9911796707
TMI Blog1973 (2) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... a launch Lakshmi . On 24th April, 1961, the Central Excise authorities seized 4,999 biscuits of gold weighing 10 tolas each from the said vessel. The Collector of Central Excise investigated the case and ultimately confiscated the gold so seized by order dated September 18, 1961. The assessee and some others were tried before the Special Judicial and Additional Chief Presidency Magistrate, Bombay, for offences under section 120B of the Indian Penal Code and section 167(81) of the Sea Customs Act, 1878, and section 23 of the Foreign 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. Deo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 70,78,584 to ₹ 47,19,056. He directed penal proceedings to be initiated separately under section 271(1)(c) of the Income-tax Act. As a result of the slight relief granted in appeal the total income was reduced by ₹ 23,59,528. The assessee's appeal to the Income-tax Appellate Tribunal was dismissed on 9th March, 1970. The assessee then seems to have made an application for reference to the High Court under section 256(1) in regard to certain questions of law referred to in Paragraph 21 of the Tribunal's order. This application was rejected 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forma pauperis, if the petitioner was really unable to pay the court-fees of ₹ 7,500. This apart, the averments in the petition are far too inadequate to satisfy us that in fact the petitioner was unable to pay the court-fees and as such was incapable of availing of the alternate remedy under section 256(2) of the Act. No satisfactory averments are to be found in the application to indicate that the alternate remedy could not have been efficacious or otherwise there was any impediment for the petitioner in availing of the same. The Act also does not require the assessee 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 col ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal court by the Income-tax Officer was considered to be perfectly legal. The case is Anraj Narain Dass v. Commissioner of Income-tax. The Punjab High Court relied on its earlier Full Bench decision in the case of Seth Gurmukh Singh v. Commissioner of Income-tax, the ratio of which has been approved by the Supreme Court in the Dhakeshwari Cotton Mills Ltd. case. No fault, therefore, can be found with the income-tax authorities, if they chose to rely on the proceedings and the judgments in the criminal courts, where the assessee was tried for the same set of facts. The findings 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 Addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 ₹ 1 lakh to ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and the assessee's direct interest therein. (6) The fact remains that the assessee had been found in possession of a large quantity of gold. It was up to him to prove how he paid for it and how it came into his possession. (7) It is impossible to believe that a foreigner would have handed over such a large quantity of gold without receiving the consideration thereof. The risk involved 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssibilities in his favour without finding any basis for any such contingency from the material in his possession. While, therefore, it is true that the possession by the assessee of the large quantity of gold can be explained on more than one hypothesis, the Income-tax Officer is under a statutory obligation to decide the implication of such possession on the test of probabilities from the material placed before him or the material collected by him. Here again, while considering these contentions of Mr. Albal, two material circumstances cannot be lost sight of. Firstly, while exercising the jurisdiction under articles 226 and 227 of the Constitution of India, 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 Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s impossible to hold that the view taken by the income-tax authorities could not have been taken, or it is not supported by material, or it is arbitrary or capricious. In the facts and circumstances of this case, such inferential finding is a finding of fact and does not admit of any interference in exercise of writ jurisdiction. Mr. Hajarnavis drew my attention to the following observation made by the Supreme Court in the judgment of Maqbool Hussain v. State of Bombay : 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. Now, it is true 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 observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... however, contended that absence of any written application or written record in the proceedings before the Income-tax Officer does not necessarily mean that no such application was orally made to the Income-tax officer. Assessment order of the Income-tax Officer does not refer to any such request. Our attention was drawn by Mr. Albal to page 50 of the paper book, where the relevant observation of the Appellate Assistant Commissioner of Income-tax appears. All that is referred to in this portion of the order is the request of the assessee for re-examination of these two witness Even in his memo of special civil application to this court, we do not find any specific averment 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oceedings if they happen to be on the statute book on the date when the trial takes place. It is not disputed that at the time of the trial, section 69A was in existence and as such the proceeding before the Income-tax Officer can legitimately be claimed to have been governed by this rule of evidence incorporated in section 69A of the Evidence Act (sic). Rules of evidence ordinarily pertain to the domain of adjective law as laid down in the judgments of the Supreme Court in Sajjan Singh v. State of Punjab and Ishar Ahmad Khan v. Union of India. Petitioner having been found to be the owner of the bullion (gold), value thereof can be presumed to be the income from the undisclosed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt negatived the claim holding that the penalty for infraction of law does not amount to any expenditure laid out or expended wholly and exclusively for the purpose of such business, profession or vocation. The Supreme Court affirmed the said view of this court on slightly broader base, observing as follows : An expenditure is not deductible unless it is a commercial loss in trade and a penalty imposed for breach of the law during the course of trade cannot be described as such. Infraction of the law is not a normal incident of business and, therefore, only such disbursements can be deducted as are really incidental to the business itself. They cannot be deducted if they fall 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 arisin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ized from his person while he was on his way to Pakistan to meet a Pakistani smuggler who was to deliver gold to the assessee. This amount was confiscated, and a penalty also was imposed by the Collector of Central Excise and Land Customs. The income-tax authorities proceeded thereafter against him to assess tax on ₹ 65,500 as being the income from undisclosed sources. The Tribunal accepted the claim of Piara Singh that confiscation of this amount amounted to loss and its view was confirmed by the Punjab and Haryana High Court on the