COMMISSIONER OF INCOME TAX, PATIALA v. PIARA SINGH

Citation: [1980] 3 S.C.R. 1122

Court: Supreme Court of India

Bench: P.N. BHAGWATI, V.D. TULZAPURKAR, R.S. PATHAK

Case summary

65,500/-, and accordingly we affirm the view taken by the High ' Court on the question of law referred to it. An appeal by the assessee was dismissed by the .

Judgment text

COMMISSIONER OF INCOME TAX, PATIALA v. PIARASINGH May 8, 1980 • [P. N. BHAGWATI, V. D. TULZAPURKAR AND R. S. PATHAK, JJ. ] Losses in business-Deduction under section 10(1) of the Income Tax Act, . 1922..... :. /s a smuggler who is taxed on his income from smuggling under the Income Tax Act, 1922 entitled to a deduction under section 10(1) of the Act on account of the confiscation of currency notes e1nployetl in the smuggling activity. The respondent Piara Singh was apprehended in September 1958 by the Indian Police while crossing the Inda-Pakistan border into Pakistan. A sum o~ Rs. 65,500/r in currency notes was recovered from his person. On interrogation he stated that he was taking the currency notes to Pakistan to enilble him to purchase gold in that country with a view to smuggling it into India. The Collector of Central Excise and Land Customs ordered the confiscation of the currency notes. In the proceedings initiated by the Income Tax -Officer, ho found that Rs.

60,500/- constituted the income of tlle assesscc from undisclosed sources. An appeal by the assessee was dismissed by the Appellate Assistant Commissioner. In second appeal before the Income Tax Appellate Tribunal, the. assessee represented that if he was regarded as engaged in the business of smuggli! lll gold he was entitled to il deduction under section 10(1) of the Income Tsx Act, 1922 of the entire sum of Rs. 65,500/, as a loss incurred in tho business on the confiscation of the currency notes. The Tribunal upheld the claim to dedliction. It proceeded- on the basis that the assessee was carrying on a regular smuggling activity which consisted of taking currency notes out of India and exchanging them with gold in Pakistan which was later smuggled into India. The High Court on a reference at the instance of the Revenue answered the· reference against the Revenue. Hence the appca:J. Allowing the appeal, the Court. / HEID : I. The assessee is entitled to the deduction of Rs.

65,500;, under section 10(1) of the Income T&x Act, 1922. [1124 C, 1126 BJ 2. The assessce was Oarrying on the business of smuggling a. nd, therefore. was liable to income tax on income from that business. The currency notes carried by the assessee 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 ~rrying on that busine§s must be deemed to be aware that a necessary incident involved in the business is detection by the Customs authorities tnd 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 il Having regard to the nature of the activity possible detection by the Cus! oma authoritiCS> constitutes a normal feature integrated into all ! hat is implied and involved in ir. The confiscation of the currency notea is a loss OOCll8ion atJiak, J. ) .

deducted before the true figure of profits brought to tax caa ~ Wlllputed. Grover, J. , speaking for the Court, observed : M the business is illegal, neither the profits earned HOr the lesses mourred woold be enforceable . in law. But, tl! at dCJes not take the profits out of the taxing statute. Similarly, • the taint of illegality of the business cannot detract from the losses being taken into account for computation of the .. ·llilJ. ount Which rofits" under secf tion 10(1) of the Act of 1922. The tax cOllector cannot ·be heard to say that he will bring the gross receipts to tax. He can only tax profits of a trade or business. That cannot be done without deducting the losses and the legitimate .. e11penses of the business. " Reliance was placed by the Revenue on Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax, Bombay City fl(') In that case, however, the assessee carried on the lawful business of importing dates from abroad and selling them in India.

Thei import of dates by steamer was prohibited. Nonetheless he imported dates from Iraq by steamer, and the eonsignments were confiscated by the customs authorities. But the dates were released subsequently on payment of fine. The assessee's claim to deduction under s. 10(2) (xv) of the Ineome Tax Act was rejected on the ground that the amount was Nid by way of penalty for a breach of the law. An infraction of the law was not a normal incident of business carried on by the assessee, and the penalty was rightly held to fall on the assessee in some character other than that of a trader. Reference w,as made by the Revenue to Soni Hinduji Kushalji & Co. v. Commissioner of 2 Income-tax, A. P( ). The assessee's claim to the deduction of the value of gold confiscated by the. customs authorities was ~ound unsustainable by the court.

The decision in that case can b~ explained on the ground that the assessee was carrying on a lawful business in gold, silver and jewellery and committed an infraction of the law h1 smuggling gold into the country. Our attention has also been invited to J. S. Parkar v. V. B. Palekar and Others(') where on a difference of opinion between two learned Judges of the Bombay High Court a third learned Judge agreed with the view that the value of gold confiscated by the customs authorities in smuggling operations was not entitled to deduction against the estimated and assessed income. from an undisclosed 'ource. It was observed that the Joss arose by reason of an infraction . ·~. ·. ·. · (J) (1961) 41 I. T. R. 350. • (2) (1973) 89 I. T. R. 112. f (3) (1974) 941. T. R. 616. I I ·. '--- of the Jaw and as it had not fallen on the assessee as a trader or business man a deduction could not be allowed.

Apparently, the true significance of the distinction between an infraction of the law "committed in the carrying on of a lawful business and an infraction of the law committed in a business inherently unlawful and constituting a normal incident of it was not pointedly placed before the High Court in that case. We hold that the assessee is entitled to the deduction of ... Rs. 65,500/-, and accordingly we affirm the view taken by the High ' Court on the question of law referred to it. The appeal fails and is dismissed with costs. Appeal dismissed. S. R.