TaxTMI 
TaxTMI 
2023 (4) TMI 1057
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....tuated at A-11, 12, Sector - VII, NOIDA taken on rent by the assessee, Shri Prakash Chand Lunia. The DRI recovered 144 slabs of silver from the premises and two silver ingots from the business premises of the assessee at 1397, Chandni Chowk, Delhi. The assessee was arrested under Section 104 of the Customs Act for committing offence punishable under Section 135 of the Customs Act. The Collector, Customs held that the assessee Shri Prakash Chand Lunia is the owner of silver/bullion and the transaction thereof was not recorded in the books of accounts. The Collector of Customs, New Delhi ordered confiscation of the said 146 slabs of silver weighing 4641.962 Kilograms valued at Rs.3.06 Crores. The Collector Customs further imposed a personal penalty of Rs.25 Lakhs on Sh. Prakash Chand Lunia under Section 112 of the Customs Act. The Collector held that the silver under reference was of smuggled nature. 2.2 During the course of the assessment proceedings the Assessing Officer observed that the assessee was not able to explain the nature and source of acquisition of silver of which he is held to be the owner, therefore the deeming provisions of Section 69A of the Income Tax Act, 1961 ....
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....e the High Court. The High Court while deciding both the cases together, qua the first question, decided in favour of the Revenue and the rental premises of the assessee, the same is to be added to his income as a natural consequence. However, with regard to the second question, the High Court held that loss of confiscation by the DRI official of Customs Department is business loss. While holding the High Court has relied upon the decision of this Court in the case of CIT, Patiala vs. Piara Singh reported in 124 ITR 41. The impugned judgment and order passed by the High Court is the subject matter of the present appeal. 3. Shri Balbir Singh, learned ASG has appeared on behalf of the Revenue and Shri Arijit Prasad, learned Senior Advocate has appeared on behalf of the assessee. 3.1 Shri Balbir Singh, learned ASG appearing on behalf of the Revenue has vehemently submitted that in the facts and circumstances of the case and while dealing with the relevant provisions of the Act, 1961, the High Court has materially erred in relying upon the decision of this Court in the case of Piara Singh (supra). It is submitted that as such the AO, CIT(A) and ITAT have correctly distinguished t....
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....ntraband gold is an action in rem and not a proceeding in personam and thus, a proceeding in rem in the strict sense of the term is an action taken directly against the property (i.e., smuggled gold) and even if the offender is not known, customs authorities have power to confiscate the contraband gold. In view of the aforesaid, the Court stated that confiscation of contraband gold by customs authorities cannot be said to be a trading or commercial loss connected with or incidental to assessee's business. The High Court further relied on Haji Aziz (supra) and various other judgments to state that such confiscation of smuggled/contraband goods which results in infraction of law and has no incidence/connection to the business of assessee, cannot be allowed as a business loss. Thus, the aforesaid case which has been referred to and distinguished in Piara Singh (supra), squarely applies to the facts of the present case herein. Similarly, the case of JS Parkar (supra) would also be applicable to the present case as in the former case, the assessee not only claimed the value of the gold confiscated as a trading loss but also set off of the said loss against his assumed and assessed i....
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....ss expenditure. It is submitted that in the said case, ITAT found the assessee engaged in the business of manufacturing and selling heroin and thus, this Court held that assessee's claim of business loss was allowable as he was in the business of heroin. It is submitted that the case of Apex Laboratories (supra) distinguishes the judgment in TA Quereshi (supra) and states that the case relating to the assessee bribing doctors, did not deal with business loss but business expenditure which was disallowable under Explanation 1 to Section 37(1). It is submitted that thus either way, neither can the Respondent- Assessee claim business loss due to him not being in the smuggling business nor can he claim business expenditure as the same is prohibited under Explanation 1 to Section 37(1). 3.6 Making above submissions and relying upon the above submissions, it is prayed to allow the present appeals and restore the ITAT orders. 4. Shri Arijit Prasad, learned Senior Advocate appearing on behalf of the assessee has vehemently submitted that in the present case the respondent - assessee is engaged in the business of purchase and sale of silver. Total sales of Rs.1,46,07,314/- of Silver w....