above basis. The discussion at page 682 indicates that reliance was entirely placed by the learned judges on the ratio of the judgment of the Gujarat High Court in 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 occas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his, however, is based on the principle that an expenditure is not deductible unless it is a commercial loss in trade and a penalty imposed for breach of the law during the course of the trade cannot be described as such. Penalties which are incurred for infraction of the law are not a normal incident of business and they fall on the assessee in some character other than that of a trader. Applying this test laid down by Grover J., speaking for the Supreme Court, in S. C. Kothari's case and the test laid down by Kapur J., speaking for the Supreme Court, in the case of Haji Aziz and Abdul Shakoor Bros., it shall have to be held that confiscation of goods incurred for infraction of law cannot be said to 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 prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2), and section 24 of the 1922 Act and corresponding provisions of sections 28, 29 to 44A and sections 70 and 71 of the 1961 Act, it will be noticed that the provisions deal with the deductions or disbursement from the profits earned under various contingencies. If the losses are incurred in the same business (source of income) under the same head enumerated under section 14, the same are liable to be deducted under section 22 (section 10(1) of the old Act) of the Act. If losses an incurred under a different source falling under the same head, the losses are liable to be deducted from the income of any other source falling under the same head under section 70. When, however, net result of all sources under any 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 tru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held by the Supreme Court. The petitioner was sentenced to two years' rigorous imprisonment which sentence, it is to be presumed, he had served out. It is also not in dispute that the 49,990 tolas of gold were confiscated by the customs authorities and personal penalty was also sought to be imposed. The grievance of the petitioner with regard to the assessment procedure arises thereafter. The questions that fall for consideration in this writ petition may now be summarised. The first contention of the petitioner was that the Income-tax Officer who made the assessment relied entirely on the evidence and material contained in the Supreme Court paper-book relating to the criminal case against the petitioner in which ultimately 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 taxin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... late authorities and which admittedly had come into force only from 1st April, 1964, that is to say, after the assessment year, was a rule of procedure or a rule of substantive law and whether it could be applied to the instant case and, secondly, whether by reason of not permitting the two approvers, Dhuri and Tarkar, to be brought before the Income-tax Officer for cross-examination by the petitioner, rules of natural justice had been violated. Now, as regards these two questions are concerned, I am in respectful agreement with the finding of my learned brother, Deshpande J., so that these two questions need not detain me any longer. There is, however, a contention raised by Mr. Hajarnavis for the revenue that the present writ petition 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned Tribunal's finding was couched in these words : The assessee had failed to prove the source of this investment and, in our opinion, the department was justified in treating the cost of gold acquired by the assessee as having come out of the undisclosed income of the assessee. It will be noticed that the learned Tribunal not only used the word investment but also the word cost . We were told at the Bar by the learned counsel for the revenue that the word investment is not a term of art. Be that as it may, it is nevertheless obvious that, so far as the provisions under which action had been taken by the income-tax authorities to bring in the value of the gold as the income of the assessee, there has been some blurring of perspective. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thorities could support their finding that the petitioner had either paid for the gold and thereby made an investment or that the petitioner was otherwise the owner of the contraband gold so that its value could be, in the absence of a satisfactory explanation from him regarding the source, treated as his income. It is appropriate at this stage to set out what I may call the ingredients on which the criminal courts came to the finding that the petitioner had in conspiracy with others smuggled gold into India and was in posesssion thereof in contravention of section 120-B, Indian Penal Code, section 167.81 of the Sea Customs Act, 1878, and section 23 of the Foreign Exchange Regulation Act, 1947. It requires to be repeated that the question of ownership was never and could 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 cal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee did acquire and was beneficially interested in the gold seized. The learned Tribunal also set out some of the pieces of evidence as found by the Special Magistrate and then came to make the following observations : . . . . The fact remains that the assessee had been found in possession of a large quantity of gold. It was up to him to prove how he paid for it. It is impossible to believe that a foreigner would have handed over such a large quantity of gold without receiving the consideration thereof. The risk involved in smuggling gold is well known where the penalty of detection is complete confiscation. It will be, therefore, opposed to all human conduct that an unknown foreigner would have handed over the goods without receiving the price for it. The natural presumption in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iffers from ownership in another quite different respect. Ownership, as we saw, consists of a combination of legal rights, some or all of which may be present in any particular instance ; and such rights imply the existence of legal rules and a system of law....Whether a person has ownership depends on rules of law ; whether he has possession is a question that could be answered as a matter of fact and without reference to law at all ....... Again, at page 292 it is stated : ....... Possession consists basically in a relationship between a person and an object within the context of the society in which he lives,.....Ownership, on the other hand, consists not of a factual relationship but of certain legal rights and is a matter not of fact but of a law. . . . . It would, therefore, appear that after the fact of 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 Suprem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was in fact the owner of the gold. This they could only do on evidence and not by inference from facts relevant only on the question of possession or by wrongly placing the burden of proof on the petitioner. It is to be noticed that section 69 and section 69A do statutorily place a burden on the assessee to explain the source of investment or the source of the acquisition of the gold, but that burden can only arise after