBE and other provisions concerning unexplained income.
- Whether a penalty or confiscation, being a proceeding in rem, qualifies as a commercial loss deductible under the Income‑Tax Act.
Legislation cited
- Customs Acts. 104, s. 112, s. 167-B, s. 182, s. 183
- Finance (No.2) Act, 1998s. Explanation 1 to Section 37(1)
- Income Tax Act, 1961s. 10(1), s. 10(2), s. 115BBE, s. 37(1), s. 69A
Subjects
Income TaxSection 37Explanation 1business lossconfiscationsmugglingpenaltyproceeding in remPiara SinghHaji Azizunexplained incomeSection 115BBE
Judgment
[2023] 7 S.C.R. 85 85
THE COMMISSIONER OF INCOME TAX JAIPUR A
v.
PRAKASH CHAND LUNIA (D) THR. LRS. & ANR.
(Civil Appeal Nos. 7689-90 of 2022)
APRIL 24, 2023 B
[M. R. SHAH AND M. M. SUNDRESH, JJ.]
Income Tax Act, 1961 – Explanation to s.37(1) – ‘any
expenditure’ in s.37 – Expenditure/loss incurred for any purpose
which is an offence or prohibited by law, not deductible in terms of
C
Explanation 1 to s.37 – High Court relying upon the decision of
Supreme Court in Piara Singh case allowed the loss of confiscation
of silver bars as a business loss – Sustainability of – Held: Not
sustainable – Explanation to s.37(1) provides that any expenditure
incurred by the assessee for any purpose which is an offence or
prohibited by law is not an allowable business expense – In the D
present case, the main business of the assessee was dealing in silver
– His business cannot be said to be smuggling of the silver bars as
was the case in Piara Singh – Assessee was carrying on an otherwise
legitimate silver business and in attempt to make larger profits, he
indulged into smuggling of silver, which was an infraction of law –
E
High Court erred in relying upon the Piara Singh case – Impugned
judgment set aside – Order of the assessing officer, CIT(A) and
ITAT rejecting theclaim of the respondent-assessee to treat the silver
bars confiscated by the customs authorities as business loss restored
– Per M.M. Sundresh. J (Supplementing)‘any expenditure’ mentioned
in s.37 takes in its sweep loss occasioned in the course of business, F
being incidental to it – Thus, any loss incurred by way of an
expenditure by an assessee for any purpose which is an offence or
which is prohibited by law is not deductible in terms of Explanation
1 to s.37 – A penalty or a confiscation is a proceeding in rem, and
therefore, a loss in pursuance to the same is not available for
G
deduction regardless of the nature of business, as a penalty or
confiscation cannot be said to be incidental to any business –
Decisions in Piara Singh and Dr. T.A. Quereshi do not lay down
correct law in light of the decision in Haji Aziz and the insertion of
Explanation 1 to s.37 – Impugned judgment set aside – Finance
(No.2) Act 1998 – Income Tax Act, 1922 – ss.10(1), (2). H
85
86 SUPREME COURT REPORTS [2023] 7 S.C.R.
A Allowing the appeals, the Court
HELD: 1.1 The provisions of Section 37(1) under the Act
has been amended by Finance (No.2) Act, 1998 by introducing
Explanation 1 thereto w.e.f. 01.04.1962 wherein any expenditure
incurred by the assessee for any purpose which is an offence or
B prohibited by law is not an allowable business expense. It is true
that in the present case the respondent - assessee did not claim
value of silver bars confiscation as business expenses thus claimed
as business loss. However, the amendment to Section 37 might
have some bearing on the issue involved. [Para 6.1][98-C-D]
C 1.2 On going through the impugned judgment and order
passed by the High Court, it appears that the High Court has
simply relied upon the decision of this Court in the case of Piara
Singh. The High Court has materially erred in relying upon the
decision of this Court in the case of Piara Singh. [Para 6.2][98-E]
D CIT, Patiala vs. Piara Singh 124 ITR 4 – held
inapplicable.
1.3 In the present case the ownership of the confiscated
silver bars of the assessee now cannot be disputed and even the
assessee is not disputing the same. Even on that also there are
E concurrent findings by all the authorities below and including the
customs authorities. Therefore, the next question which is posed
for consideration before this Court is whether the assessee can
claim the business loss of the value of the silver bar confiscated
and whether the decision of this Court in the case of Piara Singh
would be applicable? To answer to the aforesaid question, it can
F be seen that in the present case the main business of the
assessee is dealing in silver. His business cannot be said to be
smuggling of the silver bars as was the case in the case of Piara
Singh. In the assessee’s case he was carrying on an otherwise
legitimate silver business and in attempt to make larger profits,
G he indulged into smuggling of silver, which was an infraction of
Civil law. In that view of the matter the decision of this Court in
the case of Piara Singh which has been relied upon by the High
Court while passing the impugned judgment and order and it has
been relied upon by the assessee shall not be applicable to the
H
THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH 87
CHAND LUNIA (D) THR. LRS. & ANR.
facts of the case. On hand or the other hand the decision of this A
Court in the case of Haji Aziz and the decisions of the Andhra
Pradesh High Court and the Bombay High Court which were
pressed into service by the Revenue in Piara Singh would be
applicable with full force. [Paras 6.7, 6.8][99-H; 100-A-D]
Haji Aziz & Abdul Shakoor Bros. v. CIT, AIR 1961 SC B
663 : [1961] SCR 651 – relied on.
Soni Hinduji Kushalji & Co. vs. CIT, (1973) 89 ITR
112(AP); JS Parkar v. VB Palekar, (1974) 94 ITR 616
(Bom) – approved.
1.4 In view of the above and for the reason stated above C
and looking to the business of the assessee namely silver business
and was not in the business of smuggling silver, the decision of
this Court in the case of Piara Singh shall not be applicable and
therefore the impugned judgment and order passed by the High
Court quashing and setting aside the order passed by the D
Assessing Officer, CIT(A) and the ITAT rejecting the claim of
the Assessee to treat the silver bars confiscated by the customs
authorities as business loss and consequently value allowing the
same as business loss is unsustainable and the same deserves to
be quashed and set side. [Para 7][100-E-F]
E
CIT Patiala vs. Piara Singh, 1980 Supp SCC 166 :
[1980] SCR 1122 – held inapplicable.
Chuharmal v. CIT, (1988) 3 SCC 588 : [1988] 3 SCR
788; CIT v. K Chinnathamban, (2007) 7 SCC 390 :
[2007] 8 SCR 496; TA Quereshi (Dr.) v. CIT, (2007) 2 F
SCC 759 : [2006] 10 Suppl. SCR 311; Apex
Laboratories (P) Ltd. v. CIT, (2022) 7 SCC 98 –
referred to.
Per M.M. Sundresh, J. (Supplementing)
1.1 Explanation-I makes a declaration to remove any G
possible doubts to reckon a loss suffered in the form of
expenditure for any purpose which is an offence or one that is
prohibited by law. There is no difficulty in holding that this
explanation is clarificatory in nature. Applying the principle of
literal interpretation with the intendment being very clear, giving
H
88 SUPREME COURT REPORTS [2023] 7 S.C.R.
A no room for further doubts, coupled with the fact that there is no
challenge to it, the meaning appears to be rather very clear. It
seeks to prohibit a deduction of any expenditure incurred by an
assessee for any purpose which is an offence or which is prohibited
by law. Due regard will have to be given to the words ‘any
expenditure’ and ‘any purpose’. The reiteration being a legislative
B
clarification of the main provision is required to be taken note of,
as such, the power of judicial review over an explanation, which
has been introduced to explain and remove the doubts of the
main provision, is rather limited. [Para 12][103-G-H; 104-A-B]
1.2 Though the provision speaks of expenditure while not
C making a specific reference to loss, one has to press into service
the accepted commercial practice and trading principles. If one
is to treat the expenditure as a genus, a loss would become a
specie. All losses would become expenditures but not vice versa.
A commercial loss in trade arising out of a business being carried
D on and incidental to it would be a deductible loss. There is a
similarity in the test qua a loss as laid down by this Court, and
expenditure under Section 37 of the Act. Perhaps, there is a
distinction when it comes to the accounting treatment of the two
concepts. Thus, there is no difficulty in holding that the word
‘any expenditure’ mentioned in Section 37 of the Act takes in its
E sweep loss occasioned in the course of business, as well.
Therefore, I agree with the view of my learned brother that
Section 37 of the Act and Explanation 1 will have a bearing in the
present case. [Para 13][104-C-E]
Badridas Daga v. CIT, [1959] SCR 690 – relied on.
F
1.3 A little bit of interplay between Section 115BBE and
Section 37(1) of the Act might throw more light on both the
provisions. If a loss in pursuance to an offence or prohibited
business cannot be brought under Section 115BBE of the Act for
income assessed under 68, 69 and 69A to 69D of the Act, which
G deals with unexplained income, expenditure etc., it can never be
said that the same would be brought under Section 37(1) of the
Act, despite the fact that the objective behind both the provisions
are overlapping with some connection. Section 115BBE being a
subsequent legislation, the true meaning of Section 37(1) can be
H understood on that basis. [Para 17][106-A-C]
THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH 89
CHAND LUNIA (D) THR. LRS. & ANR.
1.4 Conclusions: A
I. The word ‘any expenditure’ mentioned in Section 37 of
the Act takes in its sweep loss occasioned in the course of
business, being incidental to it.
II. As a consequence, any loss incurred by way of an
expenditure by an assessee for any purpose which is an offence B
or which is prohibited by law is not deductible in terms of
Explanation 1 to Section 37 of the Act.
III. Such an expenditure/loss incurred for any purpose
which is an offence shall not be deemed to have been incurred
for the purpose of business or profession or incidental to it, and C
hence, no deduction can be made.
IV. A penalty or a confiscation is a proceeding in rem, and
therefore, a loss in pursuance to the same is not available for
deduction regardless of the nature of business, as a penalty or
confiscation cannot be said to be incidental to any business. D
V. The decisions of this Court in Piara Singh and Dr. T.A.
Quereshi do not lay down correct law in light of the decision of
this Court in Haji Aziz and the insertion of Explanation 1 to Section
37. [Para 26][132-F-H; 133-A-C]
E
Commissioner of Income Tax vs. Piara Singh, 1980 Supp
SCC 166 : [1980] SCR 1122; Dr. T.A. Quereshi v.
Commissioner of Income Tax, Bhopal (2007) 2 SCC 759
: [2006] 10 Suppl. SCR 311 – held not correct law.
CIT v. S.C. Kothari, 1972 (4) SCC 402: [1972] 1 SCR
F
950 – held inapplicable.
Haji Aziz & Abdul Shakoor Bros. v. CIT, [1961] 2 SCR
651 – relied on.
Soni Hinduji Kushalji & Co. vs. CIT, (1973) 89 ITR
112(AP); JS Parkar v. VB Palekar, (1974) 94 ITR 616 G
(Bom) – approved.
Maqbool Hussain v. State of Bombay etc. [1953] SCR
730 – referred to.
H
90 SUPREME COURT REPORTS [2023] 7 S.C.R.
A Case Law Reference
In the judgment of M. R. Shah J.
[1961] SCR 651 relied on Para 3.1
[1988] 3 SCR 788 referred to Para 3.3
B [2007] 8 SCR 496 referred to Para 3.3
[2006] 10 Suppl. SCR 311 referred to Para 3.4
(2022) 7 SCC 98 referred to Para 3.4
[1980] SCR 1122 held inapplicable Para 6
C In the judgment of M.M. Sundresh, J.
[1980] SCR 1122 held not correct law Para 6
[1959] SCR 690 relied on Para 13
[1961] 2 SCR 651 relied on Para 20
[1972] 1 SCR 950 held inapplicable Para 21
D
[1953] SCR 730 referred to Para 22.1
[2006] 10 Suppl. SCR 311 held not correct law Para 25
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos.7689-
7690 of 2022.
E From the Judgment and Order dated 22.11.2016 of the High Court
of Judicature for Rajasthan at Jaipur in DBITA No.96 of 2003 and
DBITR No.6 of 1996.
Balbir Singh, ASG, A. K. Shrivastava, Sr. Adv., Rupesh Kumar,
Shyam Gopal, S. A. Haseeb, Divyansh H. Rathi, Ms. Monica Benjamin,
F Ms. Sunita Sharma, Raj Bahadur Yadav, Advs. for the Appellant.
Arijit Prasad, Sr. Adv., Ms. Supriya Juneja, Paritosh Gupta, Aditya
Singla, Ms. A. Sahitya Veena, Advs. for the Respondents.
