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TMI Blog2022 (3) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... ods procured by violation of MM DR Act/Rules and, therefore are illegal exports as per Section 11H of Customs Act, 1962. The MMDR Act itself provides for punishments for contraventions of provisions of the Act. Sub-clause (a) of Section 11H defines illegal exports - appellant herein is a registered 100% EOU and does not possess any mining lease. Both these are different entities in the eyes of law. Merely because the supplier of goods has committed violation of local law, the exporter, who has procured the goods cannot be put into adverse situations. Even if it is proved that the supplier had contravened the provisions of MMDR Act, to hold that the exports are illegal exports, it has to be established that the exporter had acted consciously or abetted for such illegal mining. It needs to be stated that there is no show cause notice issued under the Customs Act, 1962 against the appellant alleging illegal export. By depriving the refund the department has sought to impose a punishment or penalty on the appellant for the alleged illegal export. The intention of Notification No. 41/2012 is to refund the service tax paid by the exporter on the goods exported. This is to give effe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w? Can the Government profit from an illegal activity by collecting tax on it while on the other hand, taking action against the person under some other law? Does it not amount to the Government endorsing the illegal activity? These fundamental questions do not appear to have been addressed in the context of service tax. The settled legal position is therefore, the taxation should not consider legality or illegality of the acts in question. So long as the acts in question fall under the taxing statute, tax must be paid regardless of whatever action is necessary and may be taken under any other law which has been violated. Conversely, if any benefit is available under the tax laws, it is available regardless of the illegality of the underlying act. Although the goods are illegally imported, duty as applicable, is collected. This rate would be the tariff rate read with any exemption notifications that may apply. Not only is the customs duty collected on the illegal imports but the benefit of any exemption notification is also available for such illegal imports. Similarly, when export goods confiscated under Section 113 and thereafter allowed to be redeemed and exported, if any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eriod from 2000-01 to 2015-16 and they themselves had accepted that a total quantum of 9,65,948.8 MTs of minerals were transported by them during the period from 2014-15 and 2015-16 after the mining operation was banned and issuance of transport permits halted. It was also learnt from the Committee that the entire quantum of 9,65,948.8 MTs of minerals transported without transport permit during the period from 2014-15 and 2015-16 was an illegal transport. The respondent was thus of the view that appellants were not eligible for the refunds claimed, inasmuch as, the minerals had been exported by illicit mining and transportation. Hence, eight show cause notices were issued upon the appellant proposing to deny the eight refund claims for the period from May, 2016 to December, 2016 on the above grounds. After due process of law, the Assistant Commissioner of CGST Central Excise, Tuticorin Division, who was the Refund Sanctioning Authority (RSA) denied the eight refund claims. Appeal was preferred by the appellant against such rejection of refund claims. The Commissioner (Appeals), vide Order impugned herein, upheld the rejection of refund claims. Hence these appeals. 2. The issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fund claims have been filed. Assuming as illicit mining on the basis of Minutes of the Committee, the refund claims have been wrongly rejected. (iv) The Learned Counsel submitted that the allegation of illegal mining is against M/s. V.V. Minerals [Mines], whereas, the export is made by M/s. V.V. Minerals [100% EOU], which is a different entity. The EOU has procured minerals from another entity M/s. V.V. Minerals (Mines) and exported the goods after processing. In fact, M/s. V.V. Minerals, the appellant herein which is an 100% EOU has no mining lease. They procured minerals from other licence holders and undertook further processing of the raw materials. The recommendation by the District Level Committee is only against the mining licensees. Since the appellant does not have any mining lease, such recommendations made by District Level Committee is not applicable to them. The orders passed by the authorities below merely basing of the Minutes of the District Level Committee are not tenable in law. (v) As per Section 21 of Mining and Minerals [Development and Regulation] Act, 1957 (hereinafter called as MMDR Act ) punishments are provided for contravening the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nied the refund claims, as the claims which arise out of illegal exports. He prayed that the appeals may be dismissed. 5. Heard both sides. 6. The issue is the rejection of refund claims filed under Notification No. 41/2012-S.T., dated 29-6-2012. Undisputedly, the department does not have a case that the appellant has not exported goods or that they have not paid service tax on the input services used for export of goods. So also, there is no allegation that the conditions of the above notification are not fulfilled. The reason for rejecting the refund claims for the period from May, 2016 to December, 2016 is that the department gathered information from the District Level Committee of Tirunelveli that appellant has committed illicit mining of Beach Sands and unlawfully transported the same. The export of goods procured by violation of MM DR Act/Rules and, therefore are illegal exports as per Section 11H of Customs Act, 1962. To understand the allegations raised in the show cause notice, it would be worthwhile to reproduce the relevant provisions of MMDR Act/Rules, which reads as under :- (1A) No person shall transport or store or cause to be transported or stored any mine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be, for the period during which the land was occupied by such person without any lawful authority. 7. From the above, it can be seen that the MMDR Act itself provides for punishments for contraventions of provisions of the Act. Sub-clause (a) of Section 11H defines illegal exports. Though, the department contends that the goods fall within the definition of Illegal export , apart from the Minutes of the District Level Committee, there is nothing to establish violation of MMDR Act/Rules by the appellant. For that matter, it is also contended by the appellant that M/s. V.V. Minerals [Mines] is a different entity, which is the licence holder for mining of Beach Sands. The appellant herein is a registered 100% EOU and does not possess any mining lease. Both these are different entities in the eyes of law. Merely because the supplier of goods has committed violation of local law, the exporter, who has procured the goods cannot be put into adverse situations. Even if it is proved that the supplier had contravened the provisions of MMDR Act, to hold that the exports are illegal exports, it has to be established that the exporter had acted consciously or abetted for such illegal minin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces availed for exporting the goods, the department cannot deny the refund stating reasons beyond the Customs Act as well as Finance Act. Notification No. 41/2012 emanates from the Finance Act and, therefore, only if there is violation under the said Act as well as the notification, refund can be rejected. Since the department does not have a case that the appellants have violated provisions of the Finance Act or the notification, I am of the opinion that the rejection of refund claim cannot sustain. 