the initial burden on the taxing authorities of proving the factum of investment or the factum of ownership has been discharged. Sections 69 and 69A can be said to be in the nature of penal or at least onerous provisions and the burden lies on the revenue to prove that the condition precedent laid down, therefore, is satisfied before any order including the value thereof in the assessment can be made. It would appear 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ignificant that section 69A speaks of found to be the owner of...bullion...... It does not say found to be in possession, of bullion... If the legislature had intended that mere possession of gold, etc., would cast an obligation on the possessor to explain its source it could have very well said so without bringing in the concept of ownership and insisting that the assessee must be found to be the owner. Found by whom ? Obviously by the Income-tax Officer and it follows that the finding must be on the basis of proper evidence or material proving such ownership. Again, take the case of investment under section 69. Could it be validly contended that the department has merely to allege that an assessee has made an investment, say, in house property or in shares or in bonds, without proving the factual existence of such an investment ? There must 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) The assessee was convicted by the criminal court for the breaches of the provisions of law with regard to the possession and importation of gold. (3) The role played by the unknown and mysterious Muslim gentleman who was admittedly on the scene and who had participated in the bringing in of the gold by going out on the launch, Lakshmi , and establishing contact with the other vessel which brought gold was not of any importance and what was significant was that this Muslim gentleman had been allowed to escape. (4) Offer of a bribe to the customs officials by the assessee was inconsistent with any other hypothesis than that the assessee was in fact the owner of the gold, and had direct interest in the same. (5) Taking into consideration human nature it was impossible to believe that a foreigner would have handed over such a large quantity of gold without receiving 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w of evidence by this court can arise ; not because the evidence is to be weighed by this court ; but to show that whatever facts were proved were of such a nature that from those facts, without anything else, a legitimate inference could not be drawn that the petitioner had paid for the gold or that he was the owner of the gold. Mr. Albal, the learned advocate for the petitioner, has drawn our attention to a judgment of the Supreme Court in Mehta Parikh Co. v. Commissioner of Income-tax, where the question as to the scope of inference from findings of facts has been discussed. That was a case with reference to high denomination notes of ₹ 1,000 each and the assessee had claimed that on the relevant date he held 61 such notes of the aggregate value of ₹ 61,000 and that he had been wrongly assessed on the whole amount of ₹ 61,000 as undisclosed profits. The Appellate Assistant Commissioner confirmed the order of the Income-tax Officer, but the Tribunal on appeal partly accepted the appellant's contention as to ₹ 31,000 and rejected the contention as to ₹ 30,000. The High Court held that the sum of ₹ 30,000 represented profits and that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I think, fairly summarised by saying that the court should take that course if it appears that the Commissioners have acted without any evidence or upon a view of the facts which could not reasonably be entertained.' and Lord Radcliffe expressed himself as under at page 592 : 'If the case contains anything ex facie which is bad law and which bears upon the determination, it is obviously erroneous in point of law. But, without any such misconception appearing ex facie, it may be that the facts found are such that no person acting judicially and properly instructed as to the relevant law could have come to the determination under appeal. In those circumstances, too, the court must intervene.' It follows, therefore, that facts proved or admitted may provide evidence to support further conclusions to be deduced from them, which conclusions may themselves be conclusions of fact and such inferences from facts 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and whether there was no evidence on which the department could come to a finding of investment and/or ownership. There is a reference to the Supreme Court judgment in A. Govindarajulu Mudaliar v. Commissioner of Income-tax, but that case is also not applicable to the facts of the present case because there was no dispute in that case as to the existence of the amounts in question and the point that was raised was that it was the duty of the department to adduce the evidence to show from what source the income was derived, in other words, the factum of the amount of cash received was not in dispute. There is no doubt that the onus of proving the source of the sum of money found to have been received by the assessee is on him, but the question first is whether the factum of the receipt of that money has been established. In the Kerala case there was at least one admission that ₹ 3,500 was borrowed for payment to Mohamed Koya so that a nexus had been 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sary jurisdiction to allow any new question to be raised for the first time in an appeal before it and it is well-settled that the Tribunal should allow such questions to be raised if it is a question which can be decided on the facts already on record. The Tribunal has the power and the jurisdiction to grant relief under the provisions of the Act on even a ground different from that which was urged before the lower authorities. It may allow a new point to be taken after the evidence or without taking fresh evidence and it has been held that in an appropriate case it would be the duty of the Tribunal in order to do complete justice to the assessee to remand the matter back to the Income-tax Officer to gather necessary material so that the benefit of any provision may be given to the assessee. It is not as if there was a contest between the taxing authorities and the assessee. The taxing authorities are duty bound to comply with the provisions of the law and where 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 nec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sary investment in gold and/or was the owner thereof. And it may be stated that this is the point which is said to have been found by the Income-tax Officer and on that basis the value of the gold had been included in the assessment. Both the Income-tax Officer and the Appellate Assistant Commissioner have referred to the petitioner as being a person who was dealing in gold. It is also a fact, which is not without significance, that the quantity of gold involved was approximately 50,000 tolas. It is not easy to understand how the Tribunal could properly say that it was not a case of calling in aid one more provision of law . The petitioner was doing precisely that. He was asking the Tribunal to take into consideration the provisions of law relating to set-off and consider that very question, i.e., whether these provisions could be called in aid for the benefit of the petitioner. It is, as I have said, quite possible that on a proper hearing and ascertainment of the relevant 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 judg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of such loss set off against his income from any other source under the same head. (2) (i) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any short-term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset. (ii) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any capital asset other than a short-term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset not being a short-term capital asset. 