The Judgment of the Court was delivered by
M. R. SHAH, J.
G
1. Feeling aggrieved and dissatisfied with the impugned judgment
and order dated 22.11.2016 passed by the High Court of Judicature for
Rajasthan at Jaipur passed in DBITA No.96/2003 and DBITR No.6/
1996 by which the High Court has allowed the said appeals, the Revenue
has preferred the present appeals.
H
THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH 91
CHAND LUNIA (D) THR. LRS. & ANR. [M. R. SHAH, J.]
2. The facts leading to the present appeals in nutshell are as under: A
2.1 A search was conducted by the Directorate of Revenue
Intelligence (DRI) officers at the premises situated at A-11, 12, Sector -
VII, NOIDA taken on rent by the assessee, Shri Prakash Chand Lunia.
The DRI recovered 144 slabs of silver from the premises and two silver
ingots from the business premises of the assessee at 1397, Chandni B
Chowk, Delhi. The assessee was arrested under Section 104 of the
Customs Act for committing offence punishable under Section 135 of
the Customs Act. The Collector, Customs held that the assessee Shri
Prakash Chand Lunia is the owner of silver/bullion and the transaction
thereof was not recorded in the books of accounts. The Collector of
Customs, New Delhi ordered confiscation of the said 146 slabs of silver C
weighing 4641.962 Kilograms valued at Rs.3.06 Crores. The Collector
Customs further imposed a personal penalty of Rs.25 Lakhs on Sh.
Prakash Chand Lunia under Section 112 of the Customs Act. The
Collector held that the silver under reference was of smuggled nature.
2.2 During the course of the assessment proceedings the Assessing D
Officer observed that the assessee was not able to explain the nature
and source of acquisition of silver of which he is held to be the owner,
therefore the deeming provisions of Section 69A of the Income Tax Act,
1961 (hereinafter referred to as ‘the Act, 1961) would be applicable.
The investment in this regard was not found recorded in the books of E
accounts of the assessee that were produced before the then Assessing
Officer. Accordingly, the Assessing Officer passed an assessment Order
and made an addition of Rs.3,06,36,909/- under Section 69A of the Act,
1961. In appeals preferred by the Assessee against the assessment order,
the CIT(A) dismissed the appeal of the assessee. Feeling aggrieved the
assessee preferred the appeal before the ITAT. The ITAT, Jaipur also F
upheld the order of the CIT(A) so far as Section 69A is concerned,
however, partly allowed the appeal of the assessee. As regards some
other minor additions, the ITAT set aside some minor other additions and
remanded the matter to the AO for fresh examination. The AO re-
examined the issue and addition was made. The CIT(A) also upheld the G
order of the AO. The Assessee preferred the appeal against the fresh
order passed by the CIT(A) before the ITAT. The ITAT, in the second
round as well upheld the order of the authorities below. A reference was
made by the ITAT to the High Court with the following questions of law:
H
92 SUPREME COURT REPORTS [2023] 7 S.C.R.
A (i) “Whether on the facts and in the circumstances of the case,
the Tribunal after construing and interpreting the provisions
contained in section 69A of the Income Tax Act, 1961 was
right in law, in holding that the assessee was the owner of
the 144 silver bars found at premises no A 11 & 12 , Sector
- VII, Noida and two silver bars found at premises of M/s
B
Lunia & Co Delhi and in sustaining addition of
Rs.3,06,36,909/- being unexplained investment in the hands
of the assessee under Section 69A of the Act?
(ii) If the answer to the above question is in affirmative then,
whether, on the facts and in the circumstances of the case,
C the Tribunal was right in law in distinguishing the ratio laid
down by their Lordships of the Supreme Court in the case
of Piara Singh v/s CIT, 124 ITR 41 and thereby not allowing
the loss on account of confiscation of silver bars?”
2.3 While the reference was pending before the High Court, penalty
D proceedings were initiated against the assessee. An order under Section
271 (i) (c) of the Act came to be confirmed by both the CIT (A) and the
ITAT. Accordingly, the assessee filed an appeal under Section 260A of
the Act against the Penalty order, before the High Court. The High
Court while deciding both the cases together, qua the first question,
E decided in favour of the Revenue and the rental premises of the assessee,
the same is to be added to his income as a natural consequence. However,
with regard to the second question, the High Court held that loss of
confiscation by the DRI official of Customs Department is business
loss. While holding the High Court has relied upon the decision of this
Court in the case of CIT, Patiala vs. Piara Singh reported in 124
F ITR 41. The impugned judgment and order passed by the High Court is
the subject matter of the present appeal.
3. Shri Balbir Singh, learned ASG has appeared on behalf of the
Revenue and Shri Arijit Prasad, learned Senior Advocate has appeared
on behalf of the assessee.
G
3.1 Shri Balbir Singh, learned ASG appearing on behalf of the
Revenue has vehemently submitted that in the facts and circumstances
of the case and while dealing with the relevant provisions of the Act,
1961, the High Court has materially erred in relying upon the decision of
this Court in the case of Piara Singh (supra). It is submitted that as
H such the AO, CIT(A) and ITAT have correctly distinguished the judgment
THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH 93
CHAND LUNIA (D) THR. LRS. & ANR. [M. R. SHAH, J.]
in case of the Piara Singh (supra) as the same pertained to an assessee A
who was engaged in the business of smuggling of currency notes and
for whom confiscation of the currency notes was a loss occasioned in
pursuing his business, i.e., a loss which sprung directly from carrying on
of his business and was incidental to it. It is submitted that due to this,
the assessee in the aforesaid case was held entitled to deduction under
B
Section 10(1) of Income Tax Act, 1922. It is submitted that however in
para 7 of the aforesaid judgment which refers to three cases where an
exception to the aforesaid rule was noted by the Court. It is submitted
that in the said decision this Court noted earlier decisions of this Court as
well as the Andhra Pradesh High Court and the Bombay High Court. It
is submitted that in the case of Haji Aziz & Abdul Shakoor Bros. v. C
CIT, AIR 1961 SC 663, the assessee’s claim for deduction of fine paid
by him for release of his dates confiscated by customs authorities, was
rejected on the ground that the amount paid by way of penalty for breach
of law was not a normal course of business carried on by it. In the other
two cases, customs authorities had confiscated gold from assessees
D
otherwise engaged in legitimate businesses. It is submitted that in two
relied upon cases of Andhra Pradesh High Court and the Bombay High
Court the assessees claimed the value of gold seized as a trading/business
loss which is identical to the Respondent-Assessee’s claim in the facts
of the present SLP. It is submitted that therefore the decision of this
Court in Haji Aziz & Abdul Shakoor Bros. v. CIT, AIR 1961 SC 663, E
of the Andhra Pradesh High Court in the case of Soni Hinduji Kushalji
& Co. vs. CIT, (1973) 89 ITR 112(AP) and of the Bombay High
Court in the case of JS Parkar v. VB Palekar, (1974) 94 ITR 616
(Bom) shall be applicable with full force to the facts of the case on
hand.
F
3.2 It is submitted that the Andhra Pradesh High Court observed
in para 10 of the judgment in case of Soni Hinduji Kushalji (supra)
that when a claim for deduction is made, the loss must be one that springs
directly from or is incidental to the business which the assessee carries
on and not every sort or kind of loss which has absolutely no nexus or
connection with his business. In paras 11 and 12, the High Court relied G
on various judgments to state that confiscation of contraband gold is an
action in rem and not a proceeding in personam and thus, a proceeding
in rem in the strict sense of the term is an action taken directly against
the property (i.e., smuggled gold) and even if the offender is not known,
customs authorities have power to confiscate the contraband gold. In H
94 SUPREME COURT REPORTS [2023] 7 S.C.R.
A view of the aforesaid, the Court stated that confiscation of contraband
gold by customs authorities cannot be said to be a trading or commercial
loss connected with or incidental to assessee’s business. The High Court
further relied on Haji Aziz (supra) and various other judgments to state
that such confiscation of smuggled/contraband goods which results in
infraction of law and has no incidence/connection to the business of
B
assessee, cannot be allowed as a business loss. Thus, the aforesaid case
which has been referred to and distinguished in Piara Singh (supra),
squarely applies to the facts of the present case herein. Similarly, the
case of JS Parkar (supra) would also be applicable to the present case
as in the former case, the assessee not only claimed the value of the
C gold confiscated as a trading loss but also set off of the said loss against
his assumed and assessed income from undisclosed sources. Furthermore,
the value of gold was sought to be taxed U/s.69/69A by the tax authorities.
However, in this case also the Bombay High Court rejected the contention
that Section 110 of the Evidence Act (where a person found in possession
of anything, the onus of proving that he was not the owner is on the
D
person who affirmed that he was not owner) was inapplicable to taxation
proceedings and agreed that tax authorities had rightly inferred assessee
to be owner of seized gold based on circumstantial evidence and assessee
was not entitled to claim value of such gold as a trading loss.
3.3 Shri Balbir Singh, learned ASG has further relied upon the
E decisions of this Court in the case of Chuharmal v. CIT, (1988) 3 SCC
588 and CIT v. K Chinnathamban, (2007) 7 SCC 390, on onus of
proving ownership being on the person who denies ownership and who
is in possession. It is submitted that ownership of confiscated silver fell
on the Respondent-Assessee in the present case which he failed to
F discharge and which accordingly rendered the tax authorities’ concurrent
findings on his ownership to be valid. It is submitted that when the assessee
has been unable to deny possession and ownership and in fact admitted
the same before the Settlement Commission as well as the High Court,
and further claimed the value of confiscated silver as a trading loss
before AO, CIT(A) and ITAT, to alternatively argue to the contrary and
G deny ownership in order to state that Section 69A cannot be applied in
his case may not be accepted.
3.4 It is submitted by learned ASG that assessee shall also not be
permitted to claim such loss as a business expenditure in view of the
express prohibition under Explanation 1 to Section 37(1) of the Act which
H
THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH 95
CHAND LUNIA (D) THR. LRS. & ANR. [M. R. SHAH, J.]
was added w.e.f.01.04.1962. Reliance is placed on the decisions of this A
Court in the case of TA Quereshi (Dr.) v. CIT, (2007) 2 SCC 759 as
well as Apex Laboratories (P) Ltd. v. CIT, (2022) 7 SCC 98. It is
submitted that Explanation 1 to Section 37(1) of the Act expressly
disallows any expenditure incurred by an assessee for any purpose which
is an offence or is prohibited by law, which may be claimed as an
B
expenditure incurred for the purpose of business/profession.
3.5 It is submitted that in the case of TA Quereshi (supra), this
Court clarified that the facts of the said case pertained to business loss
and not business expenditure. It is submitted that in the said case, ITAT
found the assessee engaged in the business of manufacturing and selling
heroin and thus, this Court held that assessee’s claim of business loss C
was allowable as he was in the business of heroin. It is submitted that
the case of Apex Laboratories (supra) distinguishes the judgment in
TA Quereshi (supra) and states that the case relating to the assessee
bribing doctors, did not deal with business loss but business expenditure
which was disallowable under Explanation 1 to Section 37(1). It is D
submitted that thus either way, neither can the Respondent-Assessee
claim business loss due to him not being in the smuggling business nor
can he claim business expenditure as the same is prohibited under
Explanation 1 to Section 37(1).
3.6 Making above submissions and relying upon the above E
submissions, it is prayed to allow the present appeals and restore the
ITAT orders.
4. Shri Arijit Prasad, learned Senior Advocate appearing on behalf
of the assessee has vehemently submitted that in the present case the
respondent – assessee is engaged in the business of purchase and sale F
of silver. Total sales of Rs.1,46,07,314/- of Silver was declared by the
respondent – assessee with a gross profit of Rs.1,32,712/- for the
assessment year in question. Search was conducted by the officers of
DRI when unaccounted 146 slabs of silver was recovered. The Collector
of Customs ordered absolute confiscation of the said 146 slabs of silver
valued at Rs.3,06,036,909/- was proposed to be added as deemed income G
under Section 69A of the Act. The respondent – assessee disputed being
the owner of the slabs. In the alternative, the respondent also requested
that 146 silver slabs having been absolutely confiscated by the Customs
Department, the value of such tradable silver slabs should be allowed as
loss. However, the Assessing Officer made the addition of H
96 SUPREME COURT REPORTS [2023] 7 S.C.R.
A Rs.3,06,036,909/- as income under Section 69A of the Act being a value
of 146 silver bars seized from the possession of the respondent. The
said order of addition came to be confirmed upto ITAT, however by the
impugned judgment and order the High Court has answered the reference
in favour of the assessee by holding that when the value of material is
added to the income of the respondent, as a natural consequence, the
B
loss by confiscation of the said material is required to be allowed as
business loss. It is submitted that it is through that before the High Court,
the assessee did not press the argument regarding the ownership of the
silver slabs and therefore, the said question was not answered by the
High Court.
