2023 (4) TMI 1057 - SC - Income Tax

Supreme Court disallows business loss deduction for confiscated silver; smuggling not business activity.

The Commissioner of Income Tax Jaipur Versus Prakash Chand Lunia (D) Thr. Lrs. & Anr.

The Supreme Court ruled in favor of the Revenue, disallowing the deduction of loss due to confiscation as a business loss. The Court upheld the ... Loss of confiscation of silver bars by DRI officials - distinction between a claim for deduction of a loss incurred in an illegal business, as against a claim of a loss qua a legitimate business - Whether allowable business expenditure u/s 37(1)? - Addition u/s 69A as Assessee unable to explain the nature and source of acquisition of silver of which he is held to be the owner - investment in this regard was not found recorded in the books of accounts of the assessee that were produced before the then Assessing Officer - whether the High Court has erred in law in allowing the 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 (5) TMI 2 - SUPREME COURT]? - HELD THAT:- M. R. Shah, J. Judgment:- As 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. 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 ([1980 (5) TMI 2 - SUPREME COURT]) would be applicable? - 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 (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 the same as business loss is unsustainable and the same deserves to be quashed and set side. The impugned judgment and order passed by the High Court is hereby quashed and set aside and the order passed by the assessing officer, CIT(A) and the ITAT are hereby restored. M. M. Sundresh, J Judgment: - Disallowance of illegal expenses - Whether a business, as defined under Section 2(13) of the Act, and as dealt with under Section 37 of the Act, would include a deduction when the said expenditure is incurred for any purpose which is an offence or prohibited by law? - HELD THAT:- 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 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 understood on that basis. There cannot be a situation where an assessee carrying on an illegal business can claim deduction of expenses or losses 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 [2006 (12) TMI 91 - SUPREME COURT] leads to a situation where the expenditure incurred in manufacturing something illegal may not be allowable as a deduction in view of the Explanation 1, however, if upon seizure, the manufactured goods are 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. Conclusion(s) 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 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 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. V. The decisions of this Court in Piara Singh (supra) and Dr. T.A. Quereshi (supra) do not lay down correct law in light of the decision of this Court in Haji Aziz (supra) and the insertion of Explanation 1 to Section 37. Thus we are 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 the case on hand being prospective in nature. Issues Involved:1. Applicability of Section 69A of the Income Tax Act, 1961.2. Deductibility of loss due to confiscation as a business loss.3. Interpretation of Explanation 1 to Section 37(1) of the Income Tax Act, 1961.Summary:Issue 1: Applicability of Section 69A of the Income Tax Act, 1961The Supreme Court upheld the concurrent findings of the tax authorities that the assessee was the owner of the confiscated silver bars. The deeming provisions of Section 69A of the Income Tax Act, 1961 were applicable as the investment in silver was not recorded in the books of accounts. The High Court's decision to add the value of the confiscated silver to the assessee's income was affirmed.Issue 2: Deductibility of loss due to confiscation as a business lossThe Supreme Court held that the High Court erred in allowing the loss of confiscated silver bars as a business loss. The Court distinguished the present case from the precedent set in CIT Patiala vs. Piara Singh, noting that the assessee's primary business was legitimate silver trading, and not smuggling. The confiscation of silver due to smuggling was an infraction of law and not incidental to the assessee's legitimate business. Therefore, the loss from confiscation could not be treated as a business loss.Issue 3: Interpretation of Explanation 1 to Section 37(1) of the Income Tax Act, 1961The Court emphasized that Explanation 1 to Section 37(1), which disallows any expenditure incurred for purposes that are an offence or prohibited by law, applies to the case. The loss due to confiscation of smuggled silver could not be deducted as a business expense under Section 37(1). The Court clarified that the decisions in Piara Singh and Dr. T.A. Quereshi do not lay down the correct law in light of the decision in Haji Aziz & Abdul Shakoor Bros and the insertion of Explanation 1 to Section 37.Conclusion:The Supreme Court quashed the High Court's judgment and restored the orders of the Assessing Officer, CIT(A), and ITAT, thereby disallowing the deduction of the loss due to confiscation as a business loss. The appeals by the Revenue were allowed, and the High Court's decision was set aside.