71. Set off of loss from one head against income from another.-(1) 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 no income under the head 'Capital gains', he shall, subject to the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be immaterial. Another obstacle that was suggested to be in the way of the petitioner's claim was that fresh facts would have in any event to be gathered because there were no means of ascertaining as to whether the value of the gold as income from undisclosed source was earned by the petitioner under the head of speculative business or capital gains. Now, it requires to be stated that there are, in any event, two limitations to the rule of set-off. A loss in a speculative business can be set off only against profits under another speculative business and a loss in respect of capital assets can be set off against income from any other capital assets. Now, in so far as the first limitation is concerned, no further investigation of facts would have been necessary because speculative transaction has been defined in section 43(5), which reads as follows : (5) 'speculative transaction' means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, 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- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f or otherwise. A question, therefore, arises as to whether confiscation of gold by customs authorities can never be equated with a commerical loss normally available for deduction or set-off under the provisions of the Income-tax Act. In other words, does the loss of gold by confiscation amount to a commercial loss. It is not possible to accept Mr. Hajarnavis's contention that loss by confiscation is the same as a loss occasioned by reason of payment of penalty. It is true that in common parlance or for consideration in general law, confiscation of a person's property may operate as a punishment or the person concerned may feel that he has been penalised. It has been said that a person will rather forgive the death of a relation than the confiscation of his property. So great is the pain of deprivation of property. But, in my view, for the purpose of the point under consideration there is a very significant difference between the payment of a fine or penalty and confiscation of contraband goods. Confiscation is loss of goods and there is no material difference between losing goods by theft, pilferage, fire, sinking at sea or deprivation by sovereign authority. Penalt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as it would have been if the business had been a legal business. It cannot, with any show of reason, be said that such a deprivation of gold or stock-in-trade or other articles would not be a loss incurred in the carrying on of the illegal business in such gold or other articles. It does not require much argument to notice that the loss of gold by confiscation is an inherent hazard in the whole process of bringing in and smuggling gold and dealing with it and such a hazard could well be described in the circumstances of the case as a business hazard. I am supported in my view by a judgment of the High Court of Punjab and Haryana in Commissioner of Income-tax v. Piara Singh, where the learned judges observed that the hazard of losing the money with which the gold had to be acquired was inherent in the activity of smuggling of gold and the confiscation of the amount was a loss allowable under section 10(1) of the Indian Income-tax Act, 1922. In that case the assessee, Piara Singh, was carrying on regular smuggling activity which consisted of taking out of India Indian currency notes and exchanging them with gold in Pakistan and then smuggling that gold into India. He was caug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for consideration in that case was not the loss of goods at all. What was considered there was that the assessee's goods, viz., the dates which he had imported in contravention of the law had been confiscated with an option to release the goods by payment of fine and that the assessee had incurred expenditure by paying the fine and obtaining release of the goods. The deduction claimed in that case, therefore, was clearly on the footing of the disbursement of money laid out and expended. There is no doubt, therefore, that in the case when the assessee incurred the liability he did so as a penalty for infringement of the law and that it was rightly held that the amount which was expended for obtaining the release of the goods was not deductible. No such case arises in the instant case. No expenditure has been laid out for paying a fine or a penalty. Again it is to be noticed that what the Supreme Court laid down in that case was that an expenditure is not deductible unless it is a commercial loss in trade and a penalty imposed for breach of the law during the course of the trade cannot be described as such. It is significant that in the case before us there is a loss of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contention urged on behalf of the revenue that although the profits from an illegal trade or business would be exigible to tax the losses from such business could not be taken into account while computing the profits. This is what the High Court observed : 'There is in principle no distinction between profits and losses of a business and if the profits of an illegal business are assessable to tax, equally the losses arising from illegal business must be held to be liable to be taken into account in computing the income of the assessee.' The High Court was not inclined to accede to the submission on behalf of the revenue that the same principle would be applicable as has been applied in certain cases in which the question which came up for determination was whether an expenditure incurred on an illegal activity would be deductible under section 10(2)(xv) of the Act of 1922. One of such cases is a decision of the Punjab High Court in Raj Woollen Industries v. Commissioner of Income-tax. In that case the real question was whether a certain amount which was paid to achieve what was prohibited by law, viz., the export of wool without having the requisite export licence, wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax). In that case this court said quite clearly that a disbursement is deductible only if it falls within section 10(2)(xv) of the Act of 1922, and a penalty cannot be regarded as an expenditure wholly and exclusively laid out for the purpose of the business. Moreover, disbursement or expenses of a trader is something, which comes out of his pocket. A loss is something different. That is not a thing which he expends or disburses. That is a thing which comes upon him as extra'. (Finlay J. in Allen v. Farquharson Brothers Co.). If the business is illegal neither the profits earned nor the losses incurred would be enforceable in law. But that does not take the profits out of the taxing statute. Similarly, the taint of illegality of the business cannot detract from the losses being taken into account for computation of the amount which can be subjected to tax as 'profits' under section 10(1) of the Act of 1922. 