Commissioner of Income Tax, Patiala Vs.
Piara Singh [1980] INSC 112 (8 May 1980)
PATHAK, R.S.
PATHAK, R.S.
BHAGWATI, P.N.
TULZAPURKAR, V.D.
CITATION: 1980 AIR 1271 1980 SCR (3)1122
CITATOR INFO:
D 1990 SC1451 (7,8)
ACT:
Losses in business-Deduction under section
10(1) of the Income Tax Act, 1922-Is a smuggler who is taxed on his income from
smuggling under the Income Tax Act, 1922 entitled to a deduction under section
10(1) of the Act on account of the confiscation of currency notes employed in the
smuggling activity.
HEADNOTE:
The respondent Piara Singh was apprehended in
September 1958 by the Indian Police while crossing the Indo-Pakistan border
into Pakistan. A sum of Rs. 65,500/- in currency notes was recovered from his
person. On interrogation he stated that he was taking the currency notes to
Pakistan to enable him to purchase gold in that country with a view to
smuggling it into India. The Collector of Central Excise and Land Customs
ordered the confiscation of the currency notes.
In the proceedings initiated by the Income
Tax Officer, he found that Rs. 60,500/- constituted the income of the assessee
from undisclosed sources. An appeal by the assessee was dismissed by the
Appellate Assistant Commissioner. In second appeal before the Income Tax
Appellate Tribunal, the assessee represented that if he was regarded as engaged
in the business of smuggling gold he was entitled to a deduction under section
10(1) of the Income Tax Act, 1922 of the entire sum of Rs. 65,500/- as a loss
incurred in the business on the confiscation of the currency notes. The
Tribunal upheld the claim to deduction. It proceeded on the basis that the
assessee was carrying on a regular smuggling activity which consisted of taking
currency notes out of India and exchanging them with gold in Pakistan which was
later smuggled into India. The High Court on a reference at the instance of the
Revenue answered the reference against the Revenue. Hence the appeal.
Allowing the appeal, the Court.
HELD: 1. The assessee is entitled to the
deduction of Rs. 65,500/- under section 10(1) of the Income Tax Act, 1922.
[1124 C, 1126 B]
2. The assessee was carrying on the business
of smuggling and, therefore, was liable to income tax on income from that
business. The currency notes carried by the assessee across the border was an
essential part of the smuggling operation. If the activity of smuggling can be
regarded as a business, those who are carrying on that business must be deemed
to be aware that a necessary incident involved in the business is detection by
the Customs authorities and the consequent confiscation of the currency notes.
It is an incident as predictable in the course of carrying on the activity as
any other feature of it. Having regard to the nature of the activity possible
detection by the Customs authorities constitutes a normal feature integrated
into all that is implied and involved in it. The confiscation of the currency
notes is a loss occasioned in pursuing the business; it is a loss in much the
same way as if the currency 1123 notes had been stolen or dropped on the way
while carrying on the business. It is a loss which springs directly from the
carrying on of the business and is incidental to it.
Applying the principle laid down by this
Court in Badridas Daga v. Commissioner of Income Tax the deduction must be
allowed.
[1124 D-E] Badridas Daga v. Commissioner of
Income Tax, [1958] 34 ITR 10; Commissioner of Income Tax, Gujarat v. S. C.
Kothari [1971] 82 ITR 194; applied.
Haji Aziz and Abdul Shakoor Bros. v. Commissioner
of Income Tax, Bombay City II, [1961] 41 ITR 350, Sari Hinduji Khushalji 7 Co.
v. Commr. of Income Tax, A.P. [1973] 89 ITR 112; J. S. Parkar v. V. B. Palekar
and Ors. [1974] 94 ITR 616; distinguished and explained.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 2752 of 1972.
Appeal by Certificate from the Judgment and
Order dated the 5th November, 1970 of the Punjab and Haryana High Court in
Income Tax Reference No. 38 of 1969.
G. A. Shah & Miss A. Subhashini for the
appellant.
Naunit Lal & Mr. Kailash Yasudev for
respondent.
The Judgment of the Court was delivered by
PATHAK, J. Is a smuggler, who is taxed on his income from smuggling under the
Income Tax Act, 1922, entitled to a deduction under Section 10(1) of the Act on
account of the confiscation of currency notes employed in the smuggling
activity? The respondent, Piara Singh, was apprehended in September, 1958 by
the Indian Police while crossing the Indo-Pakistan border into Pakistan. A sum
of Rs. 65,500/- in currency notes was recovered from his person. On
interrogation he stated that he was taking the currency notes to Pakistan to
enable him to purchase gold in that country with a view to smuggling it into
India. The Collector of Central Excise and Land Customs ordered the
confiscation of the currency notes.
The Income Tax Officer now took proceedings
under the Indian Income Tax Act, 1922 for assessing the assessee's income and
determining his tax liability. He came to the finding that out of Rs. 65,500/-
an amount of Rs. 60,500/- constituted the income of the assessee from
undisclosed sources. An appeal by the assessee was dismissed by the Appellate
Assistant Commissioner. In second appeal before the Income Tax Appellate
Tribunal the assessee represented that if he was regarded as engaged in the
business of smuggling gold he was entitled to a deduction under Section 10(1)
of the Income Tax Act of the entire sum of Rs.
