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2003 DIGILAW 1429 (RAJ)

Commissioner of Income v. Hiranand

2003-10-17

K.S.RATHORE, S.K.KESHOTE

body2003
JUDGMENT 1. - The Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (for short, "the Tribunal") has referred, under section 256(2) of the Income-tax Act, 1961 (hereinafter shall be referred to as "the Act, 1961"), at the instance of the Revenue, the following questions of law to this court for decision : "(i) Whether, on the facts and in the circumstances of the case, the decision of the Income-tax Appellate Tribunal is perverse inasmuch as the relevant material was not properly evaluated and wrong conclusions were drawn ? (ii) Whether, on the facts and in the circumstances of the case, the Tribunal had any material for the conclusion that the assessee was carrying on the illegal business of smuggling of gold ? (iii) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the loss arising to the assessee due to confiscation of gold by the customs authorities is to be deducted from the amount included in his income as unexplained investment ?" 2. The Central Excise Department, Jaipur on January 24, 1979, seized foreign gold weighing 1,469 grams worth Rs. 1,32,500 from the assessee at Jaipur under section 110 of the Customs Act, 1962 (for short, "the Act, 1962") for contravention of the restrictions/prohibitions imposed vide notification issued under section 11 of the Act, 1962, read with section 13(1) of the Foreign Exchange Regulation Act, 1973 (for short, "the Act, 1973"). 3. In consequence of the information and material available with the Central Excise Department, proceedings were initiated by the Revenue against the assessee and a notice was issued under section 139(2) of the Act, 1961. In response to that notice the assessee filed his return of income on June 30, 1979. 4. Since the case was completed without making necessary enquiries under section 143(1) of the Act, 1961, on November 26, 1980, necessary approval under the provisions of section 143(2)(b) thereof was obtained from the Inspecting Assistant Commissioner of Income-tax, Ajmer Range, Ajmer, so as to complete the assessee's case under section 143(3) after making necessary enquiries. On the basis of this approval received from that authority notices under sections 143(2) and 142(1) of the Act, 1961 were issued and served upon the assessee requiring him to file the details called for. On the basis of this approval received from that authority notices under sections 143(2) and 142(1) of the Act, 1961 were issued and served upon the assessee requiring him to file the details called for. After hearing the case the draft of the proposed order of assessment of the year 1979-80 was forwarded to the assessee on March 23, 1982 as the amount of variation to be proposed which was prejudicial to the assessee exceeded Rs. 1 lakh in view of the provisions contained under section 144B(1) of the Act, 1961. 5. The assessee filed his objection to the proposed assessment order vide letter dated March 29, 1982. The copy of the draft assessment order and the objections against the same of the assessee were forwarded by the Assessing Officer to the Inspecting Assistant Commissioner, Ajmer Range, Ajmer, for directions under section 144B of the Act, 1961 to enable him to complete the assessment. The Inspecting Assistant Commissioner, Ajmer Range, Ajmer, after hearing the assessee has issued directions vide his letter dated August 21, 1982 to the Assessing Officer for finalising the assessment. 6. The gold was confiscated by the customs authorities. Before the customs authorities the assessee admitted that he had carried the gold on behalf of others, namely, Kanhiya Lal, Padam Chand and Dharam Chand. The plea of the assessee before the Department was that the gold never belonged to him and that the customs authorities have forcibly recorded his statement and got it signed. 7. The Assessing Officer, after considering all these, was of the view that the amount of Rs. 1,32,500 is treated the income of the assessee from undisclosed sources. Before the Assessing Officer the assessee did claim deduction of this amount as business loss and placed reliance on the decision of the Hon'ble Supreme Court in CIT v. Piara Singh (1980) 124 ITR 40 . The Assessing Officer did not allow the claim on the ground that the assessee never admitted carrying on any business of gold smuggling. 8. Before the Assessing Officer the assessee did claim deduction of this amount as business loss and placed reliance on the decision of the Hon'ble Supreme Court in CIT v. Piara Singh (1980) 124 ITR 40 . The Assessing Officer did not allow the claim on the ground that the assessee never admitted carrying on any business of gold smuggling. 8. The matter was taken by the assessee to the Commissioner of Income-tax (Appeals), Rajasthan I, Jaipur, who also rejected the claim of the assessee on the ground that it was never the case of the assessee of having carried on any such business and that there was no basis for allowing the seizure of gold as business loss as what was proposed to be added was the unaccounted money which was utilised for acquiring of gold. 9. The assessee has filed appeal before the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur. Before the learned Tribunal the plea of the assessee was that the decision in CIT v. Piara Singh (1980) 124 ITR 40 (SC) , fully applied in the present case. The learned Tribunal opined that since the entire facts go to indicate that the assessee had been carrying on the illegal business of smuggling, the loss thereon from deemed confiscation had to be deducted from the amount included as unexplained investment. The alternative contention raised before the learned Tribunal that the confiscation of the gold has to be termed as a short-term capital loss and, as such, be allowed under section 71(3) of the Act, 1961, it is held that this contention is only consequential. The Revenue filed an application under section 256(2) of the Act, 1961, and prayed for reference of the aforesaid questions for adjudication and decision to this court. 