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 ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... particularly to ensure that the ends of justice are served. Thus the High Court can quash proceedings even of the income-tax authorities which may be held to be without jurisdiction or without the authority of law. The High Court may quash an order vitiated by an error apparent on the face of the record or passed in violation of the principles of natural justice. These propositions are too well-known to require any elaborate discussion of the authorities. The existence of an alternative remedy under the Income-tax Act would not bar such exercise of powers, particularly if the alternate remedy is onerous, likely to be time-consuming or even likely to cause harassment to the citizen in his effort to obtain vindication of his legal rights. If, therefore, the action of the taxing authorities is such that it violates any fundamental rights of the assessee or is not in compliance with the statutory provisions or it is without the authority of law then the High Court would not only have the jurisdiction to issue writs, directions and orders, as may be necessary, to ensure that justice is done but it would even be under a duty to do so. If it is necessary to cite an authority, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per Petition No. 3 of 1972 decided by Nain J. on the 8th of December, 1972, has been shown to us. The contention is no doubt attractive, but it does not take into account several other factors. One of them being, as we are told at the Bar by Mr. Albal, the learned advocate for the petitioner, that the entire property of the assessee has been attached and that the time-consuming procedure under the Income-tax Act would have placed an intolerable burden on the petitioner. In the words of the Supreme Court, when there is nothing in the conduct of the petitioner which would justify the refusal of a proper remedy under article 226 of the Constitution such relief should be given. In fact, the Supreme Court has in the Calcutta Discount Company's case, referred to above, in terms observed that : When the Constitution confers on the High Courts the power to give relief, it becomes the duty of the courts to grant such relief in fit cases and the courts would be failing to perform their duty if relief is refused without adequate reasons. In the present case, I am unable to persuade myself that relief should be denied to the petitioner, who has already paid his debt to the society ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he was the owner of a launch, Lakshmi . On April 24, 1961, the Central Excise authorities seized 4,999 biscuits of gold weighing 10 tolas each from this vessel. The Collector of Central Excise investigated the case and ultimately confiscated the gold so seized by an order dated 18th September, 1961. The petitioner and some others were also tried before the Special Judicial and Additional Chief Presidency Magistrate, Bombay, for offences of criminal conspiracy under section 120-B, Indian Penal Code, read with section 167.81 of the Sea Customs Act, 1878, and section 23 of the Foreign Exchange Regulation Act, 1947. The learned Magistrate at the end of the trial convicted the petitioner and some other accused for those offences on July 22, 1963, and the petitioner was sentenced to suffer rigorous imprisonment for two years. The said conviction and sentence imposed upon him by the learned Magistrate were confirmed by the High Court on August 11, 1964, and the appeal of the petitioner and others to the Supreme Court was also dismissed by that court on November 6, 1968. In the meanwhile the petitioner (assessee) submitted his return of his income for the assessment year 1962-63 corres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way or the other is on the department. Along with this letter he enclosed many other documents including the copy of the judgment of the Special Judicial Presidency Magistrate in Case No. 140/W of 1963 dated July 22, 1963, and the copy of his written statement filed before the said Magistrate. In other words, he denied the possession of gold in question and contended that without any proof being led in that behalf the department could not tax the value of that gold as his income. By assessment order dated February 13, 1967, the Income-tax Officer computed the total income of the petitioner-assessee under section 143(3) of the Income-tax Act to the tune of ₹ 70,98,834, ₹ 70,78,584 having been added to his income by way of investment in acquisition of gold as income from undisclosed sources as discussed above . The value of the gold in question was ascertained at this figure by adopting the prevailing rate of gold at ₹ 141.60 per tola. He referred the question of penalty for concealment of income to the I.A.C.P. (R. II), Poona. On appeal by the assessee made to the Appellate Assistant Commissioner of Income-tax the findings recorded by the Income-tax Officer w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 256(1) of the Income-tax, Act, 1961, in regard to certain questions of law referred in paragraph 21 of the Tribunal's order, but that application was rejected by the Tribunal on February 10, 1971. Instead of making an application to this court under section 256(2) of the Income-tax Act, the petitioner-assessee filed this writ petition under articles 226 and 227 of the Constitution in this court on June 15, 1971, praying for a writ in the nature of certiorari for quashing the assessment order dated February 13, 1967, passed by the Income-tax Officer and the order dated March 9, 1970, passed by the Income-tax Appellate Tribunal and also for a writ in the nature of prohibition permanently restraining the Income-tax Officer and the Tribunal, their servants and agents from acting in pursuance of the said assessment orders. In the alternative the petitioner prayed for remand of the matter to the Tribunal with a direction that the Tribunal should allow the petitioner to argue the point that the loss arising to him due to the confiscation of the gold was an allowable business loss. Before the Division Bench, which heard this matter, a preliminary objection to the maintai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment whatsoever in the gold. Fifthly, it was contended that in either case when admittedly the smuggled gold had been confiscated by the excise and customs authorities, the assessee was entitled to claim loss suffered thereby as deductible loss while computing his net profits or was entitled to set off the same against the alleged undisclosed income. All these contentions were refuted by the revenue and the impugned orders were sought to be justified. On a consideration of the rival submissions that were put forward before the Division Bench, Mr. Justice Deshpande negatived all the contentions that were urged on behalf of the petitioner in the case. With regard to the first contention he took the view that the position was well-settled that the provisions of the Evidence Act did not apply to the proceedings