2004 (11) TMI 54 - HC - Income Tax

Addition on account of income from undisclosed sources Assessee, doctor loss on account of seizure - assessee claimed that the value of the contraband articles (heroin) seized from his possession works out to Rs. 5,50,000. He, therefore, claimed that since heroin seized from him forms part of the stock-in-trade and hence, its loss on account of seizure is an allowable deduction while computing his profits and gains of business/profession Held that assessee had nothing to do with the contraband article-heroin for carrying on his profession. It is an admitted fact that the possession of heroin is an offence under the NDPS Act. In this view, the rigour of the Explanation to section 37 was fully satisfied and hence the question of claiming any deduction for the value of the seized article did not arise nor was the assessee entitled to claim any such deduction who was found indulging in such heinous and illegal business Held that Tribunal was not justified in allowing the deduction of Rs. 5,50,000 out of the gross total income of the assessee.

Summary

Issues:
1. Whether possession of heroin in contravention of the Narcotic Drugs and Psychotropic Substances Act, 1985, can be treated as stock-in-trade possessed by a medical practitioner?
2. Whether a medical practitioner can deduct a specific amount from the stock of heroin as a loss during trade?
3. Whether the order passed by the Income-tax Appellate Tribunal is perverse and illegal?

Analysis:

Issue 1:
The case involved the question of whether possession of heroin by a medical practitioner can be considered as stock-in-trade. The court referred to the Explanation appended to section 37 of the Income-tax Act, which states that any expenditure incurred for an illegal purpose shall not be deemed to have been incurred for business or profession. The court held that possession of heroin is an offense under the NDPS Act, and the doctor's involvement in such illegal activities was not connected to his profession. Therefore, the deduction claimed by the doctor for the seized heroin was disallowed.

Issue 2:
The court addressed whether the medical practitioner could deduct a specific amount as a loss from the seized heroin. The Tribunal had allowed the deduction based on a Supreme Court decision and the Finance Minister's speech. However, the court emphasized that the introduction of the Explanation to section 37 was necessitated by the Supreme Court's decision in a similar case. The court found that the Tribunal erred in relying on the previous decision and the Minister's speech, stating that the Explanation's plain wording should have been the basis for deciding the deduction issue. Consequently, the deduction was disallowed, and the Tribunal's decision was set aside.

Issue 3:
The court examined whether the Tribunal's order was perverse and illegal. After considering the arguments and perusing the case record, the court concluded that the Tribunal's decision to allow the deduction was legally unsustainable. The court set aside the Tribunal's order and allowed the Revenue's appeal, thereby rejecting the deduction claimed by the medical practitioner for the seized heroin.

In conclusion, the High Court of Madhya Pradesh ruled in favor of the Revenue, disallowing the deduction claimed by the medical practitioner for the seized heroin based on the provisions of the Income-tax Act and the Explanation appended to section 37. The court emphasized that illegal expenditures cannot be considered as incurred for business or profession, leading to the rejection of the deduction claimed by the doctor.