65,500/- as a loss incurred in the business
on the confiscation of the currency notes. The Appellate Tribunal upheld the
1124 claim to deduction. It proceeded on the basis that the assessee was
carrying on a regular smuggling activity which consisted of taking currency
notes out of India and exchanging them for gold in Pakistan which was later
smuggled into India. At the instance of the Revenue, a reference was made to
the High Court of Punjab and Haryana on the following question:
"Whether on the facts and in the
circumstances of the case the loss of Rs. 65,500/- arising from the
confiscation of the currency notes was an allowable deduction under section
10(1) of the Income-tax Act, 1922?" The High Court answered the question
in the affirmative.
And now this appeal by the Revenue.
In our Judgment, the High Court is right. The
Income Tax authorities found that the assessee was carrying on the business of
smuggling They held that he was, therefore, liable to income-tax on income from
that business. On the basis that such income was taxable, the question is
whether the confiscation of the currency notes entitles the assessee to the
deduction claimed. The currency notes carried by the assessee across the border
constituted the means for acquiring gold in Pakistan, which gold he
subsequently sold in India at a profit. The currency notes were necessary for
acquiring the gold. The carriage of currency notes across the border was an
essential part of the smuggling operation.
If the activity of smuggling can be regarded
as a business, those who are carrying on that business must be deemed to be
aware that a necessary incident involved in the business is detection by the
Custom authorities and the consequent confiscation of the currency notes. It is
an incident as predictable in the course of carrying on the activity as any
other feature of it. Having regard to the nature of the activity possible
detection by the Customs authorities constitutes a normal feature integrated
into all that is implied and involved in it. The confiscation of the currency
notes is a loss occasioned in pursuing the business, it is a loss in much the
same way as if the currency notes had been stolen or dropped on the way while
carrying on the business.
It is a loss which springs directly from the
carrying on of the business and is incidental to it. Applying the principle
laid down by this Court in Badridas Daga v. Commissioner of Income-tax the
deduction must be allowed.
In Commissioner of Income-tax, Gujarat v.
S.C. Kothari this Court held that for the purpose of Section 10(1) of the
Income Tax Act, 1922 a loss incurred in carrying on an illegal business must be
1125 deducted before the true figure of profits brought to tax can be computed.
Grover, J., speaking for the Court, observed:
If the business is illegal, neither the
profits earned nor the losses incurred would be enforceable in law. But, that
does not take the profits out of the taxing statute. Similarly, the taint of
illegality of the business cannot detract from the losses being taken into
account for computation of the amount which can be subjected to tax as
"profits" under Section 10(1) of the Act of 1922. The tax collector
cannot be heard to say that he will bring the gross receipts to tax. He can
only tax profits of a trade or business. That cannot be done without deducting
the losses and the legitimate expenses of the business." Reliance was placed
by the Revenue on Haji Aziz and Abdul Shakoor Bros. v. Commissioner of
Income-tax, Bombay City II. In that case, however, the assessee carried on the
lawful business of importing dates from abroad and selling them in India. The
import of dates by steamer was prohibited. Nonetheless he imported dates from
Iraq by steamer, and the consignments were confiscated by the customs
authorities. But the dates were released subsequently on payment of fine. The
assessee's claim to deduction under s. 10(2) (xv) of the Income Tax Act was
rejected on the ground that the amount was paid by way of penalty for a breach
of the law. An infraction of the law was not a normal incident of business
carried on by the assessee, and the penalty was rightly held to fall on the
assessee in some character other than that of a trader.
Reference was made by the Revenue to Soni
Hinduji Kushalji & Co. v. Commissioner of Income-tax, A.P. The assessee's
claim to the deduction of the value of gold confiscated by the customs
authorities was found unsustainable by the court.
The decision in that case can be explained on
the ground that the assessee was carrying on a lawful business in gold, silver
and jewellery and committed an infraction of the law in smuggling gold into the
country. Our attention has also been invited to J. S. Parkar v. V. B. Palekar
and Others where on a difference of opinion between two learned Judges of the
Bombay High Court a third learned Judge agreed with the view that the value of
gold confiscated by the customs authorities in smuggling operations was not
entitled to deduction against the estimated and assessed income from an
undisclosed source. It was observed that the loss arose by reason of an
infraction 1126 of the law and as it had not fallen on the assessee as a trader
or business man a deduction could not be allowed.
Apparently, the true significance of the
distinction between an infraction of the law committed in the carrying on of a
lawful business and an infraction of the law committed in a business inherently
unlawful and constituting a normal incident of it was not pointedly placed
before the High Court in that case.
We hold that the assessee is entitled to the
deduction of Rs. 65,500/-, and accordingly we affirm the view taken by the High
Court on the question of law referred to it.
The appeal fails and is dismissed with costs.
S.R. Appeal dismissed.
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