Summary
Smuggled silver worth about Rs. 3.06 crores owned by a silver trader was absolutely confiscated by Customs; its value was added under Section 69A, and the Rajasthan High Court, relying on Piara Singh, allowed the confiscation as a business loss. The Supreme Court reversed. M.R. Shah J. held that Piara Singh applies only where smuggling is itself the assessee's business and that a legitimate trader who commits an infraction of law cannot deduct the loss, following Haji Aziz. M.M. Sundresh J., concurring, held that 'expenditure' in Section 37 includes a loss, that Explanation 1 to Section 37(1) bars deduction of any loss incurred for a purpose that is an offence or prohibited by law, that confiscation and penalty are proceedings in rem not incidental to any business, and that Piara Singh and Dr. T.A. Quereshi do not lay down correct law.
Issues
- Whether an assessee carrying on a legitimate business of dealing in silver can claim the value of smuggled silver absolutely confiscated by the Customs authorities as a deductible business or trading loss, the value having been added to his income under Section 69A.
- Whether the decision in CIT v. Piara Singh, allowing a smuggler the loss of confiscated currency, applies to an assessee whose business is lawful but who committed an infraction of law.
- Whether the word 'expenditure' in Section 37(1) of the Income Tax Act, read with Explanation 1, covers a loss, so that a loss incurred for a purpose that is an offence or prohibited by law is non-deductible.
- Whether the decisions in Piara Singh and Dr. T.A. Quereshi remain good law in the light of Haji Aziz and Explanation 1 to Section 37(1).
Provisions considered
- Section 69A, Income Tax Act, 1961The value of the silver, of which the assessee was found to be the owner and which was unrecorded in his books, was added as unexplained investment; ownership was not disputed before the Supreme Court and the addition stood. (¶¶ Shah J. 2.2, Shah J. 6.7, Sundresh J. 5)
- Section 37(1) and Explanation 1 (inserted by the Finance (No. 2) Act, 1998 with effect from 01.04.1962), Income Tax Act, 1961Explanation 1 declares that expenditure for any purpose which is an offence or prohibited by law is not deemed incurred for business and is non-deductible; Sundresh J. held the clarificatory Explanation also reaches a loss, since loss is a species of expenditure, and Shah J. held the amendment has a bearing even though the claim was framed as a loss. (¶¶ Shah J. 6.1, Sundresh J. 8, Sundresh J. 10, Sundresh J. 11, Sundresh J. 12, Sundresh J. 13, Sundresh J. 26)
- Section 115BBE, Income Tax Act, 1961Its non-obstante sub-section (2), which from 2016 bars set-off of any loss against deemed income under Sections 68 to 69D, confirms that a loss is treated as a facet of expenditure for deduction purposes, though the provision is prospective and not applied to this case. (¶¶ Sundresh J. 14, Sundresh J. 15, Sundresh J. 16, Sundresh J. 17, Sundresh J. 27)
- Sections 10(1) and 10(2)(xv), Income Tax Act, 1922Under the old Act a trading loss was deductible only if it sprang directly from and was incidental to the business (Badridas Daga), and a penalty for infraction of law was held not a commercial loss (Haji Aziz); the Court traced the later decisions to these principles. (¶¶ Shah J. 6.3, Shah J. 6.4, Sundresh J. 19, Sundresh J. 20, Sundresh J. 21)
- Sections 104, 112 and 135, Customs Act, 1962The assessee was arrested and penalised and the silver confiscated as smuggled goods; confiscation is a proceeding in rem against the goods, which is why its loss falls on the assessee in a character other than that of a trader. (¶¶ Shah J. 2.1, Shah J. 6.5, Sundresh J. 20.1, Sundresh J. 22.1, Sundresh J. 26)
Held
- Shah J.: Piara Singh concerned an assessee whose business was itself smuggling, so that confiscation was a loss springing directly from that business; it distinguished Haji Aziz and the Andhra Pradesh and Bombay decisions, which concerned legitimate traders who had smuggled goods in breach of law. Where the assessee's business was lawful silver dealing and he indulged in smuggling to make larger profits, Piara Singh does not apply and Haji Aziz, Soni Hinduji Kushalji and J.S. Parkar apply with full force; the confiscated silver cannot be allowed as a business loss. (¶¶ Shah J. 6.2, Shah J. 6.3, Shah J. 6.4, Shah J. 6.8, Shah J. 7)
- Sundresh J.: 'Any expenditure' in Section 37 takes in its sweep a loss occasioned in the course of business, loss being a species of the genus expenditure; consequently a loss incurred for any purpose which is an offence or is prohibited by law is non-deductible under Explanation 1, which is clarificatory and retrospective. (¶¶ Sundresh J. 12, Sundresh J. 13, Sundresh J. 26)
- Sundresh J.: A penalty or confiscation is a proceeding in rem enforced against the goods; a loss flowing from it is not incidental to any business, lawful or unlawful, and falls on the assessee in a character other than that of a trader, so it is not deductible regardless of the nature of the business. Badridas Daga's requirement that a deductible loss spring directly from and be incidental to the business, and Haji Aziz's holding that an infraction of law is not a normal incident of business, govern. (¶¶ Sundresh J. 19.1, Sundresh J. 20.1, Sundresh J. 22.3, Sundresh J. 23.3, Sundresh J. 26)
- Sundresh J.: Piara Singh approved Haji Aziz yet overlooked its ratio on the in rem nature of confiscation and lacked the benefit of Explanation 1; S.C. Kothari lays down only that illegality of a business is irrelevant to computing its income and does not deal with penalty or confiscation. Dr. T.A. Quereshi, a two-Judge decision that followed Piara Singh without noticing the three-Judge decision in Haji Aziz, is per incuriam; Piara Singh and Quereshi do not lay down correct law, and an artificial distinction allowing deduction of confiscated illegal goods while disallowing the expenditure of producing them has no legal basis. (¶¶ Sundresh J. 21.1, Sundresh J. 21.2, Sundresh J. 24.1, Sundresh J. 24.2, Sundresh J. 24.3, Sundresh J. 25.1, Sundresh J. 25.2, Sundresh J. 26)
Result
Appeals by the Revenue allowed; Rajasthan High Court's judgment dated 22.11.2016 set aside and the orders of the Assessing Officer, CIT(A) and ITAT rejecting the claim to treat the confiscated silver as a business loss restored. No costs.