The Supreme Court ruled that 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.
Facts
A search was conducted by the Directorate of Revenue Intelligence (DRI) officers at the premises situated at NOIDA taken on rent by the assessee, 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 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 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 Prakash Chand Lunia under Section 112 of the Customs Act. The Collector held that the silver under reference was of smuggled nature.
Submissions
Balbir Singh, ASG appearing for the Revenue, submitted that as such the AO, CIT(A) and ITAT have correctly distinguished the judgment in case of the Piara Singh as the same pertained to an assessee who was engaged in the business of smuggling of currency notes and for whom confiscation of the currency notes was a loss occasioned in pursuing his business, i.e., a loss which sprung directly from carrying on of his business and was incidental to it.
He submitted that due to this, the assessee in the aforesaid case was held entitled to deduction under Section 10(1) of Income Tax Act, 1922.
He argued that thus either way, neither can the RespondentAssessee 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).
Senior Advocate Arijit Prasad, appearing for the assessee, submitted that therefore present case is one where set off is claimed of the value of the 146 silver slabs as loss on account of absolute confiscation rather than claim of expenditure of any penalty and/or fine imposed for infraction of law.
Decision
The single judge bench of Justice M.M. Sundresh said that 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 (supra) 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” the court said.
The bench held 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.
Case title: The Commissioner of Income Tax Jaipur v/s Prakash Chand Lunia (D) Thr.Lrs. & Anr.
Citation: Civil Appeal Nos.7689-90 Of 2022