C 4.1 It is submitted that therefore present case is one where set
off is claimed of the value of the 146 silver slabs as loss on account of
absolute confiscation rather than claim of expenditure of any penalty
and/or fine imposed for infraction of law.
4.2 It is submitted that as such the issue in the present appeals is
D fairly covered in favour of the assessee in view of the decision of this
Court in the case of TA Quereshi (Dr.) (supra). In the said decision, it
is held that the judgment of the High Court applying Section 37 of the
Act to the case of business loss on account of absolute confiscation of
the goods was erroneous. It is submitted that the submission of the
E assessee therein that Section 37 of the Act related to business expenditure
whereas case of absolute confiscation was one of business loss has
been accepted.
4.3 It is submitted that in the present case, upon search, 146 silver
slabs were found to be in possession of the assessee. The value of the
F said silver slabs was determined to be Rs. 3,06,036,909/- and the same
was added to the computation of income of the assessee under Section
69A of the Act as undisclosed valuable article which was not recorded
in the books of account of the assessee.
4.4 It is submitted that however as the respondent – assessee
G was engaged in the business of trading of silver and the said silver slabs
were in possession of the assessee for the purpose of trading, absolute
confiscation of the said silver slabs would result in loss of stock in trade
and the value thereof would be available as deduction as business/trading
loss. It is submitted that therefore the decision of this Court in the case
of T.A. Quereshi (Supra) shall be clearly applicable.
H
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CHAND LUNIA (D) THR. LRS. & ANR. [M. R. SHAH, J.]
4.5 It is submitted that in the case of T.A. Quereshi (Supra) this A
Court has drawn a distinction between claim of deduction as expenditure
of penalty/fine as against claim of business loss on account of confiscation
of goods which are unaccounted stock in trade. It is submitted that in
case of claim of deduction as expenditure of any fine and/or penalty, the
Courts have held that such deduction would not be available to the
B
assessee as it would defeat the very purpose behind such penal action.
Whereas, in case of claim of set off as business loss, the unaccounted
goods though added to the income of assessee but is not available to the
assessee for his trade. It is submitted that while extending the benefit of
such set off, this Court in the case of Piara Singh (supra) and T.A.
Quereshi (Supra) have held that the assessee shall be entitled to the C
set off as business loss.
4.6 It is submitted that unlike a case of imposition of redemption
fine where the confiscated goods are released on payment of such
amount, absolute confiscation of the goods results in the said goods
vesting with the Central Government. In such cases, though the value of D
the goods is added to the income of the assessee, but the assessee has
no option of redeeming the goods for its onward trade. Thus, there is an
evident distinction between a case where deduction is sought of any
penalty and/or fine as allowable expenditure and a case where business
loss is claimed on account of absolute confiscation of the goods which
results in loss of stock in trade. It is submitted that present one is a case E
where the set off is claimed as business loss on account of absolute
confiscation of the silver bars and not of any penalty and/or fine. The
judgments cited during the course of hearing by the Petitioner are
therefore rendered on distinct and distinguishable facts and would not
be applicable to the facts of the present case. F
4.7 It is submitted that the said distinction has also been statutorily
recognized. As highlighted by the appellant, Section 37 which deals with
allowance and deduction of expenditure, was amended vide Finance
Act, 1998 w.e.f. 01.04.1962 whereby Explanation 1 was added to clarify
that any expenditure incurred by an assessee for any purpose which is G
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. In contrast
thereto, consciously no such restriction has been brought in law with
regard to set off of the value of the unaccounted stock in trade which
have been absolutely confiscated. H
98 SUPREME COURT REPORTS [2023] 7 S.C.R.
A 4.8 Making above submissions it is prayed to dismiss the present
appeals.
5. Heard learned counsel for the respective parties at length.
6. The short question which is posed for consideration before this
Court is whether the High Court has erred in law in allowing the
B respondent – assessee the loss of confiscation of silver bars by DRI
officials as a business loss, relying upon the decision of this Court in the
case of CIT Patiala vs. Piara Singh, 1980 Supp SCC 166?
6.1 While considering the aforesaid question, at the outset, it is
required to be noted that the provisions of Section 37(1) under the Act
C has been amended by Finance (No.2) Act, 1998 by introducing
Explanation 1 thereto w.e.f. 01.04.1962 wherein any expenditure incurred
by the assessee for any purpose which is an offence or prohibited by
law is not an allowable business expense. It is true that in the present
case the respondent - assessee did not claim value of silver bars
D confiscation as business expenses thus claimed as business loss. However,
the amendment to Section 37 might have some bearing on the issue
involved.
6.2 On going through the impugned judgment and order passed
by the High Court, it appears that the High Court has simply relied upon
E the decision of this Court in the case of Piara Singh (supra). Having
gone through the decision of this Court in the case of Piara Singh
(supra), we are of the opinion that the High Court has materially erred
in relying upon the decision of this Court in the case of Piara Singh
(supra).
F 6.3 In the case of Piara Singh (supra) the assessee was found
to be in the business of smuggling of currency notes and to that it was
found that confiscation of currency notes was a loss occasioned in
pursuing his business i.e. a loss which sprung directly from carrying on
of his business and was incidental to it. Due to this, the assessee in the
said case held entitled to deduction under Section 10(1) of the Income
G Tax Act, 1922. In view of the above fact situation this Court in the case
of Piara Singh (supra) distinguished the decisions of this Court in the
case of Haji Aziz & Abdul Shakoor Bros. reported in AIR 1961 SC
663, and the decision in the case of Soni Hinduji Kushalji & Co. vs.
CIT, (1973) 89 ITR 112(AP) and not agreed with the decision of the
Bombay High Court in the case of J.S. Parkar vs. VB Palekar, (1974
H
THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH 99
CHAND LUNIA (D) THR. LRS. & ANR. [M. R. SHAH, J.]
94 ITR 616 (Bom). It is to be noted that in all the aforesaid three cases A
which were relied upon by the Revenue in the case of Piara Singh
(supra) were found to be involved in legitimate businesses and not
smuggling business but however they were found to have smuggled goods
contrary to law which resulted in an infraction of law and resultant
confiscation by customs authorities.
B
6.4 In the case of Haji Aziz (supra) the assessee claimed for
deduction of fine paid by him for release of his dates confiscated by
customs authorities was rejected on the ground that the amount paid by
way of penalty for breach of law was not a normal business carried out
by it. In the case of Soni Hinduji Kushalji (supra) and JS Parkar
(supra), the customs authorities had confiscated gold from assessees C
otherwise engaged in legitimate businesses. In the aforesaid two cases
the assessee claimed the value of gold seized as a trading/business loss.
It was held that the assessees are not entitled to the deductions as claimed
as business loss.
6.5 In the case of Soni Hinduji (supra), the Andhra Pradesh D
High Court held that when a claim for deduction is made, the loss must
be one that springs directly from or is incidental to the business which
the assessee carries on and not every sort or kind of loss which has
absolutely no nexus or connection with his business. It was observed
that confiscation of contraband gold was an action in rem and not a E
proceeding in personam and thus, a proceeding in rem in the strict sense
of the term is an action taken directly against the property (i.e. smuggled
gold) and even if the offender is not known, the customs authorities
have power to confiscate the contraband gold.
6.6 In the case of JS Parkar (supra), the assessee not only F
claimed the value of the gold confiscated as a trading loss but also set
off of the said loss against his assumed and assessed income from
undisclosed sources. The value of gold was sought to be taxed under
Section 69/69A of the Act by the tax authorities. However, the Bombay
High Court held the assessee to be the owner of the smuggled confiscated
gold and the assessee was not entitled to claim value of such gold as a G
trading loss.
6.7 In the present case the ownership of the confiscated silver
bars of the assessee now cannot be disputed and even the assessee is
not disputing the same. Even on that also there are concurrent findings
by all the authorities below and including the customs authorities. H
100 SUPREME COURT REPORTS [2023] 7 S.C.R.
A Therefore, the next question which is posed for consideration before
this Court is whether the assessee can claim the business loss of the
value of the silver bar confiscated and whether the decision of this Court
in the case of Piara Singh (supra) would be applicable?
6.8 To answer to the aforesaid question, it can be seen that in the
B present case the main business of the assessee is dealing in silver. His
business cannot be said to be smuggling of the silver bars as was the
case in the case of Piara Singh (supra). As observed hereinabove in
the assessee’s case he was carrying on an otherwise legitimate silver
business and in attempt to make larger profits, he indulged into smuggling
of silver, which was an infraction of law. In that view of the matter the
C decision of this Court in the case of Piara Singh (supra) which has
been relied upon by the High Court while passing the impugned judgment
and order and it has been relied upon by the assessee shall not be
applicable to the facts of the case. On hand or the other hand the decision
of this Court in the case of Haji Aziz (1961) 41 ITR 350 (SC) and the
D decisions of the Andhra Pradesh High Court and the Bombay High Court
which were pressed into service by the Revenue in Piara Singh (supra)
would be applicable with full force.
7. In view of the above and for the reason stated above and looking
to the business of the assessee namely silver business and was not in the
E business of smuggling silver, the decision of this Court in the case of
Piara Singh (supra) shall not be applicable and therefore the impugned
judgment and order passed by the High Court quashing and setting aside
the order passed by the Assessing Officer, CIT(A) and the ITAT rejecting
the claim of the Assessee to treat the silver bars confiscated by the
customs authorities as business loss and consequently value allowing
F the same as business loss is unsustainable and the same deserves to be
quashed and set side.
8.1 In view of the above and for the reason stated above present
appeals succeed. The impugned judgment and order passed by the High
Court is hereby quashed and set aside and the order passed by the
G assessing officer, CIT(A) and the ITAT are hereby restored.
Present appeals are accordingly allowed. No costs.
M. M. SUNDRESH, J.
1. The present appeal is filed by the Revenue, challenging the
H decision of the Division Bench of the Rajasthan High Court at Jaipur,
THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH 101
CHAND LUNIA (D) THR. LRS. & ANR. [M. M. SUNDRESH, J.]
drawing a distinction between a claim for deduction of a loss incurred in A
an illegal business, as against a claim of a loss qua a legitimate business,
though an illegality is attached to it. The aforesaid issue is to be tested on
an offence committed leading to either a penalty or confiscation.
2. Heard Mr. Balbir Singh, learned Additional Solicitor General,
Mr. AK Shrivastava, learned seniorcounsel for the Appellant and Mr. B
Arjit Prasad, learned senior counsel for the Respondents.
3. I have gone through the well-merited judgment rendered by my
learned brother, Justice M.R. Shah. While concurring with the ultimate
conclusion arrived at in overturning the decision of the High Court, I
would like to give my own reasoning on the aforesaid aspect. The facts C
being narrated with utmost clarity by my learned brother, only those
which are required in support of the reasoning are being recorded.
4. The Director of Revenue Intelligence set out a search at the
business premises of the Respondent/assessee. The recovery yielded
silver slabs/silver ingots. The assessee was in the business of making D
jewellery.
5. The Respondent/assessee filed his return for the Assessment
Year 1989-1990 followed by a petition before the Income Tax Settlement
Commission.The Collector of Customs videorder dated 18.12.1990
ordered confiscation of goods and imposed penalty. It was done on the E
premise that the goods were smuggled by the assessee. A claim was
made by the assessee that the loss on account of confiscation would be
allowable as trading loss being incidental to the business, and hence,
deductible. This argument was duly rejected as he was neither doing the
business of smuggling, nor he owned the silver. The plea of ownership
was given up by the Respondent/assessee before the High Court, and F
therefore, the decision of the assessing officer in bringing the loss suffered
under Section 69A of the Income Tax Act, 1961 (hereinafter referred to
as “the Act”), has become final.
6. Before the Hight Court, the Respondent/assessee placing
reliance upon the judgment of this Court in Commissioner of Income G
Tax v. Piara Singh(1980) Supp. SCC 166, inter alia contended that
smuggling by itself being prohibited in law, any loss occurred thereunder
is liable for deduction. The aforesaid argumentmade, found acceptance
at the hands of the High Court, which is sought to be impugned by the
Revenue before us.
