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TMI Blog1973 (2) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... Exchange Regulation Act of 1947. At the conclusion of the trial the assessee and some other accused were convicted by the learned Magistrate for these offences on July 22, 1963. The said convictions and sentences were confirmed by this High Court on August 11, 1964. Appeal of the assessee and others to the Supreme Court in Criminal Appeal No. 233 of 1964 was ultimately dismissed by the said court on 6th November, 1968. In the meanwhile, the assessee submitted his return of income for the year 1962-63 on September 1, 1962. Therein he disclosed his income from property, share of profit from the firm of Messrs. Parkar Navigation and Company, Messrs. Deogad Fisheries and Messrs. Parkar Brothers. He also disclosed his salary income which he received from Messrs. Parkar Navigation Company and dividend income of his shares. In response to the notice of the Income-tax Officer, 'B' Ward, Kolhapur, under section 143(2) of the Income-tax Act, 1961, the assessee appeared before the said officer through his advocate and produced before him cash book and ledger. In the course of the assessment proceedings, the Income-tax Officer seems to have learnt about the seizure of gold to the tun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Tribunal on 10th February, 1971. Instead of making an application to the High Court under section 256(2) of the Income-tax Act, the petitioner has filed this writ petition under articles 226 and 227 of the Constitution to this court on 15th June, 1971. Mr. Albal, the learned advocate, appearing for the petitioner, contended, firstly, that the assessment order could not have been founded on the judgments and the evidence produced before the criminal court. He, secondly, contended that even if the Income-tax Officer is found to be justified in relying on such material, the same falls short of proving the ownership of the assessee of the gold involved in the said smuggling and as such the value of such gold can under no circumstances be treated as undisclosed income of the assessee. He, thirdly, contended that the findings recorded by the income-tax authorities are based on gross violation of the principles of natural justice inasmuch as the witnesses examined before the criminal court, particularly Dhuri and Tarkar, were not examined before the Income-tax Officer who had turned approvers. Nor the petitioner was permitted to be examined in support of his case nor the said tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee to pay the tax before availing of the remedy provided in the Act. However, it is by now settled law that existence of alternate remedy by itself does not amount to an absolute bar to entertainment of the petition under articles 226 and 227 of the Constitution of India. Citizens are entitled to come to this court and invoke its extraordinary jurisdiction where the impugned orders involve a question of patent lack of jurisdiction, or the question of gross violation of the principles of natural justice, or the question of deciding the vires of the Act or the Rules, or where the impugned order seeks to levy or collect some amount from the citizens without the authority of any law. While entertaining such applications the court will certainly bear in mind the fact that alternate remedy did exist and could have been availed of. The High Court also will not readily encourage any citizen to bypass the alternate remedy and rush to invoke its extraordinary jurisdiction. These, however, are mere factors to be considered while exercising the discretionary powers possessed by the High Court under these articles. If any authority is needed, it will be sufficient to make reference to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s recorded in the criminal courts are undoubtedly relevant for deciding the controversies that have arisen in the case. Mr. Albal, however, contends that even if all the facts found by the criminal courts are accepted as correct and evidence relied on by the criminal courts is accepted as true, yet the said material is far too inadequate to hold that the assessee in this case had been the owner of the gold in dispute by purchasing the same from his undisclosed income. Now admittedly there is no direct evidence. It is also equally true that while the petitioner was being tried by the Special Judicial and Additional Chief Presidency Magistrate for offences under section 120-B of the Indian Penal Code, section 167.81 of the Sea Customs Act of 1878 and section 23 of the Foreign Exchange Regulation Act of 1947, the ownership of the gold was not in issue. The only question really, therefore, that requires close consideration is whether the facts found by the criminal court and the material relied on by the said court and consequently by the income-tax authorities furnish such circumstantial evidence from which the petitioner's ownership of the gold in dispute could have been legitim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to send him in his black car to Gadniche-Pani. (10) While the investigation was going on, the assessee contacted the inspector and offered him bribe of Rs. 1 lakh to Rs. 5 lakhs and requested him to throw the gold in the sea or retain the same with himself and to save him from disgrace. The Income-tax Officer took notice also of the previous history of the assessee's case with regard to his business, which he has dealt with in paragraph 3 of his order. It is enough to refer to the fact that the assessee and his brothers started independent business in the year 1948, and purchased five launches for Rs. 2 lakhs from "Lotus Line Ltd." The total fleet of launches at the end of 1949, was 10. This firm was converted into a private limited company in the year 1955 and it owned a building at Sassoon Dock, Bombay. Nominal capital of the company is Rs. 5 lakhs and other capital for consideration other than cash is about Rs. 1,80,000, which is distributed among the Parkar family and relatives. It is from these circumstances found by the income-tax authorities that they arrived at the conclusion that the assessee must have paid the price of the gold that was smuggled in his launch to h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in smuggling gold is well-known, where the penalty on detection is complete confiscation. It will, therefore, be opposed to all human conduct that an unknown foreigner would have handed over the goods without receiving the price thereof. The natural presumption in the circumstances of the case can only be that the assessee had paid for it. (8) The assessee had failed to prove the source for this investment and, in our opinion, the department was justified in treating the cost of the gold acquired by the assessee as having come out of the undisclosed income of the assessee. Mr. Albal, the learned advocate appearing for the petitioner, contended that the material relied on at best may prove the possession of the assessee, but it cannot be sufficient to conclude the finding of his ownership. He, secondly, contended that such possession of the assessee being of a carrier or of a bailee or of some other nature, cannot be ruled out altogether if the way the smuggling activities are carried on in this country on a large scale by the local and the gang of international smugglers through their hireling is taken into account. He, thirdly, contended that the observation of the income-tax au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia, the High Court's power to review the evidence or interfere with the findings of fact is extremely limited. It is not permissible for the High Court to proceed to weigh, assess and appraise the evidence, as if it is hearing an appeal against the order of the income-tax authorities. The second major difficulty in the way of considering the contentions raised by Mr. Albal is that the assessee has not at all chosen to explain this possession of gold with him. We have already referred to the letter of the assessee to the Income-tax Officer dated July 27, 1966. That appears to be the only explanation offered by the assessee. The averments made therein do deny everything, including possesion of the gold by him that was seized from his launch. It is not possible to ignore the fact that true facts with regard to the gold found and seized from his launch are exclusively within the knowledge of the assessee himself. He along could have shed light how smuggling activities are carried on and how his possession could be of a mere carrier or of a person other than the owner. He did not care to file any detailed statement seeking to explain the circumstances conclusively found against him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue that the context in which this observation is made is slightly different. It is also true that what is observed here is a substance of what section 110 of the Evidence Act says. Mr. Albal contends thatwhen the Evidence