1971 (4) TMI 33 - HC - Income Tax

Business loss - gold belonging to the assessee confiscated by the customs authorities - action is taken directly against the property and the confiscation cannot be said to be trading or commercial loss connected with or incidental to the assessee s business - Infraction or violation of the law is not a normal incident of a trade or business and, therefore, the penalty by way of confiscation of the contraband gold is not a commercial loss so as to be allowed as a permissible deduction - Tribunal is justified in law in disallowing the sum of Rs. 56,978 claimed as a business loss for the assessment year 1963-64

Summary

Issues Involved:
1. Whether the Tribunal is justified in law in disallowing the sum of Rs. 56,978 claimed as a business loss for the assessment year 1963-64.
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the loss of Rs. 56,978 should have been claimed in the year in which the Collector has passed the order, but not when the Supreme Court has passed the order.

Issue-Wise Detailed Analysis:

1. Justification of Tribunal in Disallowing the Sum of Rs. 56,978:
The petitioner, a firm engaged in the business of gold, silver, and jewelry, had gold confiscated by customs officials on October 28, 1955, valued at Rs. 56,978. The firm claimed this amount as a business loss in the assessment year 1963-64. The Income-tax Officer rejected this claim, stating that the loss did not relate to the business carried on by the firm but was due to the confiscation of gold under the Sea Customs Act. Subsequent appeals to the Appellate Assistant Commissioner and the Appellate Tribunal were also dismissed.

The court considered whether the loss incurred due to the confiscation of gold could be regarded as a commercial loss pertaining to the business or incidental to the business the assessee was carrying on. The court noted that while profits from illegal business are taxable, the loss must be one that springs directly from the business or trade carried on by the assessee or is incidental to it.

The court referred to several precedents, including the Gujarat High Court's decision in Commissioner of Income-tax v. S. C. Kothari, which allowed deductions for losses in illegal businesses. However, it distinguished this case by stating that the loss due to confiscation of contraband gold is not a commercial loss connected with or incidental to the assessee's business. The court emphasized that confiscation is an action in rem, not in personam, and is a penalty for contravention of the law.

The court cited the Supreme Court's decision in Haji Aziz and Abdul Shakoor Bros v. Commissioner of Income-tax, which held that penalties for breaches of law during the course of trade are not deductible as commercial losses. The court concluded that the confiscation of gold was a penalty for an infraction of the law and not a commercial loss incidental to the assessee's business.

2. Timing of Claiming the Loss:
Given the affirmative answer to the first question, the second question about the timing of claiming the loss did not arise for consideration.

Conclusion:
The court affirmed the Tribunal's decision to disallow the sum of Rs. 56,978 as a business loss, stating that the confiscation of contraband gold is not a commercial loss incidental to the business. The reference was answered in favor of the revenue, with costs awarded to the revenue and an advocate's fee of Rs. 250.