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....sessee. The value of the said silver slabs was determined to be Rs. 3,06,036,909/- and the same was added to the computation of income of the assessee under Section 69A of the Act as undisclosed valuable article which was not recorded in the books of account of the assessee. 4.4 It is submitted that however as the respondent - assessee was engaged in the business of trading of silver and the said silver slabs were in possession of the assessee for the purpose of trading, absolute confiscation of the said silver slabs would result in loss of stock in trade and the value thereof would be available as deduction as business/trading loss. It is submitted that therefore the decision of this Court in the case of T.A. Quereshi (Supra) shall be clearly applicable. 4.5 It is submitted that in the case of T.A. Quereshi (Supra) this Court has drawn a distinction between claim of deduction as expenditure of penalty/fine as against claim of business loss on account of confiscation of goods which are unaccounted stock in trade. It is submitted that in case of claim of deduction as expenditure of any fine and/or penalty, the Courts have held that such deduction would not be available to the ....
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.... which is posed for consideration before this Court is 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 Supp SCC 166? 6.1 While considering the aforesaid question, at the outset, it is required to be noted that the provisions of Section 37(1) under the Act has been amended by Finance (No.2) Act, 1998 by introducing Explanation 1 thereto w.e.f. 01.04.1962 wherein any expenditure incurred by the assessee for any purpose which is an offence or prohibited by law is not an allowable business expense. It is true that in the present case the respondent - assessee did not claim value of silver bars confiscation as business expenses thus claimed as business loss. However, the amendment to Section 37 might have some bearing on the issue involved. 6.2 On going through the impugned judgment and order passed by the High Court, it appears that the High Court has simply relied upon the decision of this Court in the case of Piara Singh (supra). Having gone through the decision of this Court in the ca....
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....f contraband gold was an action in rem and not a proceeding in personam and thus, a proceeding in rem in the strict sense of the term is an action taken directly against the property (i.e. smuggled gold) and even if the offender is not known, the customs authorities have power to confiscate the contraband gold. 6.6 In the case of JS Parkar (supra), the assessee not only claimed the value of the gold confiscated as a trading loss but also set off of the said loss against his assumed and assessed income from undisclosed sources. The value of gold was sought to be taxed under Section 69/69A of the Act by the tax authorities. However, the Bombay High Court held the assessee to be the owner of the smuggled confiscated gold and the assessee was not entitled to claim value of such gold as a trading loss. 6.7 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. Therefore, the next question which is posed for consideration before this Court is whether the assessee ca....
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....loss incurred in an illegal business, as against a claim of a loss qua a legitimate business, though an illegality is attached to it. The aforesaid issue is to be tested on an offence committed leading to either a penalty or confiscation. 2. Heard Mr. Balbir Singh, learned Additional Solicitor General, Mr. AK Shrivastava, learned senior counsel for the Appellant and Mr. Arjit Prasad, learned senior counsel for the Respondents. 3. have gone through the well-merited judgment rendered by my learned brother, Justice M.R. Shah. While concurring with the ultimate conclusion arrived at in overturning the decision of the High Court, I would like to give my own reasoning on the aforesaid aspect. The facts being narrated with utmost clarity by my learned brother, only those which are required in support of the reasoning are being recorded. 4. The Director of Revenue Intelligence set out a search at the business premises of the Respondent/assessee. The recovery yielded silver slabs/silver ingots. The assessee was in the business of making jewellery. 5. The Respondent/assessee filed his return for the Assessment Year 1989-1990 followed by a petition before the Income Tax Settlement Co....
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....ead "Profits and gains of business or profession". [Explanation 1.]-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." 8. Section 37 of the Act, being one of the provisions meant for computing income from profits or gains of business or profession, is a residuary and omnibus provision which intends to cover all expenditure to the exclusion of those mentioned under Section 30 to 36 of the Act, apart from being in the nature of capital expenditure or personal expenses of the assessee. Therefore, the object behind this provision is very clear as it includes 'any expenditure'. The second mandate of this provision is that the expenditure will have to be laid out or expended wholly and exclusively for the purpose of the business or profession to come into the fold of income chargeable to tax as profit and gains of business or profession. 9. An ambiguity arose as to whether a business, as defined under Sectio....