H
102 SUPREME COURT REPORTS [2023] 7 S.C.R.
A RELEVANT PROVISIONS OF THE INCOME TAX ACT,
1961
“2.Definitions.- In this Act, unless the context otherwise
requires,—
xxx xxx xxx
B
(13)”business” includes any trade, commerce or manufacture or
any adventure or concern in the nature of trade, commerce or
manufacture;”
7. This provision being a definition clause merely defines various
C activities which could be termed as a business.Section 2(13) of the Act
gives a broad definition to ‘business’. Section 28 of the Act comes under
the heading ‘Profits and Gains of Business or Profession’.Various types
of income enumerated thereunder are made chargeable to income tax.
The income, as referred in Section 28 of the Act, has to be computed in
the manner as prescribed under Section 30 to 43D of the Act, which is
D accordingly provided under Section 29 of the Act.
Section 37:
“37 General.- (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
E 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 profession”.
[Explanation 1.]—For the removal of doubts, it is hereby
F 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.”
G 8. Section 37 of the Act, being one of the provisions meant for
computing income from profits or gains of business or profession, is a
residuary and omnibus provision which intends to cover all expenditure
to the exclusion of those mentioned under Section 30 to 36 of the Act,
apart from being in the nature of capital expenditure or personal expenses
of the assessee. Therefore, the object behind this provision is very clear
H as it includes ‘any expenditure’. The second mandate of this provision is
THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH 103
CHAND LUNIA (D) THR. LRS. & ANR. [M. M. SUNDRESH, J.]
that the expenditure will have to be laid out or expendedwholly and A
exclusively for the purpose of the business or profession to come
into the fold of income chargeable to tax as profit and gains of business
or profession.
9. An ambiguity arose as to whether a business, as defined under
Section 2(13) of the Act, and as dealt with under Section 37 of the Act, B
would include a deduction when the said expenditure is incurred for any
purpose which is an offence or prohibited by law.
10. Since an anomaly has been created by the interpretation of
the parimateria provision under the Income Tax Act, 1922 (hereinafter
referred to as “the Old Act”), viz. Section 10(1) and (2), therefore,
Explanation-I to Section 37 of the Act came into the statute book with C
retrospective effect from 01.04.1962 through the Finance (No.2) Act
1998, (Act 21 of 1998).
11. The purpose of theinsertion of the aforesaid Explanation was
explained by the Central Board of Direct Taxes Circular No. 772 dated
23.12.1998, D
“Disallowance of illegal expenses
20.1 Section 37 of the Income-tax Act is amended to provide 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 purposes of business or profession E
and no deduction or allowance shall be made in respect of such
ex-penditure. This amendment will result in disallowance of the
claims made by certain assessees in respect of payments on
ac-count of protection money, extortion, hafta, bribes etc. as
business expenditure. It is well decided that unlawful expenditure F
is not an allowable deduction in computation of income.
20.2 This amendment will take effect retrospectively from 1st
April, 1962 and will, accordingly, apply in relation to the as-sessment
year 1962-63 and subsequent years.”
12. Explanation-I makes a declaration to remove any possible G
doubts to reckon a loss suffered in the form of expenditure for any
purpose which is an offence or one that is prohibited by law.There is no
difficulty in holding that this explanation is clarificatory in nature.Applying
the principle of literal interpretation with the intendment being very clear,
giving no room for further doubts, coupled with the fact that there is no H
104 SUPREME COURT REPORTS [2023] 7 S.C.R.
A challenge to it, the meaning appears to be rather very clear. It seeks to
prohibit a deduction of any expenditure incurred by an assessee for any
purpose which is an offence or which is prohibited by law. Due regard
will have to be given to the words ‘any expenditure’ and ‘any purpose’.
The reiteration being a legislative clarification of the main provision is
required to be taken note of, as such,the power of judicial review over
B
an explanation, which has been introduced to explain and remove the
doubts of the main provision, is rather limited.
13. Though the provision speaks of expenditure while not making
a specific reference to loss, one has to press into service the accepted
commercial practice and trading principles. If one is to treat the
C expenditure as a genus, a loss would become a specie. All losses would
become expenditures but not vice versa. A commercial loss in trade
arising out of a business being carried on and incidental to it would be a
deductible loss as laid down by this Court in BadridasDaga v. CIT,
(1959) SCR 690. There is a similarity in the test qua a loss as laid down
D by this Court,and expenditure under Section 37 of the Act. Perhaps,
there is a distinction when it comes to the accounting treatment of the
two concepts. Thus, there is no difficulty in holding that the word ‘any
expenditure’ mentioned in Section 37 of the Act takes in its sweep loss
occasioned in the course of business, as well. Therefore, I agree with
the view of my learned brother that Section 37 of the Act and Explanation
E 1 will have a bearing in the present case.
Section 115BBE
“Section 115BBE.- “Tax on income referred to in section
68 or section 69 or section 69A or section 69B or section
F 69C or section 69D.-(1) Where the total income of an
assessee,—
(a) includes any income referred to in section 68, section 69,
section 69A, section 69B, section 69C or section 69D and
reflected in the return of income furnished under section
G 139; or
(b) determined by the Assessing Officer includes any income
referred to in section 68, section 69, section 69A, section
69B, section 69C or section 69D, if such income is not
covered under clause (a),
H the income-tax payable shall be the aggregate of—
THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH 105
CHAND LUNIA (D) THR. LRS. & ANR. [M. M. SUNDRESH, J.]
(i) the amount of income-tax calculated on the income referred A
to in clause (a) and clause (b), at the rate of sixty per cent;
and
(ii) the amount of income-tax with which the assessee would
have been chargeable had his total income been reduced
by the amount of income referred to in clause (i). B
(2) Notwithstanding anything contained in this Act, no deduction
in respect of any expenditure or allowance or set off of any loss
shall be allowed to the assessee under any provision of this Act in
computing his income referred to in clause (a) and clause (b) of
sub-section (1).” C
14. Section 115BBE of the Act deals with levy of tax on income
as mentioned in Section 68, 69, and 69A to 69D of the Act. If a case
comes under Section 115BBEsub-section (1) of the Act, the rate of
income tax shall be at 60%.
15. The object of this provision is to fill up the loopholes and to D
make sure unaccounted money either generated or used, more so in the
nature of Black Money, is penalized. When this provision was introduced
in the year 2012, the rate of tax was fixed at the rate of 30%.The Bill
also speaks about the objective behind not allowing any deduction to the
assessee in computing deemed income under Section 68, 69 and 69A to E
69D of the Act. That was the reason why a decision was made to impose
greater tax burden.The rate of tax was increased by a subsequent
amendment to 60%.
16. Sub-section (2) of Section 115BBE starts with anon-obstante
clause. It will have precedence over any other provision contained in the F
Act, while dealing with a deduction in respect of any expenditure or
allowance or set off of any loss. In other words, no such deduction
would be allowed under any provision of the Act in computing an
assessee’s income under sub-section (1).An amendment has been
introduced by Finance Act, 2016 with the inclusion of ‘set off of any
loss’ being not allowable. Sub-section (2) once again does not speak G
about loss but the fact that it makes a reference to ‘set off of any loss’
would reiterate the view taken earlier, while considering the scope and
ambit of Section 37 of the Act,that such a loss has to be read into
expenditure, at least while applying the test for the purpose of deduction.
To make the position clear one has to understand that the amendment
H
106 SUPREME COURT REPORTS [2023] 7 S.C.R.
A merely speaks about the right of the assessee to set off the loss which
presupposes that the loss has to be treated as a facet of expenditure.
17. A little bit of interplay between Section 115BBE and Section
37(1) of the Act might throw more light on both the provisions. If a loss
in pursuance to an offence or prohibited business cannot be brought
B under Section 115BBE of the Act for income assessed under 68, 69 and
69A to 69D of the Act, which deals with unexplained income, expenditure
etc., it can never be said that the same would be brought under Section
37(1) of the Act, despite the fact that the objective behind both the
provisions are overlapping with some connection. Section 115BBE being
a subsequent legislation, the true meaning of Section 37(1) can be
C understood on that basis.
18. Having understood the provisions, I shall now consider the
decisions relied upon at the Bar as they deal with the interpretation of
the provisions governing.
D 19. BadridasDaga v. CIT , (1959) SCR 690
19.1 This Court was dealing with a loss suffered due to an
embezzlement by an employee of theassessee. While interpreting Section
10(2) of the Old Act over a claim made for deduction, for which there
was no specific provision, reliance was made on the accepted commercial
E practices and trading principles. Resultantly, it was held that the deduction
was allowable in a case where there is no prohibition either expressed
or implied under the Act.Thus, the Court has made it clear that in the
absence of any prohibition, as stated above, a claim for deduction of a
loss is allowable so long as it emanates directly from the carrying on of
the business, being incidental to it. In other words, it does not include
F loss of any nature even if it has some connection with the business, if the
same cannot be said to be incidental to the business.
19.2 The court went onto hold that the payment of salary to an
employee being paid for the purpose of business, is deductible under the
general provision, therefore, logically any loss occasioned on the action
G of an employee would be incidental to the business.
19.3 Considering the aforesaid, it can be said that there is a
similarity between the test laid down for deduction of an expense in the
residuary omnibus provision under Section 10(2)(xv) of the Old Act and
the test for deduction of loss based on commercial practices and trading
H
THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH 107
CHAND LUNIA (D) THR. LRS. & ANR. [M. M. SUNDRESH, J.]
principles. The decision is therefore supporting the above stated A
interpretation of Section 37 of the Act.
19.4 Relevant paragraphs:
“The question whether monies embezzled by an agent or employee
are allowable as deduction in computing the profits of a business
under s. 10 of the Act has come up for consideration frequently B
before the Indian Courts, and the decisions have not been quite
uniform. Before discussing them, it is necessary that we should
examine the principles that are in law applicable to the
determination of the question. Three grounds have been put
forward in support of the claim for deduction: (1) that the loss C
sustained by reason of embezzlement is a bad debt allowable under
s. 10(2)(xi) of the Act; (2) that it is a business expense falling
within s. 10(2)(xv) of the Act; and (3) that it is a trading loss,
which must be taken into account in computing the profits under
s. 10(1) of the Act. As regards the first ground, the authorities
have consistently held that the deduction is not admissible under D
s. 10(2)(xi) of the Act, and that, in our view, is correct. A debt
arises out of a contract between the parties, express or implied,
and when an agent misappropriates monies belonging to his
employer in fraud of him and in breach of his obligations to him, it
cannot be said that he owes those monies under any agreement. E
He is no doubt liable in law to make good that amount, but that is
not an obligation arising out of a contract, express or implied. Nor
does it make a difference that in the accounts of the business the
amounts embezzled are shown as debits, the amounts realised
towards them, if any, as credits, and the balance is finally written
off. They are merely journal entries adjusting the accounts and do F
not import a contractual liability. Nor can a claim for deduction be
admitted under s. 10(2)(xv), because moneys which are withdrawn
by the employee out of the business till without authority and in
fraud of the proprietor can in no sense be said to be “an expenditure
laid out or expended wholly and exclusively” for the purpose of G
the business. The controversy therefore narrows itself to the
question whether amounts lost through embezzlement by an
employee are a trading loss which could be deducted in computing
the profits of a business under s. 10(1). It is to be noted that while
s, 10(1) imposes a charge on the profits or gains of a trade, it does
H
108 SUPREME COURT REPORTS [2023] 7 S.C.R.
A not provide how those profits are to be computed. Section 10(2)
enumerates various items which are admissible as deductions,
but it is well settled that they are not exhaustive of all allowances
which could be made in ascertaining profits taxable under s. 10(1).
In Income Tax Commissioner v. Chitnavis [(1932) LR 59 IA
290, 296, 297] the point for decision was whether a bad debt
B
could be deducted under s. 10(1) of the Act, there having been in
the Act, as it then stood, no provision corresponding to s. 10(2)(xi)
for deduction of such a debt. In answering the question in the
affirmative, Lord Russel observed:
“Although the Act nowhere in terms authorizes the deduction
C of bad debts of business, such a deduction is necessarily
allowable. What are chargeable in income tax in respect of a
business are the profits and gains of a year; and in assessing
the amount of the profits and gains of a year account must
necessarily be taken of all losses incurred, otherwise you would
D not arrive at the true profits and gains.”
It is likewise well settled that profits and gains which are liable to
be taxed under s. 10(1) are what are understood to be such
according to ordinary commercial principles. “The word ‘profits’
… is to be understood”, observed Lord Halsbury in Gresham
E Life Assurance Society v. Styles [(1892) AC 309, 315 : 3 TC
185, 188] “in its natural and proper sense — in a sense which no
commercial man would misunderstand”. Referring to these
observations Lord Macmillan said in Pondicherry Railway Co.
v. Income Tax Commissioner [(1931) LR 58 IA 239, 252]:
F “English authorities can only be utilized with caution in the
consideration of Indian income tax cases owing to the
differences in the relevant legislation, but the principle laid down
by Lord Chancellor Halsbury in Gresham Life Assurance
Society v. Styles [(1892) AC 309, 315 : 3 TC 185, 188] , is of
general application unaffected by the specialities of the English
G tax system.”
