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TMI Blog2005 (8) TMI 76X X X X Extracts X X X X X X X X Extracts X X X X ..... been referred to this court for its opinion, at the instance of the Revenue. "Whether, the foreign currency of Rs. 4,56,980 confiscated from the assessee was allowable as a loss to the assessee?" The matrix of facts giving rise to the substantial question of law is as follows: The assessee is an individual whose relevant accounting year ended on March 31, 1982. He was proceeding to Hong Kong on August 8, 1981. He was apprehended by the customs authorities at Bombay airport and foreign currency equivalent to Rs. 4,56,980 was seized from his custody. The customs authorities questioned the assessee and his companion Aboobakar. The Additional Collector of Customs by order dated August 16, 1982 confiscated the foreign currency seized from the assessee and further imposed fine of Rs. 1,50,000 on the assessee for contravening the Foreign Exchange Regulation Act. The order of confiscation is confirmed by the Customs, Excise and Gold (Control) Appellate Tribunal ("the CEGAT") by order dated May 2, 1984. On these facts, the Income-tax Officer treated Rs. 4,56,980 as the assessee's income from undisclosed sources but rejected the assessee's claim for the loss suffered by him. The Commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see's statement before the customs authorities denying ownership of the foreign currency seized and alleged ignorance as to how the same came into his possession. They also noted the rejection of the assessee's defence by the customs authorities and the order of confiscation of foreign currency seized from the assessee and imposition of fine of Rs. 1,50,000 on the assessee for contravention of the Foreign Exchange Regulation Act. It was also noted by the Income-tax Officer as well as the Commissioner of Income-tax (Appeals) that the customs authorities did not accept the story of the assessee as the assessee was not able to satisfy the customs authorities that he was not the owner of the money seized. In view thereof, the Income-tax Officer and the Commissioner of Income-tax (Appeals) ordered that the sum of Rs. 4,56,980 held in foreign currency and seized from the assessee be treated as unexplained income of the assessee subject to tax under section 69A of the Income-tax Act, 1961. Section 69A provides as follows: "Where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewellery or valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and therefore, foreign currency was confiscated. Alternatively, it was submitted that even if the assessee was held not to be a smuggler, the fact remains that the foreign currency found in his possession has been confiscated by the customs authorities. The Tribunal found that there was no justification for assessing the foreign currency seized as unexplained money of the assessee under section 69A and at the same time, not allowing the loss of the foreign currency. The Tribunal, accordingly, allowed the appeal and directed the amount of foreign currency of Rs. 4,56,980 confiscated from the assessee be allowed as the loss to the assessee. Before this court, the submission of the Revenue was that since the assessee was not carrying on the business of smuggling, the amount confiscated from him under section 69A would not be entitled to be treated as a business loss, as admittedly, the assessee was not carrying on the business of smuggling. Reference has been made to the judgment of the Andhra Pradesh High Court in the case of Bijjala Shivalingam v. CIT [2002] 253 ITR 105 wherein it was held that: "In order to claim deduction of expenditure under section 37(1) of the Income-tax Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y pertinent to notice that in Piara Singh's case [1980] 124 ITR 40 (SC); Shri Ram Chander's case [1986] 159 ITR 689 (P&H) and Parkash Chand Sushil Kumar's case [1989] 179 ITR 27 (P&H), the assessees were admittedly indulging in smuggling of gold. In Piara Singh's case [1980] 124 ITR 40 (SC) decided by the apex court, the assessee, Mr. Piara Singh, admitted that he was taking the currency notes to Pakistan to purchase gold there and smuggle it into India. In Shri Ram Chander's case [1986] 159 ITR 689 (P&H), the assessee admitted that the seized gold bars were delivered to him by one Mr. Champath Rai of Rohtak for delivering the same to one Lalchand. In other words, the assessee admitted his smuggling activity. Similarly, in Parkash Chand Sushil Kumar's case [1989] 179 ITR 27 (P & H), it is apparent from the judgment that Mr. Sushil Kumar, one of the partners of the assessee-firm was carrying on smuggling of gold. In the context of the position admitted by the assessees themselves and also having regard to the findings recorded by the authorities under the Customs Act, the Supreme Court and the Punjab and Haryana High Court, allowed deduction under section 37 of the Act as business o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it. The confiscation of the currency notes is a loss occasioned in pursuing the business; it is a loss in much the same way as if the currency notes had been stolen or dropped on the way while carrying on the business. It is a loss which springs directly from the carrying on of the business and is incidental to it. Applying the principle laid down by this court in Badridas Daga v. CIT [1958] 34 ITR 10, the deduction must be allowed." The apex court further noted that in CIT v. S.C. Kothari [1971] 82 ITR 794, it had held that for the purpose of section 10(1) of the Indian Income-tax Act, 1922, a loss incurred in carrying on an illegal business must be deducted before the true figure of profits brought to tax can be computed. Grover J., speaking for the court, 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trader or businessman a deduction could not be allowed." The apex court finally noted that "the true significance of the distinction between an infraction of the law committed in the carrying on of a lawful business and an infraction of the law committed in a business inherently unlawful and constituting a normal incident of it was not pointedly placed before the High Court in that case." After explaining and distinguishing the various cases referred to and relied upon by the Revenue in Piara Singh's case [1980] 124 ITR 40, the apex court negatived the contention of the Revenue and affirmed the view taken by the Punjab and Haryana High Court and allowed the deduction of Rs. 65,500 which was confiscated from Piara Singh while smuggling the same across the border, as a business loss. In the case on hand it is the contention of the Revenue that since that the assessee was admittedly not a smuggler and not carrying any illegal business or smuggling, that smuggling was not the business of the assessee and therefore, he was not entitled to deduction of Rs. 4,56,980 being the equivalent of the foreign currency seized from him. However, learned counsel for the Revenue has pointed out tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent detention under the COFEPOSA Act confirmed that he was treated as a smuggler and the business of the assessee was that of smuggling and, therefore, the foreign currency recovered from Aboobakar, a co-conspirator of the assessee was the amount involved in the smuggling activity and the confiscation of the said amount was, therefore, business loss suffered by the assessee in conducting his business of smuggling. It may be noted that it is not the case of the Revenue that the assessee was carrying on any other business, lawful as otherwise, for which the foreign currency was being illegally transported out of the country. The business of the assessee was smuggling of foreign currency, the confiscation of foreign currency equivalent to Indian Rs. 4,56,000 was, therefore, a loss of stock-in-trade of the assessee. The Revenue while bringing to tax the sum of Rs. 4,56,980 as income of the assessee under section 69A, cannot deprive the assessee of the benefit of treating the said amount as a business loss. Accordingly, we hold that the assessee shall be entitled to the benefit of treating the sum of Rs. 4,56,980 confiscated from him as business loss and answer the question referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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