before the Income-tax Officer and that it was open to the Income-tax Officer to rely upon the material in the form of judgment of the criminal court and come to a conclusion one way or the other on the question of ownership of gold. Relying upon direct authority of the Punjab High Court in the case of Anraj Narain Dass v. Commissioner of Income-tax, where reliance on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etitioner that the findings had been recorded in violation of the principles of natural justice. He found that there was no material available on record from which it could be said that the petitioner had during the proceedings that were held before the Income-tax Officer either offered himself as a witness or had actually demanded the two witnesses, namely, Dhuri and Tarkar, for cross-examination and that a grievance in that behalf had been made before the Tribunal for the first time. In the circumstances he took the view that the contention that the Income-tax Officer had recorded his findings in violation of the principles of natural justice could not be sustained. On the question as to whether section 69 was applicable to the facts of the case or section 69A was applicable, the learned judge did find that the orders passed by the three lower authorities disclosed some confusion about the applicability of one or the other section to the facts of the case. But, according to him, both sections 69 and 69A contained rules of evidence and as such the provisions thereof would be applicable to any proceedings if they happened to be on the statute book on the date when the trial took pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r breach of the law during the course of trade could not be described as such. The Supreme Court further observed that infraction of the law was not a normal incident of business and, therefore, only such disbursements could be deducted as were really incidental to the business itself and they could not be deducted if they fell on the assessee in some character other than that of a trader. Applying the test as indicated by the Supreme Court in this case, Mr. Justice Deshpande held that confiscation of goods incurred for infraction of law could not be said to be a normal incident of business and loss suffered therefrom fell on the assessee in some character other than that of a trader. He, therefore, negatived the contention that the loss consequent upon the confiscation of goods suffered by the petitioner for infraction of law could be allowed as a deductible loss while computing the profits of the assessee's business. The decision of the Punjab and Haryana High Court in the case of Commissioner of Income-tax v. Piara Singh was pressed into service on behalf of the petitioner for contending that the loss consequent upon the confiscation of goods would be allowable loss while co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the basis of which an inference about the ownership of the gold in the petitioner could be reasonably drawn and on that aspect of the matter he was persuaded to take a view different from the view taken by Mr. Justice Deshpande. In other words, on the second contention that was urged on behalf of the petitioner before the Bench, Mr. Justice Mukhi took the view that it was a case of no evidence at all, that is to say, even if the entire material that was placed before the taxing authorities was taken to have been established and was taken into consideration, no reasonable body of persons could come to the conclusion that the petitioner had either made an investment in the gold by purchasing the same or that the petitioner was the owner of that gold. In other words, he took the view that all the facts and circumstances present in the case and which were said to have been proved before the taxing authorities were such that no inference of ownership of the gold in the petitioner could be reasonably drawn from them. In this view of the matter he felt on this ground alone that the impugned orders were liable to be set aside and it was not necessary for him to decide the question whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the inference that the petitioner was the owner of the gold in question, the petitioner was entitled to succeed in getting the impugned orders quashed and he, therefore, felt that the rule deserved to be made absolute by way of quashing the impugned orders. From what I have stated above, it will at once become clear that it is only on two principal points raised in the case that there has been difference of opinion between the two learned judges and, therefore, the matter has been referred to me for final disposal and the two points on which the learned judges have differed are : (1) Whether it is a case of no evidence whatsoever for drawing an inference of ownership of the gold in question in the petitioner or whether it could be said that there was some material before the taxing authorities on the basis of which a reasonable body of persons could draw the inference about the ownership of the gold in the petitioner ? and (2) Whether the loss arising from the confiscation of the gold, in question for infraction of law sustained by the petitioner falls in the category of commercial loss so as to become an allowable deduction while computing the net profits of the petitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the assessee in the afternoon on that day for taking some instructions. (3) When the crew members went to the house of the assessee (petitioner) one unknown Muslim was found along with the petitioner in his room. The assessee told them that the launch was to be taken to Bankot side that night and the unknown Maslim was to accompany them. He further told them that at a certain spot another vessel would meet them from which 25 bags will be transferred to the launch, 'Lakshmi', which bags were to be concealed under the ballast. He further asked them to take back' Lakshmi', launch, to Deogad at midnight and come straight to Moda and anchor opposite his workshop, where arrangements would be made to unload the 25 bags. The tindel and crew would report of the arrival of the launch to the customs office the next morning. (4) In the evening the assessee, Parkar, went to his workshop and satisfied about the arrangements made. (5) At 11-00 p.m. the crew members were taken to Hambarghat where the assessee was sitting in a black car. The assessee gave them three bags containing coins and told them to deliver them to the launch which was to transfer the bags contain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g authorities further came to the conclusion that the assessee had become the owner of the gold in question which was so detected in his launch and seized by the customs authorities by paying the price therefor and they further concluded that the value of the gold not having been disclosed by the assessee in his return, the same will be his income from his undisclosed source and thus computed the total income to the tune of ₹ 70,98,834 including the value of the gold in question, which, as stated earlier, was reduced from ₹ 70,78,584 to ₹ 47,19,056. It appears that before the Tribunal a plea was put forward by counsel for the petitioner that the petitioner-assessee was merely a carrier of the gold and a suggestion was thrown that the unknown Muslim who managed to escape might be the owner of the gold (though no such plea nor