Act is found not to have any application to the proceedings before the Income-tax Officer, observations based on any provisions of the Act also equally would not have any application for determining the implication of the possession of the assessee. It has, however, to be noted that the above observation of the Supreme Court is not based so much on the provisions of section 110 of the Evidence Act, as on the basic principles of jurisprudence. This apart, every court or Tribunal or statutory body invested with the duty of ascertainment of the facts is entitled to assume that apparent set of facts is true and the burden to show that the same is not so always lies on the person who is interested in asserting so. If, therefore, in this case the assessee chose to deny the factum of possession, and thereby prevented himself from explaining the circumstances in which he came into its possession, it is not possible to find any fault with the finding of the income-tax auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that on any particular date or on any particular occasion any request for cross-examination of any witness was made. Our attention, however, was drawn by Mr. Albal to question No. 3, which he wanted the Tribunal to refer to the High Court. Even otherwise, geivence of not being allowed the cross-examination appears to have been made before the Tribunal for the first time. Such grievance for the first time before the Tribunal on any application for reference to the High Court cannot be taken into account as being the grievance of the petitioner before the Income-tax Officer and if no grievance can be found to have been made before the Income-tax Officer with regard to prayer for cross-examination being denied to him, it cannot be said that the principles of natural justice have been violated. Mr. Albal drew our attention to paragraph 6 of the order of the Appellate Assistant Commissioner, wherein the petitioner has repeated his grievance that Tarkar and Dhuri should have been examined by the Income-tax Officer, and "if necessary the appellant should have been allowed to cross-examine them on specific points". He, thus wanted to cross-examine only, if necessary and only in the event ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osed sources during the said year its provided under section 69A of the Act. Mr. Albal drew our attention to the judgment of the Kerala High Court in the case of Hajee K. Assainar v. Commissioner of Income-tax. It is unnecessary to discuss the facts of this case inasmuch as the Division Bench of the Kerala High Court in that case was dealing with a provision which affected both procedural and substantive rights. The ratio of that decision, therefore, will not be applicable to the facts of this case. It is then contended that, admittedly, the entire gold has been confiscated by the customs department and, as such, value of this should have been treated as a trading loss and the assessee was entitled to a set-off of this loss against his assumed and assessed income from undisclosed sources. Reliance was mainly placed on section 71, though faintly section 70 was also referred to. This point was raised before the Tribunal. The Tribunal, however, declined to entertain this plea, as it was raised for the first time before it and it thought that the same cannot be adjudicated without investigation of further facts. Unfortunately, the order of the Tribunal is not explicit as to in what ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all on the assessee in some character other than that of a trader." Their Lordships of the Supreme Court referred to several English cases in support of their conclusion. Reliance was placed by the learned judges on the following observations of Rowlatt J. in the case of Commissioner of Inland Revenue v. E.C. Warnes and Co. Ltd. : "....but it seems to me that a penal liability of this kind cannot be regarded as a loss connected with or arising out of a trade. I think that a loss connected with or arising out of a trade must, at any rate, amount to something in the nature of a loss which is contemplable and in the nature of a commercial loss. I do not intend that to be an exhaustive definition but. I do not think it is possible to say that when a fine--which is what the penalty in the present case amounted to--has been inflicted upon a trading body, it can be said that that is a 'loss connected with or arising out of' the trade within the meaning of this rule." The learned judges also relied on a passage from the speech of Lord Sterndale at page 566 in Von Glehn's case : " During the course of the trading this company committed a breach of the law. As I say, it has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Commissioner of Income-tax v. S. C. Kothari. The judgment in Kothari's case, however, is authority only for the proposition that illegality of any business is irrelevant for the purpose of computing profits or losses thereof. While the revenue is entitled to assess the income-tax on the income of the assessee earned even in unlawful business, the assessee also is entitled to insist on deduction of the losses arising out of such unlawful business. The Gujarat High Court had no occasion to consider whether the loss suffered by way of penalty or confiscation of goods amounts to deductible loss or not. There was an appeal to the Supreme Court in this case and its judgment is Commissioner of Income-tax v S. C. Kothari. The learned judges of the Supreme Court approved the passage quoted by the Punjab High Court at page 682 of its judgment. The following passage from the judgment of the Supreme Court. would shed light on the propriety of making any distinction between the deduction claimed under section 10(2) for expenses incurred and deduction claimed for losses suffered in the course of business under section 10(1) and also deductions claimed by way of set-off under section 24 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be a normal incident of business and loss suffered therefrom falls on the assessee in some character other than that of a trader. It is not possible to see how this principle can make any difference where the business itself is found to have been prohibited by the law. It is the commercial profit that is taxable and it is the commercial loss in trade in regard to which deduction can be claimed either because it goes to lessen the amount of profits before the quantum of net profit is determined or because the expenses are required to be incurred for the purposes of running the said business or because losses are incurred under some other sources of business under the same head or they are incurred while carrying on business or vocation under some other head. Penalty and confiscation of goods, even when incurred or suffered in the course of prohibited trade or business still cannot be said to be the normal incident even of such unlawful business and the loss so suffered can still be not said to be a commercial loss in the trade for the same reason as gains of theft, dacoity, misappropriation or cheating cannot be treated as taxable income from any business or commerce. The claim of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny one head of income is loss, the same is liable to be deducted from the income under another head under section 71. If the net result of all so under all heads is a loss, the same can be carried forward under section 72 of the Act. sections 29 to 44A corresponding to section 10(2), clauses (1) to (xvi), deal with deductions or disbursements by way of expenses, etc. These provisions deal with the mode of determining the net taxable profits or income of the assessee. If the true ratio of the Supreme Court judgment is that penalty incurred by infraction of law is not a commercial loss as it is not incidental to trade or business, it matters little as to under what count the deduction or set-off is claimed. That the margin between what and what is not incidental is very thin has been noticed by the learned judges of the Supreme Court themselves. Ratio of this judgment is applicable to all contingencies where such non-commercial loss is sought to be deducted on any count whatsoever. That the assessee in that case claimed deduction of penalty under section 10(2)(xv) cannot make any difference to the ratio of the case. I do not find it possible to agree with the view of the Punjab High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... timately his conviction under the various provisions referred to above was confirmed The petitioner has contended that it was not open to the Income-tax Officer to base his decision solely on the evidence and the materials brought out in the criminal case. It is to be noticed that the question of ownership of the contraband gold was never at issue in the criminal proceedings and it is, therefore, the contention of the petitioner that the finding given by the taxing authorities regarding the petitioner's "ownership" of the contraband gold is