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.... such, the power of judicial review over an explanation, which has been introduced to explain and remove the doubts of the main provision, is rather limited. 13. Though the provision speaks of expenditure while not making a specific reference to loss, one has to press into service the accepted commercial practice and trading principles. If one is to treat the expenditure as a genus, a loss would become a specie. All losses would become expenditures but not vice versa. A commercial loss in trade arising out of a business being carried on and incidental to it would be a deductible loss as laid down by this Court in Badridas Daga v. CIT, (1959) SCR 690. There is a similarity in the test qua a loss as laid down by this Court, and expenditure under Section 37 of the Act. Perhaps, there is a distinction when it comes to the accounting treatment of the two concepts. Thus, there is no difficulty in holding that the word 'any expenditure' mentioned in Section 37 of the Act takes in its sweep loss occasioned in the course of business, as well. Therefore, I agree with the view of my learned brother that Section 37 of the Act and Explanation 1 will have a bearing in the present case. ....
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.... Act in computing an assessee's income under sub-section (1). An amendment has been introduced by Finance Act, 2016 with the inclusion of 'set off of any loss' being not allowable. Sub-section (2) once again does not speak about loss but the fact that it makes a reference to 'set off of any loss' would reiterate the view taken earlier, while considering the scope and ambit of Section 37 of the Act, that such a loss has to be read into expenditure, at least while applying the test for the purpose of deduction. To make the position clear one has to understand that the amendment merely speaks about the right of the assessee to set off the loss which presupposes that the loss has to be treated as a facet of expenditure. 17. 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 objecti....
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....m for deduction: (1) that the loss sustained by reason of embezzlement is a bad debt allowable under s. 10(2) (xi) of the Act; (2) that it is a business expense falling within s. 10(2)(xv) of the Act; and (3) that it is a trading loss, which must be taken into account in computing the profits under s. 10(1) of the Act. As regards the first ground, the authorities have consistently held that the deduction is not admissible under s. 10(2)(xi) of the Act, and that, in our view, is correct. A debt arises out of a contract between the parties, express or implied, and when an agent misappropriates monies belonging to his employer in fraud of him and in breach of his obligations to him, it cannot be said that he owes those monies under any agreement. He is no doubt liable in law to make good that amount, but that is not an obligation arising out of a contract, express or implied. Nor does it make a difference that in the accounts of the business the amounts embezzled are shown as debits, the amounts realised towards them, if any, as credits, and the balance is finally written off. They are merely journal entries adjusting the accounts and do not import a contractual liability. Nor can a c....
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.... Lord Chancellor Halsbury in Gresham Life Assurance Society v. Styles [(1892) AC 309, 315 : 3 TC 185, 188] , is of general application unaffected by the specialities of the English tax system." The result is that when a claim is made for a deduction for which there is no specific provision in s. 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act. These being the governing principles, in deciding whether loss resulting from embezzlement by an employee in a business is admissible as a deduction under s. 10(1) what has to be considered is whether it arises out of the carrying on of the business and is incidental to it. Viewing the question as a businessman would, it seems difficult to maintain that it does not. A business especially such as is calculated to yield taxable profits has to be carried on through agents, cashiers, clerks and peons. Salary and ....
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....r. To put it simply, this Court has made the position abundantly clear that a penalty can never be understood as a commercial expenditure/loss for the purpose of the business nor a disbursement made to earn profit. It was further noted that a confiscation is a proceeding in rem, and therefore, the penalty is imposed on the goods. That being the position, in any case, an assessee cannot claim deduction of loss in a case of confiscation/penalty, as arising out of carrying on of the business or incidental to it. 20.2 Relevant paragraphs: "In support of his argument counsel for the appellant firm referred to Maqbool Hussain v. State of Bombay etc. [(1953) SCR 730] and to the following passage at p. 742 where Bhagwati, J., said: "Confiscation is no doubt one of the penalties which the Customs Authorities can impose but that is more in the nature of proceedings in rem than proceedings in personam, the object being to confiscate the offending goods which have been dealt with contrary to the provisions of the law and in respect of the confiscation also an option is given to the owner of the goods to pay in lieu of confiscation such fine as the officer thinks fit. All t....
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....venue v. Anglo Brewing Co. Ltd. [(1925) 12 TC 803, 813] to mean "for the purpose of keeping the trade going and of making it pay". The essential condition of allowance is that the expenditure should have been laid out or expended wholly and exclusively for the purpose of such business. In deciding this case, reference to decisions in some English cases will be fruitful. In Commissioners of Inland Revenue v. Warnes & Co. [(1919) 2 KB 444] , the assessee who carried on the business of oil exporters were sued for a penalty on an information exhibited by the Attorney-General under the Sea Customs Consolidation Act for breach of orders and proclamations. The matter was settled by consent on the assessee agreeing to pay a mitigated penalty of GBP 2000. All imputations on the moral culpability of the assessees were withdrawn. The provisions of the Act under which this information was lodged and penalty paid was similar to the provisions of the Indian Sea Customs Act. This amount was held not to be a proper deduction because in order to be within the provision similar to s. 10(2)(xv) of the Indian Act the loss had to be something within commercial contemplation and in the nature o....