the suggestion was put forward by the assessee before the Income-tax Officer or the Appellate Assistant Commissioner, but the Tribunal rejected the same and upheld the findings of the lower authorities. The reasoning adopted by the Tribunal for doing so has been split by Mr. Justice Deshpande in about 8 propositions which were stated by the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts which stand out glaringly on the record, are, in my view, sufficient to support the inference about the ownership of the gold being with the petitioner. In the first place, the several circumstances connected with the operation undertaken for acquiring the gold clearly establish the fact that it was the petitioner who had the lead, initiative, drive and overall control of the entire operation. Secondly, the principal fact is that the gold in question was seized from the motor-launch belonging to the petitioner and as such it was the petitioner who was in possession of such gold. Thirdly, there is the conduct on the part of the petitioner in offering bribe to the tune of ₹ 5 lakhs to the inspector and his further request to the, inspector either to throw away the gold into the sea or retain the same for himself and to save him (the petitioner) from disgrace. His said conduct and his suggestion to the inspector to deal with or dispose of the gold as the latter liked (inspector could throw it in the sea or keep it for himself) clearly indicates the extent of the power of disposition of the petitioner over the said gold. These three facts constituted sufficient material on r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is well settled that the jurisdiction of this court under article 226 or article 227 is not that of a court of appeal and under writ jurisdiction this court cannot consider the question of adequacy or sufficiency of evidence but it can only consider whether the materials or circumstances are such that the inference drawn is capable of being rationally drawn and if there be such materials on record this court will not interfere. It may be mentioned that before the Division Bench reliance was placed upon the provisions of section 110 of the Evidence Act which deals with possessory title and it was urged that on the basis of the principles enunciated therein it was perfectly open to the income-tax authorities to draw the inference that the petitioner was the owner of the gold in question. Section 110 runs as follows: When the question is whether any person is owner of anything of which he is shown to be in possession, the burden of proving that he is not the owner is on the person who affirms that he is not the owner. Relying upon the aforesaid provision it was contended that since the gold in question was found in the possession of the petitioner, it was open to the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... At page 444 the court has observed thus: ...it has often been stated with justification that Sir James Stephen has attempted to crystallize the principles contained in Taylor's work into substantive propositions. If one turns to article 123 in Taylor's Treatise on Law of Evidence (volume I, 11th edition, at page 130) it will appear clear that the substantive proposition enunciated in section 110 of Evidence Act is based on the principle contained in that article which runs as follows : 123. As men generally own the property they possess, proof of possession is presumptive proof of ownership. This rule applies both to real and personal property, and, in the former case, raises a presumption of a seisin in fee. In other words, the rule of evidence as enunciated in section 110 of the Evidence Act is one of the common law principles which could be invoked in any proceedings where the set of circumstances satisfy its conditions, that is to say, proof of possession would be proof of ownership unless possession is satisfactorily explained in any other manner. Secondly, Mr. Albal contended that when the petitioner was called upon to explain his possession of the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... htly. In the circumstances the principle enunciated in section 110 at once came into play and, in my view, the taxing authorities as also the Tribunal were entitled to draw the inference of ownership of the gold being with the petitioner. Mr. Albal, however, contended that the possibility of the petitioner being a carrier of the gold and the unidentified Muslim who escaped during the operation on the night in question being the owner of that gold had not been ruled out, and in that behalf he pointed out that there was some circumstances on record which showed that the Muslim gentleman might be the owner of the gold and the petitioner may be the carrier of the gold. He relied upon the fact that, after the exchange of the bags containing gold with the bags containing the coins, the Muslim gentleman travelled with the launch, Lakshmi , and returned to Moda island. According to Mr. Albal, he would not have travelled back to Moda island in the launch Lakshmi if he were not interested in the gold and if he were merely a person who had brought about the transaction as a broker or entered into it as the seller of gold he would have gone away in that foreign vessel. From the above cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar to me that there was material on record on the basis of which a reasonable body of persons could rationally come to the conclusion that the gold in question belonged to the petitioner and he was the owner of the gold. As stated earlier, the adequacy or sufficiency of the material is not for this court to decide and since there was material from which the inference that the petitioner was the owner of the gold in question could be reasonably drawn, this court will not interfere with that finding of fact recorded by the taxing authorities and the Tribunal. The next contention urged by Mr. Albal on behalf of the petitioner was that since admittedly the entire gold seized had been confiscated by the Collector of Central Excise by order dated September 18, 1961, the petitioner had completely lost that gold for all times, and as such the value of this gold that was lost on account of confiscation should have/been treated as a trading loss and allowed to have been deducted while computing his net income from the business of dealing in gold under section 28 of the Act of 1961 (equivalent to section 10(1) of the Act of 1922) or such loss should have been allowed to be set off against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a reference made on behalf of the department, the Gujarat High Court held that the impugned forward contracts in which loss had been incurred were unlawful, but even so the High Court held that such loss was liable to be taken into account in computing the business income of the assessee. The Gujarat High Court took the view that even where a trade is illegal, it would still be a trade within the meaning of the Income-tax Act and that there could be no distinction between profits and losses of such business and if the profits of an illegal business were assessable to tax, equally the losses arising from illegal business must be held to be liable to be taken into account in computing the income of the assessee. This view of the Gujarat High Court has been confirmed by the Supreme Court in Commissioner of Income-tax v. S. C. Kothari. In paragraph 6 of its