based on no evidence at all. It was further contended that what the taxing authorities have done is to have enumerated the ingredients and facts brought out in the criminal proceedings with regard to the offences for which the petitioner was convicted and which related only to the question of dealing in or bringing into India and possession of the contraband gold and from these so-called "basic" facts an inference is sought to be drawn that the petitioner had somehow paid for the Rs. 70 lakhs worth of gold to the foreign supplier and further that the petitioner must be presumed to be the owner of the gold. The value of the gold is sought to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition was not maintainable by reason of the alternate remedy being available to the petitioner under section 256(2) of the Income-tax Act, 1961, which he had, without sufficient cause, not availed of. I shall deal with this contention at the appropriate time. I will now consider the crucial point in the case, viz., whether the inclusion of the value of the contraband gold in the assessment of the petitioner is without authority of law in so far as it is based on no evidence at all. It is to be noticed that after assessing the normal income of the petitioner the Income-tax Officer made the following notation in the assessment : " Add : investment in acquisition of-gold and income from undisclosed sources as discussed above--Rs. 70,78,584." Mr. Hajarnavis contends that the assessment was not made on the basis of section 69 or 69A but under the charging section. The notation referred to above, in my view, makes it abundantly clear that so far as the Income-tax Officer is concerned, he has sought to base the assessment on the provisions of section 69 of the Income-tax Act, 1961, which reads as follows : " 69. Unexplained investments.--Where in the financial year immediately preced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spective. The Income-tax Officer proceeded on the footing that there had been an investment and inferred payment by the petitioner for the acquisition of the gold. The Appellate Assistant Commissioner proceeded on the footing that section 69A applied and that from the facts which had been proved in the criminal proceedings against the petitioner he sought to draw an inference that payment must have been made and that the petitioner was, therefore, proved to be the owner of the contraband gold. To add to the confusion, our attention was invited to the affidavit-in-reply filed by one G. N. Raichur, Income-tax Officer, Kolhapur, who solemnly suggested that : " It is not correct that the first respondent and/or the Tribunal applied section 69A of the Income-tax Act, 1961, in the present case." Shri Raichur further states that "reference to section 69A of the Income-tax Act is a mistake." Bat he does not state as to under what section the inclusion of the value of the gold was made in the assessment. Lastly, Mr. Hajarnavis contends that the inclusion of the value of the gold was made under the charging sections. In the view that we have taken, i.e., that section 69A is applicable no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not be in issue in the criminal proceedings. It also requires to be noticed that it is not disputed that no oral or documentary evidence was taken before the taxing authorities. They merely relied on the Supreme Court paper-book and the material collected therein. What is sought to be contended by Mr. Hajarnavis, the learned counsel for the revenue, is that several ingredients (or what the Income-tax Officer calls " important pieces of evidence ") which I am about to set out, form the basis on which the taxing authorities could legitimately base an inference, the inference being that the petitioner had paid for the gold and that he was the owner of the gold. The taxing authorities relied on the following "pieces of evidence" to justify the ultimate finding that the petitioner had in fact paid for the gold and that he was otherwise the owner of the gold : (1) Direct evidence of witnesses, Dhuri and Tarkar, who had turned approvers and who deposed about the taking out of the launch, "Lakshmi", and bringing in the gold by transhipment at sea from another vessel, "Medina", under the direction of the Muslim gentleman who was on board the "Lakshmi". (2) It was the launch, of the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the circumstances of the case can only be that the assessee had paid for it ..." After making these observations, the learned Tribunal finally concluded that : " The assessee had failed to prove the source for this investment and, in our opinion, the department was justified in treating the cost of the gold acquired by the assessee as having come out of the undisclosed income of the assessee." Now, it may be observed that it is also on record that an unknown Muslim gentleman was connected with the smuggling of the gold ; he was found to be in the company of the petitioner before the launch left Deogad and it is in evidence that he was the person who arranged for the transhipment of the gold form the vessel, " Medina ", to the launch, " Lakshmi ", at sea and that he came back to Moda. It has been stated that he was actually caught by the customs personnel but subsequently managed to disappear. The question that, therefore, arises for consideration is whether from the facts referred to by the taxing authorities on the basis of the evidence recorded before the Special Magistrate an inference would legitimately follow that the petitioner had somehow paid for the gold and was benefi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f possession has been proved by evidence in criminal proceedings it was perfectly legitimate for the taxing authorities to rely on that material and also hold for the purpose of assessment, if necessary, that the petitioner was in possession of the contraband gold. Up to this point no exception could be taken, and we have held that that material (found in the Supreme Court paper book) can properly be relied upon by the taxing authorities. But from the point of possession to the ownership the taaxing authorities have relied on no material or evidence whatsoever. By a process of surmise and conjecture they have come to hold that the petitioner had somehow paid for the gold and was the owner thereof. It was argued before us that possession being evidence of ownership simpliciter it was for the petitioner to prove that he was not the owner. Reliance was placed by Mr. Hajarnavis for the revenue on the case of Maqbool Hussain v. State of Bombay, where the following observation occurs : " Once the appellant was found in possession of the confiscated gold the burden of proving that he was not the owner would fall upon whosoever affirmed that he was not the owner." Mr. Hajarnavis argued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar that there is some confusion in the mind of the taxiing authorities that as soon as an assessee is found in possession of gold he must explain the source thereof. My attention has not been invited to any provision of law by which such a primary burden could be placed on the assessee. On the other hand, the initial burden of finding some material, however slight, to support a finding of concealed income is always on the department (See Banshidhar Onkarmall v. Commissioner of Income-tax, remarks at page 364). As I have stated above, section 1 1 0 of the Evidence Act does statutorily place the burden of proof, in the circumstances set out therein, but only when a matter is being dealt with by a court of law to which the Evidence Act is applicable. It is not in dispute that the taxing authorities are not governed by the Evidence Act. It would not be, therefore, open to the taxing authorities to say, firstly, that as the Evidence Act does not apply to assessment proceedings they are entitled to base the assessment on materials gathered by them from the record of the criminal proceedings and at the same time seek to place on the assessee the burden of proof as to ownership by invoki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st be some starting point. It would be all too easy (and appressive (sic) ) for an Income-tax Officer to say to an assessee that " your background shows that you have a lot of money. You must have invested it. Now, tell us where you have made the investment and then explain its source. After all this is a matter within your knowledge." In the case before us the burden of proving that an investment had in fact been made (and not recorded in the books) and/or that the assessee was the owner of the bullion was clearly on the department. It cannot be said with any show of reason that from the facts found in the criminal court on which the petitioner was convicted for smuggling gold into India and in which case the question of ownership was not even in issue that the department could legitimately draw an inference from those facts and the findings relative to importation