The result is that when a claim is made for a deduction for which
there is no specific provision in s. 10(2), whether it is admissible
or not will depend on whether, having regard to accepted
commercial practice and trading principles, it can be said to arise
H out of the carrying on of the business and to be incidental to it. If
THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH 109
CHAND LUNIA (D) THR. LRS. & ANR. [M. M. SUNDRESH, J.]
that is established, then the deduction must be allowed, provided A
of course there is no prohibition against it, express or implied, in
the Act.
These being the governing principles, in deciding whether
loss resulting from embezzlement by an employee in a business is
admissible as a deduction under s. 10(1) what has to be considered B
is whether it arises out of the carrying on of the business and is
incidental to it. Viewing the question as a businessman would, it
seems difficult to maintain that it does not. A business especially
such as is calculated to yield taxable profits has to be carried on
through agents, cashiers, clerks and peons. Salary and
remuneration paid to them are admissible under s. 10(2)(xv) as C
expenses incurred for the purpose of the business. If employment
of agents is incidental to the carrying on of business, it must logically
follow that losses which are incidental to such employment are
also incidental to the carrying on of the business. Human nature
being what it is, it is impossible to rule out the possibility of an D
employee taking advantage of his position as such employee and
misappropriating the funds of his employer, and the loss arising
from such misappropriation must be held to arise out of the carrying
on of business and to be incidental to it. And that is how it would
be dealt with according to ordinary commercial principles of trading.
E
At the same time, it should be emphasised that the loss for
which a deduction could be made under s. 10(1) must be one that
springs directly from the carrying on of the business and is
incidental to it and not any loss sustained by the assessee, even if
it has some connection with his business. If, for example, a thief
were to break overnight into the premises of a moneylender and F
run away with funds secured therein, that must result in the
depletion of the resources available to him for lending and the loss
must, in that sense, be a business loss, but it is not one incurred in
the running of the business, but is one to which all owners of
properties are exposed whether they do business or not. The loss G
in such a case may be said to fall on the assessee not as a person
carrying on business but as owner of funds. This distinction, though
fine, is very material as on it will depend whether deduction could
be made under s. 10(1) or not.”
(emphasis supplied) H
110 SUPREME COURT REPORTS [2023] 7 S.C.R.
A 20. Haji Aziz & Abdul Shakoor Bros. v. CIT,(1961) 2 SCR
651
20.1 Thethree-Judge bench of this Court in the aforesaid case
was concerned with two principal issues which we are dealing with at
present.In clear terms it has been held that an expenditure is not
B deductible unless it is a commercial loss in trade. A penalty incurred for
an infraction of law could never be termed as a commercial loss in
carrying on business, apart from being an abnormal incident, consequently,
it cannot be deducted. It falls on the assesse in some character other
than that of a trader. A mere connection between the loss and the business
of the assesseper se can never be the sole factor. To put it simply, this
C Court has made the position abundantly clear that a penalty can never
be understood as a commercial expenditure/loss for the purpose of the
business nor a disbursement made to earn profit. It was further noted
that a confiscation is a proceeding in rem, and therefore, the penalty is
imposed on the goods. That being the position, in any case, an assessee
D cannot claim deduction of loss in a case of confiscation/penalty, as arising
out of carrying on of the business or incidental to it.
20.2 Relevant paragraphs:
“In support of his argument counsel for the appellant firm
referred to Maqbool Hussain v. State of Bombay etc. [(1953)
E SCR 730] and to the following passage at p. 742 where Bhagwati,
J., said:
“Confiscation is no doubt one of the penalties which the
Customs Authorities can impose but that is more in the nature
of proceedings in rem than proceedings in personam, the object
F being to confiscate the offending goods which have been dealt
with contrary to the provisions of the law and in respect of the
confiscation also an option is given to the owner of the goods
to pay in lieu of confiscation such fine as the officer thinks fit.
All this is for the enforcement of the levy of and safeguarding
G the recovery of the sea customs duties.”
Similar observations were made by S.K. Das, J.,
in ShewpujanraiIndrasanrai Ltd. v. Collector of
Customs&Ors. [(1959) SCR 821 at p. 836] where it was said
that a distinction must be drawn between an action in rem and
proceeding in personam and that confiscation of the goods is a
H
THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH 111
CHAND LUNIA (D) THR. LRS. & ANR. [M. M. SUNDRESH, J.]
proceeding in rem and the penalties are enforced against the goods A
whether the offender is known or not. The view taken by this
Court in the other two cases cited by counsel for the appellants
i.e. Leo Roy Frey v. Superintendent, District Jail,
Amritsar [(1958) SCR 822] and Thomas Dana v. State of
Punjab [1959 Supp (1) SCR 274 at p. 298] is the same. In Dana
B
case [(1959) SCR 821 at p. 836] Subba Rao, J., said at p. 298:
“If the authority concerned makes an order of confiscation it
is only a proceeding in rem and the penalty is enforced against
the goods. On the other hand, if it imposes a penalty against
the person concerned, it is a proceeding against the person
and he is punished for committing the offence. It follows that C
in the case of confiscation there is no prosecution against the
person or imposition of a penalty on him.”
In Maqbool Hussain’s case [(1953) SCR 730] the question for
decision was whether after proceedings had been taken under
the Sea Customs Act an accused person could be prosecuted and D
could or could not rely upon the plea of double jeopardy, it was
held that he could not. In Shewpujanrai case [(1959) SCR 821
at p. 836] the contention raised was that after proceedings had
been taken under the Foreign Exchange Regulation Act it was
not open to the Customs Authorities to take any action under the E
Sea Customs Act. The other two cases were similar to Maqbool
Hussain case [(1953) SCR 730] . The contention now raised
before us is quite different. What is to be decided in the present
case is whether the penalty which was paid by the appellant firm
was an allowable deduction within s. 10(2)(xv) of the Income-tax
Act which provides: F
S. 10. (2)(xv) “any expenditure (not being in the nature of capital
expenditure or personal expenses of the assessee) laid out or
expended wholly and exclusively for the purpose of such
business, profession or vocation.”
G
The words “for the purpose of such business” have been construed
in Inland Revenue v. Anglo Brewing Co. Ltd. [(1925) 12 TC
803, 813] to mean “for the purpose of keeping the trade going and
of making it pay”. The essential condition of allowance is that the
expenditure should have been laid out or expended wholly and
exclusively for the purpose of such business. H
112 SUPREME COURT REPORTS [2023] 7 S.C.R.
A In deciding this case, reference to decisions in some English
cases will be fruitful. In Commissioners of Inland
Revenue v. Warnes & Co. [(1919) 2 KB 444] , the assessee who
carried on the business of oil exporters were sued for a penalty
on an information exhibited by the Attorney-General under the
Sea Customs Consolidation Act for breach of orders and
B
proclamations. The matter was settled by consent on the assessee
agreeing to pay a mitigated penalty of £ 2000. All imputations on
the moral culpability of the assessees were withdrawn. The
provisions of the Act under which this information was lodged
and penalty paid was similar to the provisions of the Indian Sea
C Customs Act. This amount was held not to be a proper deduction
because in order to be within the provision similar to s. 10(2)(xv)
of the Indian Act the loss had to be something within commercial
contemplation and in the nature of a commercial loss. Rowlatt, J.,
relying on the observation of Lord Loreburn, L.C., in Strong &
Co. v. Woodifield [(1906) AC 448] said at p. 452:
D
“but it seems to me that a penal liability of this kind cannot be
regarded as a loss connected with or arising out of a trade. I
think that a loss connected with or arising out of a trade must,
at any rate, amount to something in the nature of a loss which
is contemplable and in the nature of a commercial loss. I do
E not intend that to be an exhaustive definition, but I do not think
it is possible to say that when a fine which is what the penalty
in the present case amounted to has been inflicted upon a trading
body, it can be said that that is a ‘loss connected, with or arising
out of’ the trade within the meaning of this rule”.
F This statement of the law was approved in
the Commissioners of Inland Revenue v. Alexander Von
Glehn& Co. Ltd. [(1920) 2 KB 553] where also in similar
circumstances by consent of the assessee penalty of £ 3,000 was
paid and the penalty plus the costs were claimed as deduction in
G arriving at the profits. The Special Commissioners had found that
the penalty and costs were incurred by the assessee in the course
of carrying on their trade and so incidental thereto and were
admissible deductions. Rowlatt, J., on a reference held it to be a
non-deductible item. This judgment was affirmed on appeal by
the Court of Appeal. Lord Sterndale, M.R., was of the opinion
H
THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH 113
CHAND LUNIA (D) THR. LRS. & ANR. [M. M. SUNDRESH, J.]
that it was immaterial whether technically the proceedings were A
criminal or not. The money that was paid was paid as a penalty
and it did not matter if in the information it was called a forfeiture.
It was argued by the assesses in that case that no moral
obliquity was attributed to them and that it did not matter whether
the expense was incurred in consequence of an infraction of the B
law or whether it was a penalty for doing an illegal act. At p. 565
Lord Sterndale said:
“Now what is the position here? This business could perfectly
well be carried on without any infraction of the law. This penalty
was imposed because of an infraction of the law, and that C
does not seem to me to be, any more than the expense which
had to be paid in Strong & Co. v. Woodifield [(1906) AC 448]
appeared to Lord Davey to be, a disbursement or expense
which was laid out or expended for the purpose of such
trade….”
D
Warrington, L.J. said at p. 569:
“It is a sum which the persons conducting the trade have had
to pay because in conducting it they have so acted as to render
themselves liable to this penalty. It is not a commercial loss,
and I think when the Act speaks of a loss connected with or E
arising out of such trade it means a commercial loss, connected
with or arising out of the trade.”
In Strong & Co. v. Woodifield [(1906) AC 448] a brewing
company owned a licensed house in which they carried on the
business of inn-keepers. They incurred a liability to pay damages F
on account of injuries caused to a visitor, by the falling in of a
chimney. This sum was held not to be allowable as a deduction in
computing the profits. Lord Loreburn, L.C., in his speech said no
sum could be deducted unless it be money wholly and exclusively
laid out or expended for the purpose of such trade and that only
such losses could be deducted as were connected with it in the G
sense that they were really incidental to the trade itself and they
could not be deducted if they were mainly incidental to some other
vocation or fell on the trader in some character other than that of
a trader. Lord Davey observed:
H
114 SUPREME COURT REPORTS [2023] 7 S.C.R.
A “I think the disbursements permitted are such as are made for
that purpose. It is not enough that the disbursement is made in
the course of, or arise out of, or is connected with the trade or
is made out of the profits of the trade. It must be made for the
purpose of earning profits.”
B The following passage from Lord Sterndale’s judgment at p. 566
in Von Glehn case [(1920) 2 KB 553] from which we have already
quoted shows the effect of incurring a penalty as a result of a
breach of the law:
“During the course of the trading this company committed a
C breach of the law. As I say, it has been agreed that they did not
intend to do anything wrong in the sense that they were willingly
and knowingly sending these goods to an enemy destination;
but they committed a breach of the law, and for that breach of
the law, they were fined. That, as it seems to me, was not a
loss connected with the business, but was a fine imposed upon
D the company personally, so far as a company can be considered
to be a person, for a breach of the law which it had committed.
It is perhaps a little difficult to put the distinction into very
exact language, but there seems to me to be a difference
between a commercial loss in trading and a penalty imposed
E upon a person or a company for a breach of the law which
they have committed in that trading. For that reason I think
that both the decision of Rowlatt, J., in this case, and his former
decision in Inland Revenue Commissioners v. Warnes &
Co. [(1919) 2 KB 444] which he followed were right, and that
this appeal should be dismissed with costs.”
F
In Spofforth and Prince v. Glider [(1945) 26 TC 310] the
assessee was a firm of chartered accountants, who claimed a
deduction for certain legal costs paid in connection with a
successful defence of one of the partners in a Police Court. The
assessee Firm also sought legal advice in regard to matters
G connected with some proceedings. Summons were issued against
the assesseefirm but were eventually dismissed. The assessee
contended that the whole of the costs incurred in connection with
the proceedings were “wholly and exclusively” laid out or expended
for the appellant’s profession and were therefore allowable
H deductions. The Special Commissioner had held against the
THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH 115
CHAND LUNIA (D) THR. LRS. & ANR. [M. M. SUNDRESH, J.]
assessee which was upheld by the Court. The test laid down by A
Lord Davey in Strong & Co. v. Woodifield [(1906) AC 448] was
applied and applying that test it was held that except the expenses
for obtaining legal advice the other expenses were not admissible.
