A. Quereshi Vs. Commissioner of Income Tax, Bhopal  Insc 914 (6
B. Sinha & Markandey Katju
out of Special Leave Petition (Civil) No. 6939 of 2005) MARKANDEY KATJU, J.
appeal has been filed against the impugned judgment dated 29.11.2004 passed by
the Madhya Pradesh High Court in I.T.A. No. 33 of 1999.
learned counsel for the parties and perused the record.
appellant is an assessee. He is a doctor by profession at a place called 'Garoth'
in District Mandsaur. On 18.7.1985, CBI sleuths arrested the appellant while
transporting a huge quantity of contraband article (the narcotic drugs heroin)
in a Jeep (Jonga) RSO 3592. This led to further raid in his residential
premises. In this raid, one clandestine laboratory to manufacture heroin powder
along with several contraband drugs was recovered. All these contraband
articles were seized and proceedings under the NDPS Act were initiated against
the assessee. We are not concerned with these proceedings.
as proceedings under the Income Tax Act are concerned, with which we are
concerned, the assessee-appellant filed his return for the Assessment Year
1986-87. In this assessment the assessee claimed that since the heroin seized
from him forms part of his stock in trade hence its loss on account of seizure
is an allowable deduction while computing his profits and gains of
business/profession. The Assessment Officer by order dated 28.3.1989 did not
accept the contention of the assessee and added a sum of Rs. 5,50,000/-, being
the assessed value of the heroin seized, as an income from undisclosed source.
In appeal filed by assessee the CIT (Appeal) upheld the order of Assessment
Officer by his order dated 1.2.1990. The assessee then filed a second appeal
before the Tribunal. By its order dated 31.3.1993 the Tribunal reduced the
value of the heroin seized to Rs.2 lacs, but refused to deduct this amount from
the assessee's income as a business loss, since according to the Tribunal the assessee
had not claimed it as a business loss. However, subsequently on an application
under Section 254(2) the Tribunal by order dated 26.4.1994 accepted that the assessee
had in fact claimed it as a loss, and consequently it recalled its order dated
31.3.1993. Ultimately, the Tribunal by order dated 14.10.1998 allowed the
appeal and held that the assessee is entitled to claim the deduction as a
business loss. In other words, the Tribunal was of the view that since the
seizure has resulted in loss in trade hence, relying upon the law laid down by
this Court in CIT vs. Piara Singh 124 ITR 40, the Tribunal allowed the
deduction of Rs.2 lacs out of the gross total income of the assessee. It is
against this view of the Tribunal that the revenue felt aggrieved and filed the
appeal before the High Court which, as stated above, was admitted for final
hearing on the following questions of law:
Whether possession of heroin in contravention of provision of the NDPS Act,
1985 can be treated to be stock and trade possessed by a Medical Practitioner ?
Whether such Medical Practitioner can be permitted to deduct Rs. 2 lacs from
such stock of heroin as loss during the trade ?
Whether the order passed by the Income Tax Appellate Tribunal, Indore Bench in
IT-272/89-90 for Assessment Year 1986-87 is perverse and illegal ?
impugned order the High Court allowed the appeal and set aside the order of the
Tribunal. Hence, this appeal.
paragraph 7 of its judgment, the High Court has relied on the explanation to
Section 37 of the Income Tax Act which states :
Explanation - For the removal of doubts, it is hereby declared that any
expenditure incurred by an assessee for any purpose which is an offence or
which is prohibited by law shall not be deemed to have been incurred for the
purpose of business or profession and no deduction or allowance shall be made
in respect of such expenditure".
senior counsel for the appellant Mr. M. L.Verma, contended that Section 37 of
the Act has no application in this case since Section 37 relates to business
expenditure, and in this case we are not concerned with business expenditure
but with business loss. We agree with this contention.
doubt, it was initially contented by the assessee before the Income Tax
authorities that the apparatus for manufacturing heroin from opium did not
belong to the assessee but belonged to one V. T. Madan. However, the Assessing
Officer did not agree with this contention and the Tribunal in its earlier
order dated 31.3.1993 has recorded a finding (in paragraph 7 of its order) that
the assessee was involved in the manufacture and selling of heroin for material
gain. Thus, it has been held by the Income Tax authorities that the appellant
was engaged in manufacture of heroin and selling it for material gain.
doubt, the assessee had contended that he was only earning income from his
medical profession and was not doing any illegal activity of manufacturing and
selling of heroin. However, the finding of fact of the Tribunal in its order
dated 31.3.1993 is that the assessee was engaged in manufacture and selling of
heroin. Thus the Income Tax authorities themselves have recorded a finding that
the assessee was engaged in manufacture and selling of heroin. No doubt the
order of the Tribunal dated 31.3.1993 was subsequently recalled by the
Tribunal, but since with ultimate order dated 14.10.1998 the Tribunal has held
that the heroin seized was the assessee's stock in trade it is implicit that
the Tribunal reiterated to view that the assessee was doing the business of
manufacture and sale of heroin.
the Income Tax authorities records such a finding of fact, it follows that any
loss from such a business is a business loss.
facts of this case are squarely covered by the decision of this Court in CIT
vs. Piara Singh AIR 1980 SC 1271 which was a case of an assessee carrying on
smuggling activity and this Court held that the loss arising out of
confiscation of currency notes must be allowed as a business loss.
order of the Tribunal dated 14.10.1998 there is a finding of fact in paragraph
8 to the effect that the heroin forms part of the stock in trade of the assessee.
In view of this finding, the Tribunal allowed the assessee's claim of deducting
the loss of 5 kg. of heroin whose value was assessed by the Tribunal at Rs. 2 lacs
as a business loss.
fully agree with the view taken by the Tribunal.
High Court, however, in paragraph 10 of its judgment observed:
assessee in this case was engaged in profession of doctor.
nothing to do with the contraband article Heroin for carrying on his
profession. It is an admitted fact that possession of Heroin is an offence
under NDPS Act. In this view, the rigour of explanation to Section 37 was fully
satisfied and hence the question claiming any deduction for the value of seized
article did not arise nor was an assessee entitled to claim any such deduction
who was bound in indulging in such heinous and illegal business unconnected
with his pious professional activity. Indeed, it was disgrace for a doctor
community where one doctor was found indulging in doing such kind of activities
against the humanity".
opinion, the High Court has adopted an emotional and moral approach rather than
a legal approach. We fully agree with the High Court that the assessee was
committing a highly immoral act in illegally manufacturing and selling heroin.
However, cases are to be decided by Court on legal principles and not on one's
own moral views. Law is different from morality, as the positivist jurists Bentham
and Austin pointed out.
already observed above, the facts of the case are squarely covered by the
decision of this Court in CIT vs. Piara Singh (supra).
explanation to Section 37 has really nothing to do with the present case as it
is not a case of a business expenditure, but of business loss.
losses are allowable on ordinary commercial principles in computing profits.
Once it is found that the heroin seized formed part of the stock in trade of
the assessee, it follows that the seizure and confiscation of such stock in
trade has to be allowed as a business loss. Loss of stock in trade has to be
considered as a trading loss vide Commissioner of Income- Tax vs. S.N.A.S.A. Annamalai
Chettiar AIR 1973 SC 1032.
the reasons given above, the impugned judgment of the High Court cannot be
sustained and it is hereby set aside and the order of the Tribunal stands
restored. The appeal is allowed. No costs.