of gold and possession of gold that the assessee must have made an investment in or paid for the gold and/or was the owner of the gold. In Dhakeswari Cotton Mills, case the Supreme Court enunciated the law as follows : " In making an assessment under section 23(3) of the Indian Income-tax Act, the Income-tax Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceiving payment therefore in advance. The risk involved in smuggling gold is well known where penalty for detection was complete confiscation of the contraband gold, the natural presumption in the circumstances of the case can only be that the assessee had paid for it. (6) And lastly, the assessee had been found in possession of a large quantity of gold and it was up to him to explain how he came into possession of it and as the assessee had failed to mention the source of this investment the department was justified in coming to the conclusion that the contraband gold has come from the undisclosed income of the assessee. It is only necessary to peruse this form of reasoning to realise that the contention of Mr. Albal, the learned advocate appearing for the petitioner, that the finding of the taxing authorities is based purely on conjecture and surmise is borne out. While referring to the Tribunal's reasoning, Mr. Albal pointed out that if natural human conduct was to be taken into consideration then it could be said with equal vehemence that it was impossible for a person in the situation of the petitioner, i.e., a launch owner to produce and pay 47 or 70 lakhs of rupees in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stant Commissioner confirmed the order of the Income-tax Officer, but the Tribunal on appeal partly accepted the appellant's contention as to Rs. 31,000 and rejected the contention as to Rs. 30,000. The High Court held that the sum of Rs. 30,000 represented profits and that the finding was one of fact and that it was not an arbitrary one. The High Court, therefore, confirmed the order. The High Court also observed that it was impossible to say that the inference drawn by the Tribunal from the circumstances was an unreasonable inference that could never be drawn. The Supreme Court, while applying the true principles as to interference with the findings of facts by the Tribunal, observed as follows : " The Tribunal also fell into the same error. It could not negative the possibility of the appellant being in possession of a substantial number of these high denomination currency notes. It, however, considered that it was impossible for the appellants to have had 61 such notes in the cash balance in their hands on 12th January, 1946, and then it applied a rule of the thumb treating 31 out of such 61 notes as within the bounds of possibility, excluding 30 such notes as not covered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proved or admitted could be matters of law. The court would be entitled to intervene if it appears that the fact finding authority has acted without any evidence or upon a view of the facts, which could not reasonably be entertained or the facts found are such that no person acting judicially and properly instructed as to the relevant law would have come to the determination in question." Venkatarama Ayyar J. preferred to rest his concurring decision on the ground that the finding of the Tribunal that high denomination notes of the value of Rs. 30,000 represented concealed profits of the appellant was not supported by any evidence and was, in consequence, erroneous in point of law and, therefore, liable to be set aside. Mr. Hajarnavis for the revenue drew our attention to a judgment of the Kerala High Court, Commissioner of Income-tax v. P. R. Krishna Iyer, where it was held that in the case of seizure of gold on the person of the assessee the onus was on the assessee to prove the nature and the source of the same. The court observed as follows : " The onus of proof of the source and nature of a receipt is on the assessee. In the absence of an explanation or in the face of an e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een established. It is appropriate now to refer to a decision of the House of Lords in Bean v. Doncaster Amalgamated Collieries Ltd. wherein it was held that if an inference is made from facts which do not logically support such an inference then it is a question of there being no evidence. The following observations occur at page 307 : " Unless the Commissioners, having found the relevant facts and put to themselves the proper question, have proceeded to give the right answer, they may be said, on this view, to have erred in point of law. If an inference from facts does not logically accord with and follow from them, then one must say that there is no evidence to support it. To come to a conclusion which there is no evidence to support, is to make an error in law." Against the background of these facts and circumstances and on the authorities referred to, I find it difficult to resist the contention of Mr. Albal that in the instant case the conclusion of the taxing authorities that the petitioner must have somehow paid for the gold, that he was beneficially interested in the gold and that he was the owner of the gold is based on no evidence and, therefore, the assessment in so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is a provision under which relief can be given to the assessee and the necessary material is available it would be the duty of the taxing authorities to do so. No doubt the Tribunal would have a discretion if the necessary material is not already on record. But once it is shown that the necessary material is on record, the Tribunal would be required to consider the plea. The learned Tribunal, however, in the matter before us declired to entertain and consider the plea of set-off and observed as follows : " In reply the assessee's learned counsel submitted that the Appellate Tribunal would be perfectly justified in considering the question, that it would not be said to be a new ground, that no fresh facts required to be investigated and that even otherwise the Appellate Tribunal had jurisdiction to entertain the ground. Reliance was placed on the decision of the Supreme Court in Commissioner of Income-tax v. Mahalakshmi Textile Mills Ltd. and Beharilal Ramcharan Cotton Mills Ltd. v. Commissioner of Income-tax. Again : " We consider that the objection of the department is well-founded. The assessee is trying to set up an entirely new case not even hinted at in any of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t material the Tribunal may have come to a finding that, on the facts and circumstances of the case, a set-off could not be allowed, but that stage never arrived. It is appropriate now to refer to the judgments of the Supreme Court in Commissioner of Income-tax v. Mahalakshmi Textile Mills Ltd., which was cited before the Tribunal, but on which there is no discussion by the Tribunal excepting the statement that reliance was placed on this decision. The Supreme Court made the following observations : By the first question the jurisdiction of the Tribunal to allow a plea inconsistent with the plea raised before the departmental authorities is canvassed. Under sub-section (4) of section 33 of the Indian Income-tax Act, 1922, the Appellate Tribunal is competent to pass such orders on the appeal 'as it thinks fit'. There is nothing in the Income-tax Act which restricts the Tribunal to the determination of questions raised before the departmental authorities. All questions whether of law or of fact which relate to the assessment of the assessee may be raised before the Tribunal ; if for reasons recorded by the departmental authorities in rejecting a contention raised by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... putation under any head of income other than 'Capital gains' is a loss and the assessee has no income under the head 'Capital gains', he shall, subject to the provisions of this Chapter, be entitled to have the amount of such loss set off against his income, if any, assessable for that assessment year under any other head. (2) Where in respect of any assessment year the net result of the computation under any head of income other than 'Capital gains' is a loss and the assessee has income assessable under the head 'Capital gains', such loss may, subject to the provisions of this Chapter, be set off- (i) against the income, if any, of the assessee assessable for that assessment year under any head including income assessable under the head 'Capital gains' (whether relating to short-term capital assets or any other capital assets), or (ii) if the assessee so desires, only against his income, if any, under the head 'Capital gains', in so far as such income relates to short-term capital assets, and income under any other head. (3) Where in respect of any assessment year the net result of the computation under sections 48 to 55 in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips : Provided that for the purposes of this