In Farrie v. Hall [(1947) 28 TC 200] F, a sugar broker was
sued in the High Court for libel and the Court held that F had B
acted maliciously and that the defence of privilege could not prevail
and awarded damages against him. F sought to claim the amount
of damages as an allowable deduction contending that it was an
expenditure laid out wholly and exclusively for the purposes of his
trade or was a loss connected with or arising out of the trade.
Relying on the cases abovementioned this amount was disallowed C
because it fell on the assessee in his character of a calumniator of
a rival sugar broker and it was only remotely connected with his
trade as a sugar broker. Therefore it was not laid out exclusively
and wholly for the purpose of his business. We were also referred
to the observations of Danckwerts, J. in Newson v. D
Robertson [(1952) 33 TC 452 at p. 459] where it was said that if
the expenditure is incurred by the tax-payer for more than one
purpose including the commercial purposes in the sense that it is
incurred for the purposes of earning profits of the trade and also
some outside purpose then the expenses cannot be claimed at all
as not being wholly and exclusively laid out or expended for the E
purpose of the trade. In that case expenses claimed by a Barrister
for travelling between his house and his chambers were disallowed
because his object and purpose in travelling was mixed and not
wholly and exclusively for the purpose of the profession.
Coming now to Indian cases; In Mask & F
Co. v. Commissioner of Income-tax, Madras [(1943) 11 ITR
454] the assessee in breach of his contract sold crackers at a
lower rate and a decree was passed against him for damages for
breach of contract which he claimed as an allowable deduction.
It was held that as the assessee had disregarded the undertaking G
given and his conduct was palpably dishonest it did not constitute
an allowable expenditure. Sir Lionel Leach, C.J., after referring
to Warne’s case [(1919) 2 KB 444] and Von Glehn’s case [(1920)
2 KB 553] held that the amount did not constitute an expenditure
falling within Section 10(2)(xii). The Madras High Court
H
116 SUPREME COURT REPORTS [2023] 7 S.C.R.
A in Senthikumara Nadar & Sons v. Commissioner of Income-
tax (1957) 32 ITR 138] held that payments of penalty for an
infraction of the law fell outside the scope of permissible deductions
under s. 10(2)(xv). In that case the assessee had to pay liquidated
damages which was akin to penalty incurred for an act opposed
to public policy a policy underlying the Coffee Market Expansion
B
Act, 1942, and which was left to the Coffee Board to enforce.
Reference was also made during the course of arguments
to Commissioner of Income-tax v. Hirjee [(1953) SCR 714]. In
that case the assessee was prosecuted under the Hoarding and
Profiteering Ordinance but was finally acquitted and claimed the
C amount spent in defending himself under s. 10(2)(xv) in his
assessment. It was held that the distinction between the legal
expenses on a successful and unsuccessful defence was not sound
and that the deductibility of such expenses under s. 10(2)(xv)
must depend on the nature and purpose of the legal proceedings
D in relation to the business whose profits are in computation and
are unaffected by the final outcome of the proceedings.
A review of these cases shows that expenses which are
permitted as deductions are such as are made for the purpose of
carrying on the business i.e. to enable a person to carry on and
E earn profit in that business. It is not enough that the disbursements
are made in the course of or arise out of or are concerned with or
made out of the profits of the business but they must also be for
the purpose of earning the profits of the business. As was pointed
out in Von Glehn’s case [(1920) 2 KB 553] an expenditure is not
deductible unless it is a commercial loss in trade and a penalty
F imposed for breach of the law during the course of trade cannot
be described as such. If a sum is paid by an assessee conducting
his business, because in conducting it he has acted in a manner,
which has rendered him liable to penalty it cannot be claimed as a
deductible expense. It must be a commercial loss and in its nature
G must be contemplable as such. Such penalties which are incurred
by an assessee in proceedings launched against him for an
infraction of the law cannot be called commercial losses incurred
by an assessee in carrying on his business. Infraction of the law is
not a normal incident of business and therefore only such
disbursements can be deducted as are really incidental to the
H
THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH 117
CHAND LUNIA (D) THR. LRS. & ANR. [M. M. SUNDRESH, J.]
business itself. They cannot be deducted if they fall on the assessee A
in some character other than that of a trader. Therefore where a
penalty is incurred for the contravention of any specific statutory
provision, it cannot be said to be a commercial loss falling on the
assessee as a trader the test being that the expenses which are
for the purpose of enabling a person to carry on trade for making
B
profits in the business are permitted but not if they are merely
connected with the business.
It was argued that unless the penalty is of a nature which is
personal to the assessee and if it is merely ordered against the
goods imported it is an allowable deduction. That, in our opinion,
is an erroneous distinction because disbursement is deductible only C
if it falls within s. 10(2)(xv) of the Income-tax Act and no such
deduction can be made unless it falls within the test laid down in
the cases discussed above and it can be said to be expenditure
wholly and exclusively laid for the purpose of the business. Can it
be said that a penalty paid for an infraction of the law, even though D
it may involve no personal liability in the sense of a fine imposed
for an offence committed, is wholly and exclusively laid for the
business in the sense as those words are used in the cases that
have been discussed above. In our opinion, no expense which is
paid by way of penalty for a breach of the law can be said to be
an amount wholly and exclusively laid for the purpose of the E
business. The distinction sought to be drawn between a personal
liability and a liability of the kind now before us is not sustainable
because anything done which is an infraction of the law and is
visited with a penalty cannot on grounds of public policy be said to
be a commercial expense for the purpose of a business or a F
disbursement made for the purposes of earning the profits of such
business.”
21. CIT v. S.C. Kothari, 1972 (4) SCC 402
21.1 The decision rendered in BadridasDaga (supra) was quoted
with approval. However, it was the view expressed that if the profit is to G
be taken for the taxable income, a resultant expenditure/loss cannot be
avoided, notwithstanding the nature of business. We must hasten to note
that the decision rendered in S.C. Kothari (supra)may not be in tune
with BadridasDaga (supra) wherein this Court held that allowing a
deduction depends upon the statute and commercial principles, while H
118 SUPREME COURT REPORTS [2023] 7 S.C.R.
A applying the test of ‘purpose of business’ and‘incidental to business’ and
not by way of a general principle. Hence, non-allowance of a deduction
on the ground of one incurred as an expenditure for a purpose which is
an offence or prohibited by law can be disallowed otherwise through a
statute. This Court in SC Kothari (supra) had merely laid down the
general proposition of law by taking note of the position prevailing in
B
other countries, but in any case, it has got no application over a case of
either a penalty or confiscation.
21.2 The law as laid down in Haji Aziz (supra)despite being
noted, was not followed on both the counts, viz., the deduction of loss
qua an offence and the consequence of a penalty imposed for an
C infraction of law.
21.3 We must further add that in S.C. Kothari(supra), this Court
was concerned with Section 10(2)(xv)of the Old Act, which did not
contain any explanation as introduced to Section 37(1) of the Act.This
subsequent change in law will certainly have a bearing on the
D understanding of the said judgment.
22. Soni Hinduji Kushalji & Co. v. CIT,(1971) SCC Online
AP 223
22.1 The Division Bench of the Andhra Pradesh High Court
E considered the law laid down on deduction of loss incurred by way of a
confiscation and penalty. It took into consideration the decision of this
Court in S.C. Kothari (Supra).It was accordingly held that a loss must
be one arising directly from the business or trade,being incidental to it, as
laid down by this Court in Badridas Daga (supra).The Court while
noting the decision of this Court in Maqbool Hussain v. State of Bombay
F etc.,(1953) SCR 730 and Haji Aziz (supra), held that a confiscation
of a contraband being an action in rem is not available for deduction, as
the same, by no process of reasoning can be said to be trading or
commercial loss connected with or incidental to the assessee’s business.
22.2 Relevant paragraphs:
G
“4. Mr. Swamy appearing for the assessee-firm strongly contended
that when the profits earned from an illegal business are not exempt
from tax, the loss sustained in such business should be allowed to
be deducted from the profits or gains for purposes of computing
the tax payable by the assessee.
H
THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH 119
CHAND LUNIA (D) THR. LRS. & ANR. [M. M. SUNDRESH, J.]
5. What are chargeable to tax in respect of a business carried on A
by the assessee are the profits or gains of a particular assessment
year. While assessing the profits, necessarily loss incurred in the
business during the year should be taken into account, as otherwise
it is not possible to arrive at the true profits earned by the assessee.
It is well-settled that the taint of illegality associated with profits
B
or income is immaterial for the purpose of taxation. As observed
by Lord Haldane in Minister of Finance v. Smith [[1927] A.C.
193, 198.] , Income-tax Acts are not necessarily restricted in their
application to lawful business only. One who contravenes a statute
and trades in business prohibited by law while being liable for
prosecution for the offence committed by him will, at the same C
time, be liable to pay tax out of the income or profits earned from
the illegal trade or business. We are now concerned with the loss
representing the value of gold on account of the confiscation of
the gold for contravention of the provisions of the Customs Act.
Can that loss be regarded as a commercial loss pertaining to the
D
business or incidental to the business the assessee was carrying
on, is the real question.
6. Mr. Swamy sought to place strong reliance upon a decision of
the Gujarat High Court in Commissioner of Income-tax v. S.C.
Kothari [[1968] 69 I.T.R. 1 (Guj.).] to contend that the assessee
is entitled to claim deduction of the value of the contraband gold E
confiscated by the customs authorities, as it represented the loss
sustained by the firm in the illegal business carried on by it. The
learned judges in that case were of the view that, when illegal
business is business within the meaning of the Income-tax Act
and if profits from illegal business are assessable to tax, there is F
no reason either in principle or on authority for refusing to take
into account losses from illegal business. According to these, the
losses so incurred must necessarily be taken into account in order
to arrive at the true profits of the business and such profits may
be either positive in the sense that they are actual profits or they
may be negative in the sense that they are losses and there is in G
principle no distinction between profits and losses of a business…
xxx xxx xxx
9.Kothari’s case [[1968] 69 I.T.R. 1 (Guj.).] , as may be noticed
from the facts stated therein, was not a case where a claim for H
120 SUPREME COURT REPORTS [2023] 7 S.C.R.
A deduction was made by the assessee, as he did not say that a
particular expenditure incurred by him should be allowed as a
permissible deduction. It is on that ground that the learned judges
ruled that the decision in Commissioner of Income-tax v. Haji Aziz
& Abdul Shakoor Bros [[1955] 28 I.T.R. 266 (Bom.).] ., relied
upon by the revenue, where the claim for deduction under section
B
10(2)(xv) of the 1922 Act was negatived, was not applicable to
the case before them. Therefore, the answers given by the learned
judges in Kothari’s case [[1968] 69 I.T.R. 1 (Guj.).] render no
assistance at all to the assessee’s contention.
10. Here is a specific claim made by the assessee for deduction
C of the value of the gold confiscated by the Central Government
on the ground that it is a trading or commercial loss, though the
trade was an illegal one. It should not be lost sight of when a
claim for deduction is made, that the loss must be one that springs
directly from the business or trade which the assessee carries on
D 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.
11. It is well to remember that confiscation of contraband gold is
an action in rem and not a proceeding in personam. As observed
E by Bhagwati J. in Maqbool Hussain v. State of Bombay [[1953]
S.C.R. 730, 742 (S.C.), AIR 1953 S.C. 325.] confiscation is no
doubt one of the penalties which the customs authorities can
impose but that is more in the nature of proceedings in rem than
proceedings in personam, the object being to confiscate the
offending goods which have been dealt with contrary to the
F provisions of the law. To the same effect is the view expressed
by S.K. Das J. in ShewpujanraiIndrasanrai Ltd. v. Collector of
Customs [[1959] S.C.R. 821, 836 (S.C.), AIR 1958 S.C. 845.]
that, so far as the confiscation of the goods is concerned, it is a
proceeding in rem and the penalties are enforced against the goods
G whether the offender is known or not known and the order of
confiscation under section 182 of the Sea Customs Act operates
directly upon the status of the property and under section 184
transfers an absolute title to the Government. Subba Rao J. (as
he then was) in Thomas Dana v. State of Punjab [AIR 1959 S.C.
375.] , in his dissenting judgment (the dissent being on other points)
H observed that if the authority concerned makes an order of
THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH 121
CHAND LUNIA (D) THR. LRS. & ANR. [M. M. SUNDRESH, J.]
confiscation it is only a proceeding in rem and the penalty is A
enforced against the goods.