10. Mrs. Parinitoo Jain, learned counsel for the Revenue, contended that before the learned Tribunal there was no material to conclude that the assessee was carrying on illegal business of smuggling of gold. In her submission, in the facts and circumstances of the case, the learned Tribunal was not justified in holding that the loss arising to the assessee due to confiscation of gold by the customs authorities is to be deducted from the amount included in the income of the assessee as unexplained investment. 11. In her submission, in the facts and circumstances of the case, the learned Tribunal was not justified in holding that the loss arising to the assessee due to confiscation of gold by the customs authorities is to be deducted from the amount included in the income of the assessee as unexplained investment. 11. It has next been contended that the decision of the apex court in CIT v. Piara Singh, (1980) 124 ITR 40 is not of any help to the assessee. The learned Tribunal has wrongly placed reliance on that decision. Referring to the case of the Madhya Pradesh High Court in Vishnu Kumar Soni v. CIT, (1985) 155 ITR 34 , Smt. Parinitoo Jain, learned counsel for the Revenue, urged that the sine qua non for taking this benefit of deduction is that the assessee was carrying on illegal business of smuggling and that has not been established and thus he is not entitled for deduction of the amount of the cost of confiscation of the gold as business loss. 12. Shri P.K. Kasliwal, learned counsel appearing for the assessee, per contra, submitted that the matter is squarely covered by the decision of the Hon'ble Supreme Court in CIT v. Piara Singh (1980) 124 ITR 40 . 13. In his submission the Revenue cannot have both head and tail. The Revenue can tax the profits only on a trade or business. That cannot be done without deducting the loss as a legitimate expense of business. It is a clear case where the assessee was carrying on the business of smuggling, may be an illegal business and suffered loss as a consequence of confiscation of gold and it has rightly been allowed by the learned Tribunal as a loss in the business. The finding of fact has been recorded in favour of the assessee by the learned Tribunal that the assessee had been carrying on the illegal business of smuggling. After this finding of fact recorded the consequence thereof on the basis of the admitted facts it follows that the loss in the business due to confiscation of the gold has to be deducted from the amount included as his unexplained investment. 14. We have given our thoughtful and anxious consideration to the rival contentions raised by learned counsel for the parties. 15. 14. We have given our thoughtful and anxious consideration to the rival contentions raised by learned counsel for the parties. 15. It is an undisputed fact that the Income-tax Officer, D-Ward, Ajmer, while making the assessment of the income of the assessee for the assessment year 1979-80 added the value of seized gold of Rs. 1,32,500 and treated it to be income from other sources under section 69 of the Act, 1961. It was taken to be the income from other sources on account of unexplained investment, not recorded in the books of account of the assessee. The learned Tribunal has recorded a finding of fact that from various documents of the customs authorities it is established that the assessee was carrying on illegal business of smuggling of gold. The gold was confiscated from him. 16. The Revenue added the value of the seized gold of Rs. 1,32,500 as income of the assessee under section 69 of the Act, 1961, on account of unexplained investment for the purpose of charging tax but when the question comes for the claim made by the assessee of loss suffered in a business, i.e., on account of confiscation of the gold, the defence has been taken that the smuggling was not the business of the assessee. This approach of the Department, leaving apart that it is the settled position of law on the point by their Lordships of the Hon'ble Supreme Court in CIT v. Piara Singh (1980) 124 ITR 40 , is unfair, unreasonable, unnatural and uncalled for. It is difficult to appreciate, what to say, to accept this approach of the revenue officers only to concern with the augmenting of the revenue by all means and seldom to bother about the rightful claims made of the deduction from the gross income as a result of the business loss. The Income-tax Officers are first also the citizens of the country. They are equally concerned to see and look into that whatever legally permissible deductions available are to be given to the assessee. This one sided approach of the revenue officers of the Income-tax Department only concerned with the revenue and not to bother about the assessee's legal rights, rightful deductions and other claims, is not befitting to their position. They are equally concerned to see and look into that whatever legally permissible deductions available are to be given to the assessee. This one sided approach of the revenue officers of the Income-tax Department only concerned with the revenue and not to bother about the assessee's legal rights, rightful deductions and other claims, is not befitting to their position. They are the officers of the welfare State and have duty and obligation to see that assessees are being given their legal, rightful and legitimate claims of deductions and other benefits. Whatever may be the reason or ground it is not unknown that the assessees have fear and are afraid of entering in the Income-tax Department. 