clause-- (a) a contract in respect of raw materials or merchandise entered into by a person in the coarse of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him ; or (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations ; or (c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member ; shall not be deemed to be a speculative transaction." It is also obvious that from the material on record it could never be contended that if the petitioner was dealing in gold, then such a transaction was a speculative transaction. As regards the question of what constitutes a capital asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods and there is no material difference between losing goods by theft, pilferage, fire, sinking at sea or deprivation by sovereign authority. Penalty, on the other hand, is expenditure or disbursement of something which goes out of the assessee's pocket or is forced out of him by coercive process of law. When viewed from the point of view of the Income-tax Act (which taxes profits and gains even from illegal business) equating loss of goods by confiscation with imposition of a penalty can never be realistic. If reference is made to the provisions of the Sea Customs Act, it will be noticed that even under that Act confiscation is not equated with penalty but treated as something apart. It is well-settled that income arising out of illegality or wrong doing cannot escape taxation. Illegality in the making of profits is immaterial from the point of view and the purpose of the taxation law. As pointed out by Lord Haldane in Minister of Finance v. Smith, Income-tax Acts are not necessarily restricted to lawful business only. The assessee may be committing an offence, he may be contravening the law, he may be punished and sent to jail, but if he makes a profit out of such illegal ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king out of India Indian currency notes and exchanging them with gold in Pakistan and then smuggling that gold into India. He was caught by the customs authorities and gold amounting to Rs. 65,500 found on him was confiscated from him. He claimed the amount as a trading loss. The Income-tax Tribunal accepted the claim of the assessee that confiscation of the amount from him was a trading loss and the order of the Tribunal was confirmed by the High Court. In the same judgment there is a reference to a judgment of the Bombay High Court (and of the Supreme Court thereafter) in the case of Commissioner of Income-tax v. Haji Aziz and Abdul Shakoor Bros. The said judgment was distinguished by the learned judges of the Punjab and Haryana High Court on the ground that the deduction claimed therein was under section 10(2)(xv) of the Indian Income-tax Act, 1922, while Piara Singh was claiming deduction under section 10(1) on the footing that the true profits from his illegal business of smuggling gold could not be arrived at without taking into account the loss incurred by confiscation of Rs. 65,500 by the customs authorities. The learned judges of the Punjab and Haryana High Court also obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course of the trade cannot be described as such." It is significant that in the case before us there is a loss of stock-in-trade itself and the claim for set-off does not in any manner relate to the payment of a fine or a penalty. In Commissioner of Income-tax v. S. C. Kothari, the Supreme Court had occasion to consider deduction of a loss relating to a transaction which was held to be illegal by reason of the prohibition contained in the Forward Contracts (Regulation) Act, 1952, and it was held on the facts of that case that no set-off could be allowed under the first proviso to section 24(1) read with Explanation 2 of the Act of 1922. That was a case where a deduction had been claimed in respect of a transaction which was not only illegal but unenforceable. The assessee had entered into certain contracts for supply of groundnut oil. In the events that happened, contrary to the alleged expectation of the assessee when these contracts could not be performed, differences had to be paid. Thus, the assessee had laid out and paid an amount in relation to speculative transaction which the other party could not have enforced by reason of the transaction being hit by the provisions con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... what was prohibited by law, viz., the export of wool without having the requisite export licence, was an amount which the assessee was entitled to deduct under section 10(2)(xv) of the Act of 1922. It was held that according to principle and authority such a deduction could not be claimed . It was also observed that such a deduction could not be permissible even under section 10(1). The following obervations may be referred to : 'Profits had to be ascertained according to the accepted principles of commercial accountancy and if section 10(2)(xv) did not permit deduction of an item of expenditure which was laid out or expended for carrying on the business in contravention of the law, then such an outgoing though otherwise properly admissible, as set-off against the gross receipts on the principles of commercial accountancy could not be taken into consideration in computing the profits.' On the other hand according to the decision of a Full Bench of the Allahabad High Court in Chandrika Prasad Ram Swarup v. Commissioner of Income-tax, income assessable to tax is the actual income of an individual or a firm irrespective of the manner in which the income was derived. Legality ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a trade or business. That cannot be done without deducting the losses and the legitimate expenses of the business. We concur in the view of the High Court that for the purpose of section 10(1) the losses which have actually been incurred in carrying on a particular illegal business must be deducted before the true figure relating to profits which have to be brought to tax can be computed or determined." It is to be noticed that the Supreme Court has made a clear distinction between confiscation of goods and disbursement which comes out of the pocket of the assessee and that a loss is something different from the payment of a penalty. It is also significant that the observation has been made that even when profits from an illegal business were to be taxed "the tax collector cannot be heard to say that he will bring the gross receipts to tax." In the view that I have taken that the assessment made by the taxing authorities in so far as the value of gold was concerned is based on no evidence and, therefore, liable to be set aside, it is unnecessary for me to decide in this writ petition whether the set-off, as claimed by the petitioner, would have in fact been allowed or not. Mr. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d even be under a duty to do so. If it is necessary to cite an authority, then reference may be made to the case of Calcutta Discount Co. Ltd. v. Income-tax Officer, Companies District I, Calcutta, to which our attention was invited by Mr. Albal, the learned advocate for the petitioner. At page 207, the Supreme Court observed as follows : Mr. Sastri mentioned more than once the fact that the company would have sufficient opportunity to raise this question, viz., whether the Income-tax Officer had reason to believe that under-assessment had resulted from non-disclosure of material facts, before the Income-tax Officer himself in the assessment proceedings and, if unsuccessful there, before the appellate officer or the Appellate Tribunal or in the High Court under section 66(2) of the Indian Income-tax Act. The existence of such alternative remedy is not however always a sufficient reason for refusing a party quick relief by a writ or order prohibiting an authority acting without jurisdiction from continuing such action." The Supreme Court in the same case held that the High Court can under article 226 of the Constitution investigate conditions for the exercise of jurisdiction by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e petitioner, who has already paid his debt to the society and whose property, as stated by Mr. Albal, has been attached. In a recent case of Champalal Binani v. Commissioner of Income-tax the Supreme Court reaffirmed that a writ of certiorari may lie to the High Court where the order is on the face of it erroneous or raises the question jurisdiction or infringement of fundamental rights of the petitioner. The Supreme Court also observed that if the petitioner does not avail of the alternate remedy provided under the Income-tax Act for obtaining relief against the improper action of the authority then the High Court will require a strong case to be made out for entertaining a petition under article 226. It was held on the facts of that case that no adequate ground had been made out for entertaining the petition and this finding was based on the conduct of the petitioner in that case. In the present case, as I have already stated, the conduct of the petitioner is not such as would disentitle him to relief under article 226 of the Constitution. Notice may be taken of another judgment of the Supreme Court in Joharmal Murlidhar and Co. v. Agricultural Income-tax Officer, Assam. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income for the assessment year 1962-63 corresponding to the year S. Y. 2017, i.e., September 1, 1962. In his return he disclosed his income from property, share of profit frcm the firm of M/s. Parkar Navigation and company, M/s. Deogad Fisheries and M/s. Parkar Brothers. He also disclosed his salary income which he received from M/s. Parkar Navigation and Company and dividend income of his share. In response to a notice issued by the Income-tax Officer, B-Ward, Kolhapur, who had the jurisdiction to assess the petitioner-assessee under the provisions of the Income-tax Act, 1922, and the Income-tax Act, 1961, the petitioner-assessee appeared before the said officer along with his advocate and produced before him the cash book and the ledger book and other documents. It appears that the Income-tax Officer had come to know of the seizure of gold to the tune of 49,990 tolas from the petitioner-assessee's launch on April 24, 1961, and the conviction of the assessee along with others by the Special Judicial and Additional Chief Presidency Magistrate and, therefore, in the course of assessment proceedings the petitioner-assessee was called upon to explain the possession of such gold a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Income-tax Officer were substantially confirmed. However, in regard to the value of the gold, it was contended on behalf, of the assessee that the Income-tax Officer was in error in adopting the prevailing market rate of gold in India, i.e., Rs. 141.60 per tola for bringing the investment in gold to tax and that at the most for this purpose the international rate of gold prevailing on April 24, 1961, the date of the seizure of the gold, should have been adopted as the basis. Though this contention was not accepted in its entirety the Appellate Assistant Commissioner reduced the value of gold involved in the investment from Rs. 70,78,584 to Rs. 47,19,056 and this was done on the basis, namely : " Taking into account the attendant great risk normally taken by the purchaser of the imported contraband gold in such illegal transactions, the possible outlay on the expenditure and disbursements to the persons involved, the margin of profit on the sale is bound to be substantial, I estimate at 33 1/3%. The amount of Rs. 70,78,584 is accordingly reduced to Rs. 47,19,056 which would be the estimated cost of investment in the contraband gold and is includible as income from undiscl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nability of the petition was raised by Mr. Hajarnavis appearing for the revenue on the ground that under section 256(2) an alternative remedy for approaching the High Court requiring the Tribunal to state the case and making a reference in the event of the Tribunal declining to refer under sub-section (1) of section 256 of the Act was available to the petitioner and the same had not been availed of by him and that the petitioner had not made out any case for bypassing the said alternate remedy. However, the Division Bench did not uphold the preliminary objection and allowed the petitioner to argue his petition on merits. On behalf of the petitioner four or five contentions were urged by Mr. Albal. In the first place, it was contended that the assessment order could not have been founded on the judgment and evidence produced before the criminal court. Secondly, Mr. Albal contended that even if the Income-tax Officer was found to be justified in relying upon such material, the entire material did not establish the assessee's ownership over the gold in question and as such the value of such gold could under no circumstances be treated as income of the assessee from undisclosed sou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment of the criminal court by ; the Income-tax Officer was considered to be perfectly legal and further relying upon the decision of the Supreme Court in Dhakeshwari Cotton Mills Ltd. v. Commissioner of Income-tax he took the view that no fault could be found with the income-tax authorities if they choose to rely upon the proceedings and the judgments of the criminal courts where an assessee was tried for the same set of facts and that the findings recorded in the criminal courts being undoubtedly relevant for deciding the controversies that had arisen in the case the Income-tax Officer was justified in coming to the conclusion on the issue involved before him basing his decision on such material. As regards the second contention that it was a case of no evidence at all on which a finding had been recorded that the gold in question had been purchased by the petitioner from his undisclosed income, he took the view that, though there was no direct evidence on the point, the material in the form of circumstantial evidence which was available on record was such that an inference of ownership of the gold in the petitioner could be reasonably and legitimately drawn. In this behalf h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d since it was not disputed that at the time when the Income-tax Officer held the assessment proceedings before him, section 69A was in existence and in operation the proceedings could legitimately be disposed of by applying the rules of evidence as contained in that section. He took the view that the petitioner having been found to be the owner of the gold, the value thereof could be presumed to be the income from undisclosed source during the relevant period as provided under section 69A of the Act. In other words, the learned judge considered the case of the petitioner by applying the rules of evidence as contained in section 69A of the Act. As regards the fifth contention, the learned judge took the view that the loss suffered by the petitioner consequent upon the confiscation of the gold for infraction of law could not be said to be the commercial loss liable to be deducted while computing the profits or gains of the business nor was such loss liable to be set off under sections 70 and 71 of the Act. In this behalf the learned judge principally relied upon the ratio of the Supreme Court decision in the case of Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the income of the assessee's business, even though the business may be an illegal business. Mr. Justice Deshpande, however, observed that it was not possible for him to agree with the view expressed by the Punjab High Court as expressed in that case. In view of the above conclusions which he reached on each one of the contentions that were urged before them by Mr. Albal on behalf of the petitioner, Mr. Justice Deshpande felt that the petition was liable to be dismissed. It may, however, be stated that out of the five contentions that were urged on behalf of the petitioner, Mr. Justice Mukhi expressed his agreement with the views of Mr. Justice Deshpande on three contentions. Mr. Justice Mukhi did not find any substance in the contention that the assessment order could not have been founded on the judgment and the evidence produced before the criminal court nor did he find any substance in the contention that the findings that were recorded, by the income-tax authorities had been recorded in breach or violation of the principles of natural justice. He also agreed with the view of Mr. Justice Deshpande that the question whether the provisions of section 69 were applicable to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss consequent upon the confiscation of the goods for infraction of law suffered by the petitioner was allowable deduction in computing his profits or not or whether such loss could be set off against the income from undisclosed source as claimed by the petitioner. However, the learned judge proceeded to consider that question, though he was clearly of the view that the Tribunal was in error in not entertaining and considering the plea of the petitioner for the set-off. On the question as to whether the loss sustained by the petitioner as a result of the confiscation of gold for infraction of law could be claimed by him as deductible loss while computing his income from his business as a dealer in gold, the learned judge expressed the view that the claim of the petitioner was tenable. Differing from the view taken by his learned colleague, Mr. Justice Mukhi felt that if the profits from an illegal business were assessable to tax under the Income-tax Act, there was no reason why loss arising in illegal business should not be taken into account while computing the net profit of the said business and he was persuaded to take the view that the loss suffered on account of confiscation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness ? It is on these two points that Mr. Albal ably supported by Mr. Pandit for the