12. A proceeding in rem, therefore, in the strict sense of the term
is an action taken directly against the property (in this case the
smuggled gold) and even if the offender is not known, the customs
authorities have the power to confiscate the contraband gold. B
Therefore, by no process of reasoning can the confiscation of the
contraband gold by the customs authorities be said to be a trading
or commercial loss connected with or incidental to the assessee’s
business.
13. In Commissioners of Inland Revenue v. Alexander Von Glehn& C
Co. Ltd. [[1920] 2 K.B. 553, 566 (C.A.).] . Lord Sterndale M.R.
observed:
“During the course of the trading this company committed a
breach of the law. As I say, it has been agreed that they did not
intend to do anything wrong in the sense that they were willingly D
and knowingly sending these goods to an enemy destination,
but they committed a breach of the law, and for that breach of
the law, they were fined. That, as it seems to me, was not a
loss connected with the business, but was a fine imposed upon
the company personally, so far as a company can be considered
to be a person, for a breach of the law which it had committed. E
It is perhaps a little difficult to put the distinction into very
exact language, but there seems to me to be a difference
between a commercial loss in trading and a penalty imposed
upon a person or a company for a breach of the law which
they have committed in that trading.” F
14. The principle stated by Lord Sterndale M.R. holds good here
too, as it is impossible to hold that the loss incurred by reason of
the confiscation of the contraband gold is an expenditure incurred
in connection with the trade or business of the assessee-firm or
incidental to the carrying on of its business. G
xxx xxx xxx
16. Their Lordships of the Supreme Court in Haji Aziz and Abdul
Shakoor Bros. v. Commissioner of Income-tax [[1961] 41 I.T.R.
350 (S.C.), [1961] 2 S.C.R. 651 (S.C.).] , after reviewing several
Indian and English cases, observed at page 359: H
122 SUPREME COURT REPORTS [2023] 7 S.C.R.
A “As was pointed out in Von Glehn’s case [[1920] 2 K.B. 553
(C.A.).] , an expenditure is not deductible unless it is a
commercial loss in trade and penalty imposed for breach of
the law during the course of trade cannot be described as such.
If a sum is paid by an assessee conducting his business, because
in conducting it he has acted in a manner which has rendered
B
him liable to penalty, it cannot be claimed as a deductible
expense. It must be a commercial loss and in its nature must
be contemplable as such. Such penalties which are incurred
by an assessee in proceedings launched against him for an
infraction of the law cannot be called commercial losses incurred
C by an assessee in carrying on his business. Infraction of the
law is not a normal incident of business and, therefore only
such disbursements can be deducted as are really incidental to
the business itself. They cannot be deducted if they fall on the
assessee in some character other than that of a trader.
Therefore, where a penalty is incurred for the contravention
D
of any specific statutory provision, it cannot be said to be a
commercial loss falling on the assessee as a trader, the test
being that the expenses which are for the purpose of enabling
a person to carry on trade for making profits in the business
are permitted but not if they are merely connected with the
E business…. Anything done which is an infraction of the law
and is visited with a penalty cannot on grounds of public policy
be said to be a commercial expense for the purpose of a
business or a disbursement made for the purposes of earning
the profits of such business.”
F 17. Similar views have been expressed by the Punjab and
Allahabad High Courts in Raj Woollen Industries v. Commissioner
of Income-tax [[1961] 43 I.T.R. 36 (Punj.).] , Commissioner of
Income-tax v. Mathura Prasad Hardwar Prasad Deoria [[1965]
55 I.T.R. 476 (All.).] and Mahabir Sugar Mills (P.)
Ltd. v. Commissioner of Income-tax [[1969] 71 I.T.R. 87 (All.).]
G
18. The Supreme Court in Badridas v. Commissioner of Income-
tax [[1958] 34 I.T.R. 10, [1959] S.C.R. 690 (S.C.).] , considered
what would amount to a trading loss. Venkatarama Aiyar J.
observed:
H
THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH 123
CHAND LUNIA (D) THR. LRS. & ANR. [M. M. SUNDRESH, J.]
“When a claim is made for a deduction for which there is no A
specific provision in section 10(2), whether it is admissible or
not will depend on whether, having regard to accepted
commercial pratice and trading principles, it can be said to
arise out of the carrying on of the business and to be incidental
to it. If that is established, then the deduction must be allowed,
B
provided of course there is no prohibition against it, express or
implied in the Act. The loss for which a deduction could be
made under section 10(1) must be one that springs directly
from the carrying on of the business and is incidental to it, and
not any loss sustained by the assessee, even if it has some
connection with his business.” C
19. Judged from the test laid down by their Lordships, it is
impossible to hold that the confiscation of contraband gold, which
is in the nature of a proceeding in rem, is a loss that springs directly
from the business or trade carried on by the assessee-firm and is
incidental to its business. Following the view expressed by their D
Lordships, the Punjab High Court in Ram Gopal Ram Sarup v.
Commissioner of Income-tax [[1963] 47 I.T.R. 611 (Punj.).] , held
that the mere fact that there is some remote connection between
a loss and the business would not bring the loss within the expression
“loss incidental to the the”.
E
xxx xxx xxx
22. As pointed out by Lord Loreburn L.C. in Strong & Co. Ltd. v.
Woodi-field [[1906] A.C. 448, 452 (H.L.).] , “They cannot be
deducted if they are mainly incidental to some other vocation or
fall on the trader in some character other than that of trader. The F
nature of the trade is to be considered.”
23. This court in Commissioner of Income-tax v. Chakka Narayana
[[1961] 43 I.T.R. 249 (A.P.).] , in a case of loss sustained by an
assessee on account of theft at a railway station, held that the
loss resulting thereof was not incidental to the assessee’s business G
and was not an allowable deduction and that the mere fact that
there was some remote connection between the loss and the
business would not bring the loss within the expression “loss
incidental to the the”. The loss sustained by confiscation of the
smuggled gold is absolutely foreign to the vocation or business of
the assessee-firm. It is a loss incurred in some character other H
124 SUPREME COURT REPORTS [2023] 7 S.C.R.
A than that of a trader. The confiscation of the gold, being the result
of a proceeding in rem, falls completely outside the trade or business
which the assessee was carrying on. Confiscation of contraband
goods is one of the penalties provided under the 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
B
violation of the law is not a normal incident of a trade or business
and, therefore, the penalty by way of confiscation of the
contraband gold is not a commercial loss so as to be allowed as a
permissible deduction.”
22.3 The aforesaid reasoning of the Andhra Pradesh High Court
C arrived at after taking note of the earlier decisions rendered by this Court
in its support, deserves to be approved.
23. J.S Parkar v. V.B Palekar and Others,(1973) SCC Online
Bom 161
D 23.1 Majority view of the Bombay High Court was in line with
Soni HindujiKushalji& Co. (supra),though not referring to the said
decision. It is to be noted that though Justice Mukhi dissented with the
view of Justice Deshpande, the third Judge, Justice Tulzapurkar by a
separate judgment, concurred with the view of Justice Deshpande.
Therefore, themajority while broadly interpreting the view of this Court
E in Haji Aziz (supra), held that confiscation of goods incurred for an
infraction of law cannot be said to be a normal incident of business, and
this loss falls on the assessee in some character other than that of a
trader. The Court further noted that this principle would equally apply to
a case where the business itself is prohibited by law while disagreeing
F with the view of the Punjab and Haryana High Court in Piara Singh(1970)
SCC OnLine P&H 429,which decision did not reach this Court at that
point of time. The Court held that the decision of the Punjab and Haryana
High Court in PiaraSingh(1970) SCC OnLine P&H 429, was not in
line with the decision of this Court in Haji Aziz(supra).
G 23.2 Relevant paragraphs:
Justice Deshpande:
“23. It is then contended that, admittedly, the entire gold has
been confiscated by the customs department and, as such, value
of this should have been treated as a trading loss and the
H assessee was entitled to a set-off of this loss against his
THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH 125
CHAND LUNIA (D) THR. LRS. & ANR. [M. M. SUNDRESH, J.]
assumed and assessed income from undisclosed sources. A
Reliance was mainly placed on section 71, though faintly section
70 was also referred to. This point was raised before the
Tribunal. The Tribunal, however, declined to entertain this plea,
as it was raised for the first time before it and it thought that
the same cannot be adjudicated without investigation of further
B
facts. Unfortunately, the order of the Tribunal is not explicit as
to in what manner investigation of further facts was necessary.
It is, therefore, not possible to know if the Tribunal was reluctant
to allow set off for loss tainted with patent illegality, against the
income, source of which was not shown to be illegal or it treated
the loss by confiscation as capital loss and, therefore, was C
reluctant to deduct the same from the income from capital
gains as required under section 71. Be that as it may, I have no
hesitation in saying that if it were a pure question of law capable
of being adjudged on the material on record, the Tribunal was
under a statutory obligation to entertain and decide the same.
D
I, however, think that, on the admitted facts, the petitioner is
not entitled to claim any set-off. The loss suffered by the
assessee consequent on the confiscation of the gold for
infraction of law cannot be said to be a commercial loss liable
to set off under any provision of the Act. It will be enough to
refer to the judgment of the Supreme Court in Haji Aziz and E
Abdul Shakoor Bros. v. Commissioner of Income-tax. The
Supreme Court upheld the view of this court in the same case.
Dates were imported from abroad by the assessee in
contravention of the provisions of the Sea Customs Act. The
customs authorities confiscated the goods under section 167-
F
B of the Sea Customs Act. It, however, gave the assessee,
under section 183 of the Act, an option to pay the fine in lieu of
confiscation and get the goods released. The assessee exercised
the option and got the goods released on payment of fine. In
the course of the assessment proceedings the assessee claimed
deduction of this penalty amount under section 10(2)(xv) of G
the Indian Income-tax Act of 1922. The Bombay High Court
negatived the claim holding that the penalty for infraction of
law does not amount to any expenditure laid out or expended
wholly and exclusively for the purpose of such business,
profession or vocation. The Supreme Court affirmed the said
view of this court on slightly broader base, observing as follows: H
126 SUPREME COURT REPORTS [2023] 7 S.C.R.
A “An expenditure is not deductible unless it is a commercial
loss in trade and a penalty imposed for breach of the law
during the course of trade cannot be described as such.
Infraction of the law is not a normal incident of business
and, therefore, only such disbursements can be deducted
as are really incidental to the business itself. They cannot
B
be deducted if they fall on the assessee in some character
other than that of a trader.”
xxx xxx xxx
“29. Applying this test laid down by Grover J., speaking for
C the Supreme Court, in S.C. Kothari’s case and the test laid
down by Kapur J., speaking for the Supreme Court, in the
case of Haji Aziz and Abdul Shakoor Bros., it shall have to
be held that confiscation of goods incurred for infraction of
law cannot be said to be a normal incident of business and loss
suffered therefrom falls on the assessee in some character
D other than that of a trader. It is not possible to see how this
principle can make any difference where the business itself is
found to have been prohibited by the law. It is the commercial
profit that is taxable and it is the commercial loss in trade in
regard to which deduction can be claimed either because it
E goes to lessen the amount of profits before the quantum of net
profit is determined or because the expenses are required to
be incurred for the purposes of running the said business or
because losses are incurred under some other sources of
business under the same head or they are incurred while carrying
on business or vocation under some other head. Penalty and
F confiscation of goods even when incurred or suffered in the
course of prohibited trade or business still cannot be said to be
the normal incident even of such unlawful business and the
loss so suffered can still be not said to be a commercial loss in
the trade for the same reason as gains of theft, dacoity,
G misappropriation or cheating cannot be treated as taxable
income from any business or commerce. The claim of Mr.
Albal for deduction of value of gold confiscated by way of set-
off cannot, therefore, be entertained.
