Loss on confiscation of smuggled items by DRI cannot be claimed as business loss

THE COMMISSIONER OF INCOME TAX JAIPUR Vs. PRAKASH CHAND LUNIA (D) THR.LRS. &ANR. /CIVIL APPEAL NOS.7689-90 OF 2022

SUPREME COURT OF INDIA

The Supreme Court has set aside the Rajasthan High Court's order of allowing the loss claimed by assessee on account of confiscation of silver bars by the Customs department, as 'business loss' under Section 37(1) of the Income Tax Act, 1961. The assessee was carrying on a legitimate business of dealing in silver and in an attempt to make larger profits, he indulged into smuggling of silver. Since its business was not smuggling of silver bars, the said loss from confiscation of the smuggled items cannot be said to be a loss connected with or incidental to the assessee's business for claiming deduction under Section 37 of the Income Tax Act, 1961.

BRIEF FACTS

1. A search was conducted by the Directorate of Revenue Intelligence (DRI) officers at the premises situated at A-11, 12, Sector - VII, NOIDA taken on rent by the assessee, Shri Prakash Chand Lunia.

2. 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.

3. The assessee was arrested under Section 104 of the Customs Act for committing offence punishable under Section 135 of the Customs Act.

4. 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.

5. 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.

6. 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.

7. 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 (hereinafter referred to as 'the Act, 1961) would be applicable.

8. The investment in this regard was not found recorded in the books of accounts of the assessee that were produced before the then Assessing Officer.

9. Accordingly, the Assessing Officer passed an assessment Order and made an addition of Rs.3,06,36,909/- under Section 69A of the Act, 1961.

10. In appeals preferred by the Assessee against the assessment order, the CIT(A) dismissed the appeal of the assessee.

11. Feeling aggrieved the assessee preferred the appeal before the ITAT.

12. The ITAT, Jaipur also upheld the order of the CIT(A) so far as Section 69A is concerned, however, partly allowed the appeal of the assessee.

13. As regards some other minor additions, the ITAT set aside some minor other additions and remanded the matter to the AO for fresh examination. The AO re-examined the issue and addition was made. The CIT(A) also upheld the order of the AO. The Assessee preferred the appeal against the fresh order passed by the CIT(A) before the ITAT. The ITAT, in the second round as well upheld the order of the authorities below.

14. A reference was made by the ITAT to theHigh Court with the following questions of law:

(I) “Whether on the facts and in the circumstances of the case, the Tribunal after construing and interpreting the provisions contained in section 69A of the Income Tax Act, 1961 was right in law, in holding that the assessee was the owner of the 144 silver bars found at premises no A 11& 12 , Sector - VII, Noida and two silver bars found at premises of M/s Lunia & Co Delhi and in sustaining addition of Rs.3,06,36,909/- being unexplained investment in the hands of the assessee under Section 69A of the Act?

(II) If the answer to the above question is in affirmative then, whether, on the facts and in the circumstances of the case, the Tribunal was right in law in distinguishing the ratio laid down by their Lordships of the Supreme Court in the case of Piara Singh v/s CIT, 124 ITR 41 and thereby not allowing the loss on account of confiscation of silver bars?"

15. While the reference was pending before the High Court, penalty proceedings were initiated against the assessee. An order under Section 271 (i) (c) of the Act came to be confirmed by both the CIT (A) and the ITAT. Accordingly, the assessee filed an appeal under Section 260A of the Act against the Penalty order, before 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.

THE APEX COURT HELD THAT

16. On the abovesaid analysis, the following conclusions are arrived at:

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.