petitioner has put forward his submissions in support of the petitioner's case and Mr. Hajarnavis appearing for the revenue has made his submissions supporting the view taken by Mr. Justice Deshpande. It is, therefore, not necessary for me to deal with any of the other contentions that were urged before the Division Bench on which there has been agreement between the two learned judges of the Division Bench. I shall, therefore, proceed to consider the aforesaid two questions one after the other. In order to decide the question as to whether it is a case of no evidence at all for drawing the inference of the ownership of the gold in question in the petitioner or whether there was material on record before the taxing authorities on the basis of which reasonable inference about the ownership of the gold in question in the petitioner could be drawn, one will have to see and consider what the material before the taxing authorities was. It is true that there was no direct evidence placed before the taxing authorities to prove that the petitioner had actually invested monies for purchasing the gold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1961, when the launch was near Janjira light house, an hour after sun-set, they saw a vessel coming towards them from the West. Unknown Muslim accompanying the crew of the launch flashed a torch and the coming vessel too flashed a torch in response. Three bags containing coins were handed over to the other vessel and the 25 bags containing gold were transferred from the other vessel to the vessel, 'Lakshmi'. (7) The launch then proceeded back to Deogad and came to Moda and anchored opposite the assessee's workshop. (8) In the meanwhile the crew noticed the custom's tony coming towards them. The customs officers arrived, searched the vessel and detected the gold concealed under ballast of the vessel and seized the same. (9) In this process the unknown Muslim escaped to the shore and the assessee made arrangements to send him in his black car to Gadniche-Pani. (10) While the investigation was going on, the assessee contacted the inspector and offered him bribe of Rs. 1 lakh to Rs. 5 lakhs and requested him to throw the gold in the sea or retain the same with himself and to save him from disgrace." Apart from the aforesaid facts which pertained to the actual opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as only a carrier of somebody else is without any proof. (2) The assessee was convicted along with others for knowingly and with the intention to defraud the Government of India of the duty payable on the gold weighing 49,990 tolas of which he acquired the possession by committing the breach of the provisions with regard to the possession and importing of the gold. (3) If the assessee was merely a carrier, there would have been some evidence to show on whose behalf he was acting or for whom the goods were intended. (4) Not much importance can be attached to the role played by the unknown and mysterious Muslim. He could have been there only with a view to identify the foreign ship and bring the gold on board the assessee's launch 'Lakshmi'. He would not have been allowed to slip away by the crew of 'Lakshmi' had he really been the owner of the gold, as after being chased by the customs officials, they would have realised that they would have been answerable for the presence of the Contraband gold in the launch. (5) Offer of bribe to the customs officials by the assessee is inconsistent with any other position than that the assessee being the owner of the gold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on record which could be said to be relevant for drawing that inference, viz., that in exchange of 25 bags containing gold biscuits 3 bags containing coins were handed over to the other vessel on the night in question which suggests payment of consideration for acquisition of the gold in question. It seems that in the criminal court not much reliance was placed upon this fact by the prosecutor, presumably on the footing that the coins contained in 3 bags may not be adequate price said to have been paid for the 25 bags of gold biscuits which were received by the crew of "Lakshmi". It is not understood as to why this fact which came on record was not relied upon, especially when the size of the bags containing the coins had not come on record. In the absence of material showing what were the sizes of the 3 bags it cannot be said that the coins contained therein could never represent the price of the gold obtained in exchange. Even ottherwise, it is not understood as to why the parting of 3 bags containing coins could not be regarded as part consideration paid for the gold that was acquired and this fact, in my view, though it was not relied upon in the criminal court, could be a fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r had failed to discharge the burden that lay on him. The fact that the gold in question was found in the possession of the petitioner was never in dispute and it was not disputed by Mr. Albal in this court. He, however, urged that when the petitioner was tried for offences under the Indian Penal Code, the Sea Customs Act and the Foreign Exchange Regulation Act, the ownership of the gold was not in issue and as such his convictions cannot have any bearing on this issue of ownership. That undoubtedly is true but the taxing authorities have not found the ownership of the gold in the petitioner because of the convictions recorded against him but from the unexplained possession of the gold with him and from other facts stated above. As regards unexplained possession of the gold and the inference of ownership of that gold being drawn against the petitioner on the principle enunciated in section 110 of the Evidence Act, Mr. Albal urged a two-fold contention. Firstly, it was contended by him before me as well as before the Division Bench that it was an admitted poition that the provisions of the Evidence Act including section 110 were not applicable to the proceedings under the Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was because of the pendency of the appeal that he gave a brief reply by contending that his conviction was wrong, that his conviction was based on false evidence and that he was not in possession of the gold in question. Mr. Albal contended that since the appeal was pending before the Supreme Court the petitioner could not have given any explanation on the assumption that he was in possession as it might have put him in further jeopardy. I am unable to accept this contention. The initial proceedings before the criminal court were over, wherein the petitioner had been convicted for being in possession of the contraband gold and for being concerned with smuggling activities in respect of that gold. This conviction had been confirmed even by the High Court and only an appeal against the conviction and sentence was pending before the Supreme Court and nothing prevented him from giving, any explanation before the Income-tax Officer without prejudice to his contentions in the appeal and that too on the assumption that he had possession of the gold and such explanation would never have prejudiced the petitioner in the prosecution of his appeal in the Supreme Court. That apart, the only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sible that the Muslim gentleman might have travelled to Moda island by the launch, "Lakshmi", with a view to receive his brokerage or commission from the petitioner which would normally be paid after the gold had been carried to the shore, and as such the mere fact that he travelled back to Moda island in the launch, "Lakshmi", would not be a circumstance to show that he must be the owner of the gold in question. Secondly--and this is clinching--the evidence on record is that in the operation that was undertaken on the night in question the Muslim gentleman somehow or the other managed to escape to the shore but thereafter it was the petitioner who had made arrangements to send him in his black car to Gadniche-Pani. Now the position that had emerged on that night was that the petitioner and his associates had realised that the Customs authorities had chased their launch, "Lakshmi", which admittedly carried the gold in question and obviously the petitioner would be answerable for such seizure of the gold from his own launch. Placed in that situation it is difficult to appreciate how that Muslim gentleman, if he were the real owner of the gold, was not merely allowed to escape but ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 24 of the Act of 1922). The contention was that nobody would aquire such large quantity of gold merely for the pleasure of possessing it and that the very circumstance involved the idea of adventure in the nature of trade and as the stock had been lost the petitioner-assessee was entitled to the deduction. In support of his aforesaid contention reliance was placed upon the decision of the Gujarat High Court in Commissioner of Income-tax v. S. C. Kothari