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.... Warrington, L.J. said at p. 569: "It is a sum which the persons conducting the trade have had to pay because in conducting it they have so acted as to render themselves liable to this penalty. It is not a commercial loss, and I think when the Act speaks of a loss connected with or arising out of such trade it means a commercial loss, connected with or arising out of the trade." In Strong & Co. v. Woodifield [(1906) AC 448] a brewing company owned a licensed house in which they carried on the business of inn-keepers. They incurred a liability to pay damages on account of injuries caused to a visitor, by the falling in of a chimney. This sum was held not to be allowable as a deduction in computing the profits. Lord Loreburn, L.C., in his speech said no sum could be deducted unless it be money wholly and exclusively laid out or expended for the purpose of such trade and that only such losses could be deducted as were connected with it in the sense that they were really incidental to the trade itself and they could not be deducted if they were mainly incidental to some other vocation or fell on the trader in some character other than that of a trader. Lord Davey obs....
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....v. Woodifield [(1906) AC 448] was applied and applying that test it was held that except the expenses for obtaining legal advice the other expenses were not admissible. In Farrie v. Hall [(1947) 28 TC 200] F, a sugar broker was sued in the High Court for libel and the Court held that F had acted maliciously and that the defence of privilege could not prevail and awarded damages against him. F sought to claim the amount of damages as an allowable deduction contending that it was an expenditure laid out wholly and exclusively for the purposes of his trade or was a loss connected with or arising out of the trade. Relying on the cases abovementioned this amount was disallowed because it fell on the assessee in his character of a calumniator of a rival sugar broker and it was only remotely connected with his trade as a sugar broker. Therefore it was not laid out exclusively and wholly for the purpose of his business. We were also referred to the observations of Danckwerts, J. in Newson v. Robertson [(1952) 33 TC 452 at p. 459] where it was said that if the expenditure is incurred by the tax-payer for more than one purpose including the commercial purposes in the sense that it i....
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....siness i.e. to enable a person to carry on and earn profit in that business. It is not enough that the disbursements are made in the course of or arise out of or are concerned with or made out of the profits of the business but they must also be for the purpose of earning the profits of the business. As was pointed out in Von Glehn's case [(1920) 2 KB 553] an expenditure is not deductible unless it is a commercial loss in trade and a penalty imposed for breach of the law during the course of trade cannot be described as such. If a sum is paid by an assessee conducting his business, because in conducting it he has acted in a manner, which has rendered him liable to penalty it cannot be claimed as a deductible expense. It must be a commercial loss and in its nature must be contemplable as such. Such penalties which are incurred by an assessee in proceedings launched against him for an infraction of the law cannot be called commercial losses incurred by an assessee in carrying on his business. Infraction of the law is not a normal incident of business and therefore only such disbursements can be deducted as are really incidental to the business itself. They cannot be deducted if they ....
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....pose of business' and 'incidental to business' and not by way of a general principle. Hence, non-allowance of a deduction on the ground of one incurred as an expenditure for a purpose which is an offence or prohibited by law can be disallowed otherwise through a statute. This Court in SC Kothari (supra) had merely laid down the general proposition of law by taking note of the position prevailing in other countries, but in any case, it has got no application over a case of either a penalty or confiscation. 21.2 The law as laid down in Haji Aziz (supra) despite being noted, was not followed on both the counts, viz., the deduction of loss qua an offence and the consequence of a penalty imposed for an infraction of law. 21.3 We must further add that in S.C. Kothari (supra), this Court was concerned with Section 10(2)(xv) of the Old Act, which did not contain any explanation as introduced to Section 37(1) of the Act. This subsequent change in law will certainly have a bearing on the understanding of the said judgment. 22. Son i Hinduji Kushalji & Co. v. CIT, (1971) SCC Online AP 223 22.1 The Division Bench of the Andhra Pradesh High Court considered the law laid down on dedu....