judgment this is what the Supreme Court has observed : If the business is illegal neither the profits earned nor the losses incurred would be enforceable in law. But that does not take the profits out of the taxing statute. Similarly the taint of illegality of the business cannot detract from the losses being taken into accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... han ₹ 5,000 from his agricultural income the taxing authority treated the amount of ₹ 65,500, as his income from undisclosed source. When the matter was carried to the Tribunal it was contended on behalf of the assessee that the amount that was confiscated, viz., ₹ 65,500, was loss in the business activities of smuggling and, therefore, was allowable deduction under section 10(1) of the Act of 1922. The Tribunal accepted the contention and on a reference made to the Punjab High Court on behalf of the department, the Punjab High Court held that the loss sustained by the assessee as a result of confiscation of cash amount from him will have to be regarded as a trade loss and could be claimed as allowable deduction under section 10(1) of the Act. The High Court observed as follows : As the hazard of losing the money with which the gold had to be acquired was inherent in the activity, any confiscation of that amount would be a loss and thus allowable deduction within the meaning of section 10(1). Mr. Albal contended that in the instant case also it was a case of loss sustained consequent upon confiscation of the gold in question which was nothing but a stock- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt that court confirmed the view of this court on a slightly broader ground by observing in paragraph 15 of the judgment as follows : It is not enough that the disbursements are made in the course of or arise out of or are concerned with or made out of the profits of the business but they must also be for the purpose of earning the profits of the business. As was pointed out in Von Glehn's case, an expenditure is not deductible unless it is a commercial loss in trade and a penalty imposed. for breach of the law during the course of trade cannot be described as such. If a sum is paid by an assessee conducting his business, because in conducting it he has acted in a manner which has rendered him liable to penalty it cannot be claimed as a deductible expense. It must be a commercial loss and in its nature must be contemplable as such. Such penalties which are incurred by an assesses in proeedings launched against him for an infraction of the law cannot be called commercial losses incurred by an assesses in carrying on his business. Infraction of the law is not a normal incident of business and, therefore, only such disbursements can be deducted as are really incidental to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of the assessee penalty of 3,000 was paid and the penalty plus the costs were claimed as deduction in arriving at the profits. Rowlatt J. on a reference held it to be a non-deductible item and the judgment was upheld on appeal by the Court of Appeal. Warrington L.J. made the following observations : It is a sum which the persons conducting the trade have had to pay because in conducting it they have so acted as to render themselves liable to this penalty. It is not a commercial loss, and I think when the Act speaks of a loss connected with or arising out of such trade it means a commercial loss connected with or arising out of the trade. Lord Sterndale in this case observed as follows : 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 personally, so far as a company can be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the assessee's net profits from his single adventure of dealing in gold, the relevant provisions required to be considered are those contained in section 28 of the Income-tax Act, 1961 (which is equivalent to section 10(1) of the Act of 1922), and it is well settled that every type of loss suffered by an assessee as a businessman is not permitted to be deducted under the said provision. The tests by reference to which such loss qualifies itself to earn a deduction while computing net profits of the business have been clearly laid down by the Supreme Court in the leading case of Badridas Daga v. Commissioner of Income-tax. In that case the question that arose for consideration was whether monies embezzled by an agent or employee were allowable as deduction in computing the profits of the business under section 10 of the Act and the claim for deduction in respect of embezzled monies was put forward on three grounds : (a) that the loss sustained by reason of embezzlement was a bad debt allowable under section 10(2)(xv) of the Act ; (b) that it was a business expense falling within section 10(2)(xv) of the Act and (c) that it was a trading loss, which must be taken into account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aji Aziz's case while dealing with penalty or fine imposed in lieu of confiscation of goods, the Supreme Court has observed that the penalty suffered by an assessee for an infraction of law cannot be regarded as incidental to the business and in fact it falls upon the assessee in some character other than that of a trader. In my, view, the aforesaid authorities make the position very clear that before any loss could be claimed as deductible loss under section 10(1) of the Act, it must be a trading loss or commercial loss arising out of carrying on business or it must be incidental to the business and such loss must also fall on the assessee in his character as a trader. The question in the present case is as to whether the loss consequent upon confiscation of goods for an infraction of law suffered by the assessee could be regarded as a commercial loss or could it be said to be loss incidental to the business and, what is of importance, could it be said to have been suffered by him in his character as a trader ? In my view, it is certainly not a commercial loss arising from carrying on of the business nor can it be regarded as incidental to the activity of the assessee as deale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Gujarat High Court nor the Supreme Court had to consider the question whether the loss suffered by way of penalty or confiscation of goods amounted to commercial loss or not. In fact, while setting out the facts of the case it has been stated by the Supreme Court in paragraph 1 of its judgment that the loss of ₹ 3,40,000 and odd which was claimed as deductible loss had arisen out of certain transactions entered into by the assessee with different people for the supply of groundnut oil and it was expected by the assessee that those contracts would be performed but owing to certain reasons some of the contracts could not be performed and difference has to be paid. From this it appears clear that the loss of ₹ 3,40,000 which was claimed as deductible loss was clearly in the nature of commercial or trade loss for which deduction was claimed under section 10(1) of the Act. In the circumstances, it is clear that the statement of law enunciated in the case of S. C. Kothari is unexceptionable but, with respect, I would like to point out that the decision is no authority for the proposition that the loss suffered by way of penalty or confiscation of goods amounts to commerc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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