which decision was later on confirmed by the Supreme Court in Commissioner of Income-tax v. S. C. Kothari and also upon the decision in Commissioner of Income-tax v. Piara Singh. In S. C. Kothari's case the facts were that the assessee had, inter alia, entered into two classes of contracts in groundnut oil, groundnut seeds and groundnut cakes, one of which consisted of forward contracts which were admittedly not in violation of any prohibition imposed under the Forward Contracts (Regulation) Act, 1952, while the other consisted of forward contracts which, according to the revenue, were in violation of the prohibition imposed under sections 15(1) and 15(4) of that Act, that the assessee obtained a profit in the first clas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 expenses of the business. We concur in the view of the High Court that for the purpose of section 10(1) the losses which have actually been incurred in carrying on a particular illegal business must be deducted before the true figure relating to profits which have to be brought to tax can be computed or determined. Relying upon the aforesaid decision of the Gujarat High Court which was confrmed by the Supreme Court, Mr. Albal contended that in the instant case in the single adventure on the part of the assessee in dealing in contraband gold or smuggled gold the assessee was entitled to claim the loss arising from confiscation of the gold in question which was his stock-in-trade as allowable deduction before computing his true profits of his said business. He also relied upon the judgment of the Punjab and Haryana High Court in the case of Commissioner of Income-tax v. Piara Singh, where the view of the Gujarat High Court in S. C. Kothari's case was not merely approved but str ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rded as allowable deduction under section 28 of the Act of 1961 (equivalent to section 10(1) of the Act of 1922). On the other hand, Mr. Hajarnavis appearing for the revenue has relied upon the decision of the Bombay High Court in Commissioner of Income-tax v. Haji Aziz and Abdul Shakoor Bros., which decision was confirmed by the Supreme Court in Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax. He fairly conceded that in that case the deduction was claimed in respect of fine paid in lieu of confiscation by the assessee under section 167.81 read with section 183 of the Customs Act as an item of expenditure claimable under section 10(2)(xv) of the Indian Income-tax Act, 1922, and the deduction was not claimed under section 10(1) of the Income-tax Act. But he pointed out that the Supreme Court had confirmed the Bombay High Court decision in disallowing the deduction claimed on a broader base and not merely on the ground that the expenditure did not strictly fall within the purview of clause (xv) of section 10(2) of the Act of 1922, as had been done by the Bombay High Court. In that case the assessee imported dates from Iran by steamers in contravention of certain noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for the contravention of any specific statutory provision, it cannot be said to be a commercial loss falling on the assessee as a trader the test being that the expenses which are for the purpose of enabling a person to carry on trade for making profits in the business are permitted but not if they are merely connected with the business." (The underlining is mine.). Mr. Hajarnavis further pointed out that the Supreme Court in the course of its judgment relied upon certain observations occurring in an English decision in the case of Commissioners of Inland Revenue v. E. C. Warnes & Co. Ltd. The assessee who carried on the business of oil exporters were sued for a penalty on an information exhibited by the Attorney-General under the Sea Customs Consolidation Act for breach of orders and proclamations. The matter was settled by consent on the assessee agreeing to pay a mitigated penalty of pound 2,000. All imputations on the moral culpability of the assessee were withdrawn. The provisions of the Act under which this information was lodged and penalty paid was similar to the provisions of the Indian Sea Customs Act. This amount was held not to be a proper deduction because in order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eems to me to be a difference between a commercial loss in trading and a penalty imposed upon a person or a company for a breach of the law which they have committed in that trading. For that reason I think that both the decisions of Rowlatt J., in this case, and his former decision in Commissioners of inland Revenue v. E. C. Warnes & Co. Ltd., which he followed were right, and that this appeal should be dismissed with costs." The above observations in the two English cases were approvingly quoted by the Supreme Court in Haji Aziz's case and relying on these authorities Mr. Hajarnavis contended that in the instant case the loss consequent upon the confiscation of goods for an infraction of law could not be regarded as a commercial loss or a loss arising out of carrying on of the business or incidental to it. Mr. Hajarnavis further submitted that the fact that deduction in Haji Aziz's case was claimed under section 10(2)(xv) of the Income-tax Act was not of much consequence, for, according to him, where deduction was claimed under section 10(1) of the Act or under section 10(2) of the Act, the question that was required to be considered, by the court was whether in the form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d ground, namely, that it was a trading loss, which should be taken into account in computing the profits under section 10(1) of the Act. After referring to Lord Russell's observations in the case of Commissioner of Income-tax v. Chitnavis to the effect that : " What are chargeable to income-tax in respect of a business are the profits and gains of a year ; and in assessing the amount of the profits and gains of a year account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains." And after referring to Lord Halsbury's observations in the case of Gresham Life Assurance Society v. Styles to the effect that : " The word 'profits' is to be understood in its natural and proper sense-in assesee which no commercial man would misunderstand." The Supreme Court at page 15 has observed as follows : " The result is that when a claim is made for a deduction for which there is no specific provision in section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by confiscation of goods directly sprang from an illegal act committed by the assessee, namely, having acquired gold without requisite permit or permission, of the Reserve Bank of India and without having paid any duty for the import thereof into India. Surely, the loss has not fallen on the assessee as a trader or businessman, for, obviously, even a lay person who is not a businessman, if he were to import gold for his private use without requisite permission and without payment of customs duty, would subject himself to the penalty of having that gold confiscated from him and he would as a consequence suffer great loss. It is thus clear that the loss consequent upon confiscation of goods for infraction of law suffered by the assessee must be regarded as loss falling upon him in some character other than a trader. In this view of the matter, I am clearly of the view that the petitioner is not entitled to claim the loss suffered by him as a result of confiscation of the gold in question as allowable deduction while computing his business income under section 28 of the Act. So far as the decision of the Gujarat High Court in S. C. Kothari's case is concerned--which decision h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he view that the confiscation of cash amount of Rs. 65,500 from the assessee, who was engaged in the business activity of smuggling gold, amounted to trade loss and hence was deductible under section 10(1) of the Act. But for coming to that conclusion the Punjab High Court has principally relied upon the decision of the Gujarat High Court and of the Supreme Court in S. C. Kothari's case , in which, as I have stated above, neither the Gujarat High Court nor the Supreme Court was required to consider the question whether the loss arising from penalty or confiscation of goods for an infraction of law amounted to trade loss or commercial loss ; in fact admittedly the nature of loss suffered by the assessee was commercial since it had arisen on account of payment of differences. With great deference, I am unable to persuade myself to agree with the view of the Punjab High Court expressed in Piara Singh's case, especially when it runs counter to the tests laid down by the Supreme Court in Haji Aziz's case and in English cases to which the Supreme Court has referred while deciding Haji Aziz's case. The other contention that this loss should be allowed to be set off against ..... X X X X Extracts X X X X X X X X Extracts X X X X
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