17. The facts of this case speak how a one sided approach was there of the assessing authority and the Commissioner of Income-tax (Appeals), Rajasthan-I, Jaipur, in the matter. In the case of Shri Vishnu Kumar Soni v. CIT (1985) 155 ITR 34 (MP) it was held that the Tribunal found that the assessee was in possession of gold bars which were seized and confiscated by the customs authorities and that was the basis for the observation of the Tribunal that it was not quite improbable for the assessee to have indulged in the activities of dealing in smuggling gold. The Tribunal has also accepted the decision of the customs department that the assessee was caught in the process of smuggling. Therefore, the confiscation of the gold was a loss incurred in the course of business and the Tribunal was not right in not allowing Rs. 40,000 loss in the business. 18. Reference here may be made to the decision of the apex court in the case of CIT v. S.C. Kothari (1971) 82 ITR 794 . Their Lordships of the Hon'ble Supreme Court held that for the purpose of section 10(1) of the Indian Income-tax Act, 1922, the losses which have actually been incurred in carrying on a particular illegal business must be deducted before the true figure relating to profits which have to be brought to tax, can be computed or if the business in which the loss was sustained was the same as the business in which the profit was derived that loss should be taken into account while computing the profits of the business under section 10(1) of the Act, 1922 even if the business was illegal. 19. 19. Reference fruitfully may be made to another decision of the Hon'ble apex court in CIT v. Piara Singh (1980) 124 ITR 40 . Their Lordships of the Hon'ble Supreme Court held as under (page 42) : "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 the income from that business. On the basis that such income was tax able, 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 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 notes had been stolen or dropped on the way while carrying on of 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. CIT (1958) 34 ITR 10 the deduction must be allowed." 20. In CIT v. S.C. Kothari (1971) 82 ITR 794 , their Lordships of the Hon'ble Supreme Court held that for the purpose of section 10(1) of the Indian Income-tax Act, 1922, a loss incurred in carrying on an illegal business must be deducted before the true figure of profits brought to tax can be computed. In CIT v. S.C. Kothari (1971) 82 ITR 794 , their Lordships of the Hon'ble Supreme Court held that for the purpose of section 10(1) of the Indian Income-tax Act, 1922, a loss incurred in carrying on an illegal business must be deducted before the true figure of profits brought to tax can be computed. The Hon'ble court observed (page 802) : "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." 21. We find that a similar view has been taken by the Andhra Pradesh High Court in Soni Hinduji Kushalji and Co. v. CIT (1973) 89 ITR 112. 22. We find from the statement of case that the Tribunal accepted that the Central Excise Department, Jaipur, on January 24, 1979, seized the gold weighing 1,479 grams valued at Rs. 1,32,500 from the assessee. A finding of fact has also been recorded that the said gold was confiscated by the authorities. The assessee has admitted before the Central excise authorities that he had carried the gold though on behalf of other persons. It is true that before the Central Excise Department the plea of the assessee was that the gold never belonged to him and the customs authorities had forcibly recorded his statement and got it signed by him. The learned Tribunal has accepted as a fact that the assessee was under MISA and sentence was confirmed by this court as well. On this fact the learned Tribunal held that the Income-tax Officer has treated Rs. 1,32,500 as income of the assessee from undisclosed sources. Before the Income-tax Officer the assessee did claim deduction of amount as business loss by placing reliance on the judgment of the Hon'ble Supreme Court in CIT v. Piara Singh (1980) 124 ITR 40 . On this fact the learned Tribunal held that the Income-tax Officer has treated Rs. 1,32,500 as income of the assessee from undisclosed sources. Before the Income-tax Officer the assessee did claim deduction of amount as business loss by placing reliance on the judgment of the Hon'ble Supreme Court in CIT v. Piara Singh (1980) 124 ITR 40 . The claim was rejected on the ground that the assessee never admitted having carried on any smuggling business activities. The Revenue cannot be heard to say that it will bring the loss to tax. It can only tax profits of a trade or business and that cannot be done without deducting the losses and the legitimate expenses of the business. The finding of fact recorded by the Tribunal and the entire facts of the case go to show that the assessee had been carrying on illegal business of smuggling. The consequences of this finding recorded are inevitable. The confiscation of the gold of the assessee is a loss therefrom which has to be deducted from the amount included as unexplained investment. 23. As a result of the aforesaid discussion all the three questions referred to the court for its opinion are returned answered against the Revenue and in favour of the assessee. There shall be no order as to costs. *******