1970 (11) TMI 25 - HC - Income Tax

Smuggling business - Whether loss arising from the confiscation of the currency notes was an allowable deduction under section 10(1) of the Income-tax Act 1922

Summary

Issues:
1. Allowability of loss arising from the confiscation of currency notes under section 10(1) of the Income-tax Act, 1922.

Detailed Analysis:
The case involved the confiscation of currency notes from the assessee, who was apprehended on the border while allegedly smuggling gold. The Income-tax Officer questioned the source of the seized amount, leading to a discrepancy in the explanation provided by the assessee regarding the origin of the funds. The department contended that the confiscated amount represented the assessee's income from smuggling activities. The Appellate Tribunal determined that the entire sum belonged to the assessee and that only a portion of it constituted income from the previous year. The Tribunal accepted the assessee's claim that the confiscated amount was a loss incurred in the smuggling business, thus eligible for deduction under section 10(1) of the Income-tax Act.

Regarding the revenue's argument based on a Bombay High Court decision, the Court distinguished the present case from the cited case, emphasizing that the confiscated amount was intended for acquiring gold in Pakistan, not for releasing already acquired goods. The Court reiterated that the assessee was engaged in smuggling and the confiscated amount was part of that illegal business, making it a permissible deduction. Citing a Gujarat High Court decision, the Court affirmed that profits or losses from illegal businesses are assessable under the Income-tax Act, rejecting the revenue's argument that losses from illegal activities should not be considered for tax purposes.

In conclusion, the Court upheld the Tribunal's decision, ruling in favor of the assessee. The judgment emphasized that losses from illegal businesses are eligible for consideration in computing business income, aligning with the principle that illegal business activities fall within the purview of the Income-tax Act. The Court found no basis to differentiate between profits and losses arising from illegal activities, affirming that losses from such activities are admissible for tax assessment purposes.

Therefore, the Court answered the referred question affirmatively, supporting the assessee's claim for deduction of the confiscated amount as a loss under section 10(1) of the Income-tax Act.