TaxTMI 
TaxTMI 
2008 (12) TMI 78
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....he office of the assessee on 14.3.1989, certain incriminating documents were seized. From the documents so seized by the Income Tax Department, it was revealed that the assessee had been claiming and receiving income tax refunds by filing bogus TDS certificates along with return of income prepared by him even in the names of non-existent persons. The assessee has filed his return of income for the assessment year1987-88 originally on 30.11.1987 reporting an income of Rs.29,700/-. However on the basis of the information available after the search of his premises, the assessment was reopened under section 147 of the Income Tax Act and after considering the explanation submitted by the assessee, a sum of Rs.7,29,424/- was arrived at by the Department, being the TDS certificates encashed by the assessee during the previous year and the same was treated as "professional income" during the said previous year. 3. With respect to the assessment year 1988-89, the assessee has filed the return of income on 27.1.1989 admitting an income of Rs.32,870/-. The assessment was completed by the Assessing Officer by treating the deposits made by the assessee during the previous year relevant to th....
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....venue contended that the Tribunal was of the opinion that the assessee had indulged in making illegal claim from the Department and as such the Tribunal should have treated the refunds received by the assessee as his income. The learned counsel by placing reliance on the decisions in K.P.G.B.U.G.M.S.S.A. Mohamad Abdul Kareem and Co. v. CIT [1948]16 ITR 412 (Mad) and CIT v. S.C. Kothari [1968] 69 ITR 1 (Guj) submitted that even if the income was not earned in a legal manner, still such income is taxable and it is not the concern of the Income Tax Department as to how the assessee earned his income. 8. The learned counsel appearing on behalf of the assessee contended that the Department was not justified in assessing the income, when admittedly it was the case of the Revenue that the income was earned only by getting the refunds on fraudulent TDS certificates. The learned counsel also relied on the decision of the Division Bench of this court dated 19.7.1972, in T.C. Nos.314 and 326 of 1966 (CIT v. A.R. Adaikappa Chettiar [1973] 91 ITR 90 (Mad)). Consideration: 9. There is no factual dispute with regard to the search conducted by the Department in the business as well as res....
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....efunds not only during the assessment year 1988-89 but also in the earlier and subsequent assessment years. This kind of continuity and recurrence in obtaining such refunds will constitute a source giving the receipts the character of income. It is of course not possible to attribute the source the quality of a business or profession. The income from such refunds could only be regarded as an income under a residuary head. Though the appellant has denied that he has obtained illegal refunds he has not substantiated with any acceptable evidence that such refunds were claimed by the respective persons who filed the TDS claims before the Department. He has not produced any of the parties on whose behalf he is supposed to have rendered professional service for getting refunds. Since he has acted on their behalf it is up to him to produce the parties for examination by the Department and prove that the appellant has nothing to do with the refunds claimed by his clients though illegal. He has on the contrary admitted having opened several bank accounts in the names of various persons who have claimed refunds and also obtained the refunds himself." 11. The Tribunal concurred with the fa....
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....e Tax Act could be availed of by a taxpayer. However the fact remains that Income Tax Act makes an obligation to pay tax on all income received. 13. The taxability of income earned by the assessee by resorting to unlawful means came up for consideration before a Division Bench of this court in K.P.G.B.U.G.M.S.S.A. Mohamad Abdul Kareem and Co. v. CIT [1948]16 ITR 412. In the said case, several persons formed into a partnership agreeing that all the arrack shops leased in the names of those persons should be run by the partnership. The application submitted for registration of the said partnership was rejected on the ground that the formation of a partnership with regard to arrack and toddy shops were prohibited by abkari law without the prior permission of the District Collector. However, the Income Tax Officer assessed each firm in the status of an "association of persons". This was objected to by the assesee on the ground that since there was no lawful partnership, the assessment could be made only upon each individual lessee and not upon the entire body of lessees as an association. The contention of the assessee that the association formed for unlawful purpose has no legal ex....
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....nd Revenue [1932] 18 Tax Case 43 was also relied on by the Division Bench. In the said case, a partnership for bootlegging was entered into between three persons with an intention to transport whisky into the United States, but in breach of law of Great Britain as well as United States and the issue before the Court of Sessions was about the nature of income and its taxability, and the point was decided in favour of the Revenue by adding ill-gotten wealth in the tax net and in the said context Lord Sands observed thus (page 24): "The tax is imposed upon profits of trade. Crime, such as house-breaking, is not trade and therefore the proceeds are not caught by the tax. It does not follow, however, that there cannot be a business answering to the description of trade, albeit it is tainted with illegality. Trafficking in drugs, for example, is of the nature of trade, albeit such trafficking may in the circumstances be illegal. I respectfully adopt the dictum of Lord Haldane, in delivering the judgment of the Privy Council in the case of Smith, [1927] AC 193, that once the character of business has been ascertained as being of the nature of trade, the person who carries it on cannot ....
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....ial altogether and I do not see that there is any contact between the two propositions. It was said in the Irish case that alleganus suam turpitudinem non est audiendus. I cannot see that the State are alleging their own turpitude; it is the appellant who is alleging his own turpitude. The State says: ' t is a business'; the appellant says: 'It is an unlawful one'; he is alleging his own turpitude. It is said again: 'Is the State coming forward to take a share of unlawful gains?' It is mere rhetoric. The State is doing nothing of the kind; they are taxing the individual with reference to certain facts. They are not partners; they are not principals in the illegality or sharers in the illegality. They are merely taxing a man in respect of those resources. It think it is only rhetoric to say that they are sharing in his profits, and a piece of rhetoric which is perfectly useless for the solution of the question which I have to decide." 18. The learned counsel for the assessee relied on a decision of a Division Bench of this court in T.C.Nos.314 & 326 of 1966 dated 19th July, 1972 (CIT v. A.R. Adaikappa Chettiar [1973] 91 ITR 90 (Mad)) and contended that even embezzled money ....
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.... 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 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 (SC) the deduction must be allowed." 20. The Su....
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....rson for doing an illegal trade. In the event of taxing the income of only those who acquired the same through legal manner, the tendency of those who acquired income by illegal means would increase. It is not possible for the income tax authorities to act like police to prevent the commission of unlawful acts but it is possible for the tax machinery to tax such income. During such process strict rules of evidence are not applicable to the income tax authorities. Those piece of evidence which are not sufficient in ordinary legal proceedings to prove a particular fact would be sufficient for the tax officials to assess the income of an individual. 23. The income tax Act considers the income earned legally as well as tainted income alike. There is nothing like an illegal income so far as the Tax Collector is concerned. Even if the assessee was prosecuted by Law Enforcing authorities for commission of offence, the income earned by the offender still would be an income liable for assessment. It is not a defence in such cases that the State is also becoming a party to the illegal act by sharing the booty. 24. There was a clear factual finding recorded by the Assessing Authority as....