30. It is true, as observed by the Punjab and Haryana High
H Court in Piara Singh’s case, the risk of confiscation of goods
THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH 127
CHAND LUNIA (D) THR. LRS. & ANR. [M. M. SUNDRESH, J.]
and incurring of penalties is inherent in any unlawful trading or A
business. So is the risk of conviction and fine. It does not,
however, necessarily follow that every kind of damage suffered
in such trading falls under the category of commercial loss. It
shall have to be held, at any rate, on the authority of the Supreme
Court in Haji Aziz and Abdul Shakoor Bros. that the
B
confiscation of property or penalty incurred while indulging in
prohibited trading activities does not amount to commercial
loss though it happens in fact to be a loss according to the
ordinary meaning of the word “loss” as understood in common
parlance. Attempt to distinguish the above Supreme Court
judgment on the ground that the court was dealing with the C
claim of the assessee for deduction of penalty under section
10(2)(xv) and not under section 10(1) of the Income-tax Act
of 1922 is an exercise in futility. That, in the above case, neither
the assessee claimed deduction of such penalty by way of loss
under section 10(1) of the Act, nor the Supreme Court
D
considered it worthwhile allowing the claim under that sub-
section is also indicative, if not decisive, of the untenability of
such contention. Though deduction was claimed under section
10(1) of the Act, rejection of the claim is based on the broader
basis that penalties and confiscations are not the normal
incidents of business and do not constitute commercial loss. If E
one examines the scheme of section 10(2), and section 24 of
the 1922 Act and corresponding provisions of sections 28, 29
to 44A and sections 70 and 71 of the 1961 Act, it will be noticed
that the provisions deal with the deductions or disbursement
from the profits earned under various contingencies. If the
F
losses are incurred in the same business (source of income)
under the same head enumerated under section 14, the same
are liable to be deducted under section 22 (section 10(1) of the
old Act) of the Act. If losses are incurred under a different
source falling under the same head, the losses are liable to be
deducted from the income of any other source falling under G
the same head under section 70. When, however, net result of
all sources under any one head of income is loss, the same is
liable to be deducted from the income under another head under
section 71. If the net result of all sources under all heads is a
loss, the same can be carried forward under section 72 of the
H
128 SUPREME COURT REPORTS [2023] 7 S.C.R.
A Act. Sections 29 to 44A corresponding to section 10(2), clauses
(1) to (xvi), deal with deductions or disbursements by way of
expenses, etc. These provisions deal with the mode of
determining the net taxable profits or income of the assessee.
If the true ratio of the Supreme Court judgment is that penalty
incurred by infraction of law is not a commercial loss as it is
B
not incidental to trade or business, it matters little as to under
what count the deduction or set-off is claimed. That the margin
between what is and what is not incidental is very thin has
been noticed by the learned judges of the Supreme Court
themselves. Ratio of this judgment is applicable to all
C contingencies where such non-commercial loss is sought to be
deducted on any count whatsoever. That the assessee in that
case claimed deduction of penalty under section 10(2)(xv)
cannot make any difference to the ratio of the case. I do not
find it possible to agree with the view of the Punjab High Court.
I do not think that the Gujarat High Court’s judgment
D
in Kothari’s case supports its view. On the contrary, the ratio
of the two Supreme Court judgments run counter to the ratio
of the Punjab case.”
Justice Tulzapurkar:
E “179. I have already indicated above that in Haji Aziz’s
case1 while dealing with penalty or fine imposed in lieu of
confiscation of goods, the Supreme Court has observed that
the penalty suffered by an assessee for an infraction of law
cannot be regarded as incidental to the business and in fact it
falls upon the assessee in some character other than that of a
F trader. In my view, the aforesaid authorities make the position
very clear that before any loss could be claimed as deductible
loss under section 10(1) of the Act, it must be a trading loss or
commercial loss arising out of carrying on business or it must
be incidental to the business and such loss must also fall on the
G assessee in his character as a trader. The question in the present
case is as to whether the loss consequent upon confiscation of
goods for an infraction of law suffered by the assessee could
be regarded as a commercial loss or could it be said to be loss
incidental to the business and, what is of importance, could it
be said to have been suffered by him in his character as a
H
THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH 129
CHAND LUNIA (D) THR. LRS. & ANR. [M. M. SUNDRESH, J.]
trader? In my view, it is certainly not a commercial loss arising A
from carrying on of the business nor can it be regarded as
incidental to the activity of the assessee as dealer in gold;
moreover, it cannot be regarded as loss falling upon the
assessee in his character as a trader. It is a loss falling upon
him as a person who had infracted law. The loss suffered by
B
confiscation of goods directly sprang from an illegal act
committed by the assessee, namely, having acquired gold
without requisite permit or permission of the Reserve Bank of
India and without having paid any duty for the import thereof
into India. Surely, the loss has not fallen on the assessee as a
trader or businessman, for, obviously, even a lay person who is C
not a businessman, if he were to import gold for his private use
without requisite permission and without payment of customs
duty, would subject himself to the penalty of having that gold
confiscated from him and he would as a consequence suffer
great loss. It is thus clear that the loss consequent upon
D
confiscation of goods for infraction of law suffered by the
assessee must be regarded as loss falling upon him in some
character other than a trader. In this view of the matter, I am
clearly of the view that the petitioner is not entitled to claim the
loss suffered by him as a result of confiscation of the gold in
question as allowable deduction while computing his business E
income under section 28 of the Act.
180. So far as the decision of the Gujarat High Court in S.C.
Kothari’s case is concerned—which decision has been
confirmed by the Supreme Court— it must be observed that
the judgment is an authority only for the proposition that illegality F
of any business is irrelevant for the purpose of computing the
net income thereof under the Income-tax Act and while the
revenue is entitled to levy tax on the income of the assessee
earned even from unlawful business, the assessee is also entitled
to insist on deduction of loss arising out of such unlawful
business. There could be no quarrel with this statement of law G
which has been approved by the Supreme Court. But even
there, the loss in respect of which deduction could be claimed
while computing the profits of the unlawful business must be a
trade loss or commercial loss or loss incidental thereto but
suffered by the assessee in his character as a trader and not H
130 SUPREME COURT REPORTS [2023] 7 S.C.R.
A loss suffered as a result of confiscation of goods for an infraction
of law which would be a loss suffered by him in some capacity
other than as a trader. Besides, in S.C. Kothari’s case neither
the Gujarat High Court nor the Supreme Court had to consider
the question whether the loss suffered by way of penalty or
confiscation of goods amounted to commercial loss or not. In
B
fact, while setting out the facts of the case it has been stated
by the Supreme Court in paragraph 1 of its judgment that the
loss of Rs. 3,40,000 and odd which was claimed as deductible
loss had arisen out of certain transactions entered into by the
assessee with different people for the supply of groundnut oil
C and it was expected by the assessee that those contracts would
be performed but owing to certain reasons some of the
contracts could not be performed and difference has to be
paid. From this it appears clear that the loss of Rs. 3,40,000
which was claimed as deductible loss was clearly in the nature
of commercial or trade loss for which deduction was claimed
D
under section 10(1) of the Act. In the circumstances, it is clear
that the statement of law enunciated in the case of S.C.
Kothari is unexceptionable but, with respect, I would like to
point out that the decision is no authority for the proposition
that the loss suffered by way of penalty or confiscation of
E goods amounts to commercial loss that could be deducted while
computing the net profits of a business under section 10(1) of
the Act. It is true that in Piara Singh’s case, the Punjab and
Haryana High Court has taken the view that the confiscation
of cash amount of Rs. 65,500 from the assessee, who was
engaged in the business activity of smuggling gold, amounted
F
to trade loss and hence was deductible under section 10(1) of
the Act. But for coming to that conclusion the Punjab High
Court has principally relied upon the decision of the Gujarat
High Court and of the Supreme Court in S.C. Kothari’s case,
in which, as I have stated above, neither the Gujarat High Court
G nor the Supreme Court was required to consider the question
whether the loss arising from penalty or confiscation of goods
for an infraction of law amounted to trade loss or commercial
loss; in fact admittedly the nature of loss suffered by the assessee
was commercial since it had arisen on account of payment of
differences. With great deference, I am unable to persuade
H
THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH 131
CHAND LUNIA (D) THR. LRS. & ANR. [M. M. SUNDRESH, J.]
myself to agree with the view of the Punjab High Court A
expressed in Piara Singh’s case, especially when it runs
counter to the tests laid down by the Supreme Court in Haji
Aziz’s case and in English cases to which the Supreme Court
has referred while deciding Haji Aziz’s case. The other
contention that this loss should be allowed to be set off against
B
the income from undisclosed source under section 70 or section
71 was not pressed by Mr. Albal. In view of the above
discussion, on both the points on which there was difference
of opinion between the two learned judges I am in agreement
with the views expressed by Mr. Justice Deshpande.”
23.3 The decision of the Bombay High Court certainly falls in line C
with the one rendered in Haji Aziz (supra). The cogent reasons given
by taking penalty and confiscation out of the purview of Section 10(1)of
the Old Act appears to be the correct view.
24. Commissioner of Income Tax v. Piara Singh,(1980) Supp.
SCC 166 D
24.1 This Court did not differ with the view expressed by a co-
ordinate bench in Haji Aziz(supra). In fact, it gave its approval to the
said decision. However, reliance was placed on S.C. Kothari (supra)
by drawing a distinction between an infraction of law committed in
carrying out a lawful business, as against one committed in an inherently E
unlawful business. It was done upon a legitimate anticipation that in an
illegal business there will be many pitfalls resulting in expected loss,
which cannot be factored into a normal business.
24.2 Law as laid down in Haji Aziz (supra) on both the issues
have not been taken note of by inadvertence, particularly the nature of F
proceedings involved in the imposition of confiscation or penalty, being
proceedings in rem. This Court did not have the benefit of the explanation
as available under Section 37 of the Act, while interpreting Section 10(2)
of the Old Act, apart from ignoring the word of caution mentioned in
BadridasDaga (supra). G
24.3 We would only clarify the position that, in any case, the law
as laid down in Piara Singh(supra) may not have any application to a
case of deduction of expenditure/loss incurred on account of penalty/
confiscation coming under Section 37(1) of the Act, particularly in light
of Explanation 1.
H
132 SUPREME COURT REPORTS [2023] 7 S.C.R.
A 25. Dr. T.A. Quereshi v. Commissioner of Income Tax, Bhopal
(2007) 2 SCC 759
25.1 This Court merely followed Piara Singh(supra) while making
a casual observation on Explanation 1 to Section 37 of the Act. The
earlier decisions have not been taken into consideration as we could see
B in Piara Singh(supra), but the principle laid down was also not taken
note of. In this connection, it has to be remembered that for a precedent
to be binding there has to be a conscious consideration of an issue involved.
The judgment in Dr. T.A. Quereshi(supra) was delivered by a two-
Judge Bench while not taking note of a three-Judge Bench decision in
Haji Aziz (supra),which has neither been disapproved nor distinguished.
C Hence, this decision is per incuriamand not a binding precedent.Once
again, the question of a confiscation proceeding being in rem was not
brought to the notice of the Court.
25.2 Therefore, there cannot be a situation where an assessee
carrying on an illegal business can claim deduction of expenses orlosses
D incurred in the course of that business, while another assessee carrying
on a legitimate one cannot seek deduction for loss incurred on account
of either a confiscation or penalty. The interpretation of Section 37 of
the Act given by the Court in Dr. T. A. Quereshi (supra) leads to a
situation where the expenditure incurred in manufacturing something
E illegal may not be allowable as a deduction in view of the Explanation
1,however, if upon seizure, the manufactured goodsare confiscated, in
that case deduction will be allowable on commercial principles. This
classification being artificial not borne out by statute, which mischief is
sought to be clarified by the explanation, has no legal basis.
F Conclusion(s)
26. On the abovesaid analysis, the following conclusions are arrived
at:
I. The word ‘any expenditure’ mentioned in Section 37 of the
Act takes in its sweep loss occasioned in the course of
G business, being incidental to it.
II. As a consequence, any loss incurred by way of an
expenditure by an assessee for any purpose which is an
offence or which is prohibited by law is not deductible in
terms of Explanation 1 to Section 37 of the Act.
H
THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH 133
CHAND LUNIA (D) THR. LRS. & ANR. [M. M. SUNDRESH, J.]
III. Such an expenditure/lossincurred for any purpose which is A
an offence shall not be deemed to have been incurred for
the purpose of business or profession or incidental to it, and
hence, no deduction can be made.
IV. A penalty or a confiscation is a proceeding in rem, and
therefore, a loss in pursuance to the same is not available B
for deduction regardless of the nature of business, as a
penalty or confiscation cannot be said to be incidental to
any business.
V. The decisions of this Court in Piara Singh (supra) and
Dr. T.A. Quereshi (supra) do not lay down correct law in C
light of the decision of this Court in Haji Aziz (supra) and
the insertion of Explanation 1 to Section 37.
27. In view of the aforesaid discussion, I am inclined to hold that
the appeal of the Revenue deserves to be allowed, though conscious of
the fact that Section 115BBE of the Act may not have an application to D
the case on hand being prospective in nature. Accordingly, the judgment
&order dated 22.11.2016 passed in DBITA No. 96/2003 & DBITR No.
6/1996 by the High Court of Rajasthan at Jaipur stand set aside. No
costs.
E
Divya Pandey Appeals allowed.
(Assisted by : Abhishek Pratap Singh and Shevali Monga, LCRAs)
F
G
H
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