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TMI Blog1971 (4) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... ? 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 ? " If our answer to the first question is in the affirmative then the second question will not arise for consideration. The facts necessary for determination of the questions are these : The petitioner is a firm doing business under the name and style of M/s. Soni Hinduji Kushalji Company at Adoni. It is registered both under the Partnership Act as well as under section 26A of the Act and carries on business in gold, silver and jewellery. The customs authorities had information that the petitioner-firm was smuggling gold from Goa to Adoni and then despatching the same to Bombay to the shop of one Bhimaji Punamchand for disposal. They, therefore, kept watch on a suspect by name Rukmanna Lambade going to the said shop in Bombay. On October 28, 1955, the customs officials followed the said Rukmanna Lambade to the National Refinery Ltd., and after he had taken over some gold from the refinery, searched him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a particular assessment year. While assessing the profits, necessarily loss incurred in the business during the year should be taken into account, as otherwise it is not possible to arrive at the true profits earned by the assessee. It is well-settled that the taint of illegality associated with profits or income is immaterial for the purpose of taxation. As observed by Lord Haldane in Minister of Finance v. Smith, Income-tax Acts are not necessarily restricted in their application to lawful business only. One who contravenes a statute and trades in business prohibited by law while being liable for prosecution for the offence committed by him will, at the same time, be liable to pay tax out of the income or profits earned from the illegal trade or business. We are now concerned with the loss representing the value of gold on account of the confiscation of the gold for contravention of the provisions of the Customs Act. Can that loss be regarded as a commercial loss pertaining to the business or incidental to the business the assessee was carrying on, is the real question. Mr. Swamy sought to place strong reliance upon a decision of the Gujarat High Court in Commissioner of Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment of its profits sought to deduct its share of the loss which the bigger firm, of which it was a partner, had incurred. The claim was disallowed by the income-tax authorities on the ground that a firm cannot legally be a partner in another firm. The learned judges of the Allahabad High Court were, therefore, of the view that though a firm as such cannot enter into a partnership, with another firm, not being a legal entity, yet where two firms enter into a larger partnership, the larger partnership is in law a partnership between the members of the two firms and is not invalid and that the loss claimed was loss suffered in the course of business by the assessee-firm and was, therefore, allowable. It was further observed that even assuming that the larger partnership was illegal, the assessee-firm was entitled to have the loss in question taken into account in computing its income inasmuch as the mere illegality of the agreement cannot entitle the income-tax authorities to ignore the loss incurred. It is thus seen that the view expressed by the Full Bench of the Allahabad High Court has absolutely no application to the present case, as the question to be answered here is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing on other points) observed that if the authority concerned makes an order of confiscation it is only a proceeding in rem and the penalty is enforced against the goods. A proceeding in rem, therefore, in the strict sense of the term is an action taken directly against the property (in this case the smuggled gold) and even if the offender is not known, the customs authorities have the power to confiscate the contraband gold. Therefore, by no process of reasoning can the confiscation of the contraband gold by the customs authorities be said to be a trading or commercial loss connected with or incidental to the assessee's business. In Commissioners of Inland Revenue v. Alexander Von Glehn Co. Ltd. Lord Sterndale M.R. observed : " During the course of the trading this company committed a breach of the law. As I say, it has been agreed that they did not intend to do anything wrong in the sense that they were willingly and knowingly sending these goods to an enemy destination, but they committed a breach of the law, and for that breach of the law, they were fined. That, as it seems to me, was not a loss connected with the business, but was a fine imposed upon the company person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re merely connected with the business.... Anything done which is an infraction of the law and is visited with a penalty cannot on grounds of public policy be said to be a commercial expense for the purpose of a business or a disbursement made for the purposes of earning the profits of such business. " Similar views have been expressed by the Punjab and Allahabad High Courts in Raj Wollen Industries v. Commissioner of Income-tax, Commissioner of Income-tax v. Mathura Prasad Hardwar Prasad Deoria and Mahabir Sugar Mills (P.) Ltd. v. Commissioner of Income-tax. The Supreme Court in Badridas v. Commissioner of Income-tax, considered what would amount to a trading loss. Venkatarama Aiyar J. observed : " When a claim is made for a deduction for which there is no specific provisioin in section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial pratice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act. The loss for which a deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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