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....8] 69 I.T.R. 1 (Guj.).] to contend that the assessee is entitled to claim deduction of the value of the contraband gold confiscated by the customs authorities, as it represented the loss sustained by the firm in the illegal business carried on by it. The learned judges in that case were of the view that, when illegal business is business within the meaning of the Income-tax Act and if profits from illegal business are assessable to tax, there is no reason either in principle or on authority for refusing to take into account losses from illegal business. According to these, the losses so incurred must necessarily be taken into account in order to arrive at the true profits of the business and such profits may be either positive in the sense that they are actual profits or they may be negative in the sense that they are losses and there is in principle no distinction between profits and losses of a business... xxx xxx xxx 9.Kothari's case [[1968] 69 I.T.R. 1 (Guj.).] , as may be noticed from the facts stated therein, was not a case where a claim for deduction was made by the assessee, as he did not say that a particular expenditure incurred by him should be allo....
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.... the penalty is enforced against the goods. 12. A proceeding in rem, therefore, in the strict sense of the term is an action taken directly against the property (in this case the smuggled gold) and even if the offender is not known, the customs authorities have the power to confiscate the contraband gold. Therefore, by no process of reasoning can the confiscation of the contraband gold by the customs authorities be said to be a trading or commercial loss connected with or incidental to the assessee's business. 13. In Commissioners of Inland Revenue v. Alexander Von Glehn & Co. Ltd. [[1920] 2 K.B. 553, 566 (C.A.).] . Lord Sterndale M.R. observed: "During the course of the trading this company committed a breach of the law. As I say, it has been agreed that they did not intend to do anything wrong in the sense that they were willingly and knowingly sending these goods to an enemy destination, but they committed a breach of the law, and for that breach of the law, they were fined. That, as it seems to me, was not a loss connected with the business, but was a fine imposed upon the company personally, so far as a company can be considered to be a person, f....
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.... be said to be a commercial expense for the purpose of a business or a disbursement made for the purposes of earning the profits of such business." 17. Similar views have been expressed by the Punjab and Allahabad High Courts in Raj Woollen Industries v. Commissioner of Income-tax [[1961] 43 I.T.R. 36 (Punj.).] , Commissioner of Incometax v. Mathura Prasad Hardwar Prasad Deoria [[1965] 55 I.T.R. 476 (All.).] and Mahabir Sugar Mills (P.) Ltd. v. Commissioner of Income-tax [[1969] 71 I.T.R. 87 (All.).] . 18. The Supreme Court in Badridas v. Commissioner of Income-tax [[1958] 34 I.T.R. 10, [1959] S.C.R. 690 (S.C.).] , considered what would amount to a trading loss. Venkatarama Aiyar J. observed: "When a claim is made for a deduction for which there is no specific provision in section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial pratice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied in the Act. The loss for....
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.... contraband gold is not a commercial loss so as to be allowed as a permissible deduction." 22.3 The aforesaid reasoning of the Andhra Pradesh High Court arrived at after taking note of the earlier decisions rendered by this Court in its support, deserves to be approved. 23. J.S Parkar v. V.B Palekar and Others, (1973) SCC Online Bom 161 23.1. Majority view of the Bombay High Court was in line with Soni Hinduji Kushalji & Co. (supra), though not referring to the said decision. It is to be noted that though Justice Mukhi dissented with the view of Justice Deshpande, the third Judge, Justice Tulzapurkar by a separate judgment, concurred with the view of Justice Deshpande. Therefore, the majority while broadly interpreting the view of this Court in Haji Aziz (supra), held that confiscation of goods incurred for infraction of law cannot be said to be a normal incident of business, and this loss falls on the assessee in some character other than that of a trader. The Court further noted that this principle would equally apply to a case where the business itself is prohibited by law, while disagreeing with the view of the Punjab and Haryana High Court in Piara Singh (supra), whic....
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.... confiscation and get the goods released. The assessee exercised the option and got the goods released on payment of fine. In the course of the assessment proceedings the assessee claimed deduction of this penalty amount under section 10(2) (xv) of the Indian Income-tax Act of 1922. The Bombay High Court negatived the claim holding that the penalty for infraction of law does not amount to any expenditure laid out or expended wholly and exclusively for the purpose of such business, profession or vocation. The Supreme Court affirmed the said view of this court on slightly broader base, observing as follows: "An expenditure is not deductible unless it is a commercial loss in trade and a penalty imposed for breach of the law during the course of trade cannot be described as such. Infraction of the law is not a normal incident of business and, therefore, only such disbursements can be deducted as are really incidental to the business itself. They cannot be deducted if they fall on the assessee in some character other than that of a trader." xxx xxx xxx "29. Applying this test laid down by Grover J., speaking for the Supreme Court, in S.C. Kothari's case an....
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.... the assessee for deduction of penalty under section 10(2)(xv) and not under section 10(1) of the Income-tax Act of 1922 is an exercise in futility. That, in the above case, neither the assessee claimed deduction of such penalty by way of loss under section 10(1) of the Act, nor the Supreme Court considered it worthwhile allowing the claim under that sub-section is also indicative, if not decisive, of the untenability of such contention. Though deduction was claimed under section 10(1) of the Act, rejection of the claim is based on the broader basis that penalties and confiscations are not the normal incidents of business and do not constitute commercial loss. If one examines the scheme of section 10(2), and section 24 of the 1922 Act and corresponding provisions of sections 28, 29 to 44A and sections 70 and 71 of the 1961 Act, it will be noticed that the provisions deal with the deductions or disbursement from the profits earned under various contingencies. If the losses are incurred in the same business (source of income) under the same head enumerated under section 14, the same are liable to be deducted under section 22 (section 10(1) of the old Act) of the Act. If losses are in....
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....cter as a trader. The question in the present case is as to whether the loss consequent upon confiscation of goods for an infraction of law suffered by the assessee could be regarded as a commercial loss or could it be said to be loss incidental to the business and, what is of importance, could it be said to have been suffered by him in his character as a trader? In my view, it is certainly not a commercial loss arising from carrying on of the business nor can it be regarded as incidental to the activity of the assessee as dealer in gold; moreover, it cannot be regarded as loss falling upon the assessee in his character as a trader. It is a loss falling upon him as a person who had infracted law. The loss suffered by confiscation of goods directly sprang from an illegal act committed by the assessee, namely, having acquired gold without requisite permit or permission of the Reserve Bank of India and without having paid any duty for the import thereof into India. Surely, the loss has not fallen on the assessee as a trader or businessman, for, obviously, even a lay person who is not a businessman, if he were to import gold for his private use without requisite permission and without ....
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....e has to be paid. From this it appears clear that the loss of Rs. 3,40,000 which was claimed as deductible loss was clearly in the nature of commercial or trade loss for which deduction was claimed under section 10(1) of the Act. In the circumstances, it is clear that the statement of law enunciated in the case of S.C. Kothari is unexceptionable but, with respect, I would like to point out that the decision is no authority for the proposition that the loss suffered by way of penalty or confiscation of goods amounts to commercial loss that could be deducted while computing the net profits of a business under section 10(1) of the Act. It is true that in Piara Singh's case, the Punjab and Haryana High Court has taken the view that the confiscation of cash amount of Rs. 65,500 from the assessee, who was engaged in the business activity of smuggling gold, amounted to trade loss and hence was deductible under section 10(1) of the Act. But for coming to that conclusion the Punjab High Court has principally relied upon the decision of the Gujarat High Court and of the Supreme Court in S.C. Kothari's case, in which, as I have stated above, neither the Gujarat High Court nor the Supr....
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....e, the law as laid down in Piara Singh (supra) may not have any application to a case of deduction of expenditure/loss incurred on account of penalty/confiscation coming under Section 37(1) of the Act, particularly in light of Explanation 1. 25. Dr. T.A. Quereshi v. Commissioner of Income Tax, Bhopal (2007) 2 SCC 759 25.1. This Court merely followed Piara Singh (supra) while making a casual observation on Explanation 1 to Section 37 of the Act. The earlier decisions have not been taken into consideration as we could see in Piara Singh (supra), but the principle laid down was also not taken note of. In this connection, it has to be remembered that for a precedent to be binding there has to be a conscious consideration of an issue involved. The judgment in Dr. T.A. Quereshi (supra) was delivered by a two-Judge Bench while not taking note of a three-Judge Bench decision in Haji Aziz (supra), which has neither been disapproved nor distinguished. Hence, this decision is per incuriam and not a binding precedent. Once again, the question of a confiscation proceeding being in rem was not brought to the notice of the Court. 25.2. Therefore, there cannot be a situation where an asse....