10. We do not find any ground to differ from the view taken in the above case. From the foregoing, we hold that the rejection of refund claim is unjustified. The impugned orders are set aside, the appeals are allowed with consequential reliefs, if any. (Pronounced in open Court on .) 11 . [Per P. Venkata Subba Rao, Member (T)]. - I agree with the conclusion of my sister Member (Judicial) but for slightly different reasons. The questions which need to be answered in this case are (a) whether tax laws apply even to cases of illegal activities if they are otherwise covered by the tax law? (b) Consequently, will tax be leviable even on illegal activities? and (c) Conversely, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Regulation) Act, 1957. Section 2 of this Act contains the declaration by the Parliament that it is expedient in public interest to regulate mines and minerals (as required under Entry 54 of the List I of the Seventh Schedule of the Constitution). It reads as follows : 2. Declaration as to expediency of Union Control. - It is hereby declared that it is expedient in the public interest that the Union should take under its control the regulation of mines and the development of minerals to the extent hereinafter provided. 16. This Act classifies some minerals as minor minerals including sand which can be regulated by the State Governments while the other minerals are regulated by the Central Government. Relevant sections are as follows : Section 2(e) : minor minerals means building stones, gravel, ordinary clay, ordinary sand other than sand used for prescribed purposes, and any other mineral which the Central Government may, by notification in the Official Gazette, declare to be a minor mineral; Section 15. Power of State Governments to make rules in respect of minor minerals. - (1) The State Government may, by notification in the Official Gazette, make rules f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f which the assessee conducted some forward trading transactions and in such transactions incurred losses. The assessee also did some forward trading which was as per regulations. The assessee wanted the losses incurred in the forward trading which was allegedly illegally conducted to be taken into account to determine the tax liability which the department opposed. The assessee argued that the transactions were not illegal and also that they were eligible to reckon the losses in calculating the income tax. The Hon ble High Court held that the transactions were illegal because there was violation of the Forward Contracts (Regulation) Act. Nevertheless, such losses can be set off against the other profits to calculate Income tax under the Income-tax Act, 1922. Relevant extracts of this judgment are below : 17. That immediately takes us to a consideration of the second question. This question raises a point of considerable importance to the revenue and broadly stated the point is whether a loss arising in an unlawful business is liable to be taken into account in computing the business income of the assessee under section 10 of the Income-tax Act, 1922. Now it is well-settled in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that decision of the Supreme Court seems to have gone upon this principle, that no construction could be admitted which recognised that the State should come forward and seem to take a profit from what the State prohibited, because the State ought to have prevented it; and it was argued, if I may venture to say so, in a somewhat rhetorical style : Does the State keep its revenue eye open and its eye of justice closed? I must say, I do not feel the force of that conservation at all. Would it have made any difference, I ventured to ask in the argument, if the State had kept both its eyes open and prosecuted the man for the lottery and taxed him for the profits at the same time? That would at any rate have protected the State from the reflections which were made upon it in the words I have quoted. But, in truth, it seems to me that all that consideration is misconceived. The revenue representing the State, is merely looking at an accomplished fact. It is not condoning it; it has not taken part in it; it merely finds profits made from what appears to be a trade, and the revenue laws happen to say that the profits made from trades have to be taxed, and they say : Give us the tax . It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lawful or unlawful. Viscount Haldane, delivering the opinion of the Privy Council, also said to the same effect while construing the Canadian income tax law in Canadian Minister of Finance v. Smith, where the question was whether profit made from a business of illicit traffic in liquor carried on by the taxpayer in Ontario contrary to the provisions of the Ontario Temperance Act were taxable under the Canadian income tax laws : Construing the Dominion Act literally, the profits in question, although by the law of the particular province they are illicit, come within the words employed... There is nothing in the Act which points to any intention to curtail the statutory definition of income, and it does not appear appropriate under the circumstances to import any assumed moral or ethical standard as controlling in a case such as this the literal interpretation of the language employed... 22. These decisions clearly show that even where a trade is illegal, it would still be a trade within the meaning of the Income-tax Act and if any profits are derived from such trade, they would be assessable to tax under the Income-tax Act. The assessee cannot be heard to say that the profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gal trade and it was because the Courts came to the conclusion that illegal trade was included within the meanings of trade as used in the Income-tax Acts that they regarded the profits made from illegal trade as chargeable to tax. The basic rule which these decisions laid down was that the income-tax law is not concerned with the legality or illegality of the business. Once it is found that there is a business, legal or illegal, the income-tax law says that the profits of the business shall be chargeable to tax. Now, the word profits is to be understood as observed by Lord Halsbury in Gresham Life Assurance Society v. Styles in its natural and proper sense - in a sense which no commercial man would misunderstand . The observations of the Privy Council in Pondicherry Railway Co. v. Commissioner of Income-tax and of the Supreme Court in Badridas Daga v. Commissioner of Income-tax, Calcutta Co. Ltd. v. Commissioner of income-tax and Commissioner of Income-tax v. Bai Shirinbai K. Kooka show that the profits to be assessed are real profits and they must be ascertained on ordinary principles of commercial trading and commercial accounting. What are chargeable to Income-tax in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in Chandrika Prasad Ram Swarup v. Commissioner of Income-tax is more in point. That was a decision given by a Full Bench of the Allahabad High Court and two of the Learned Judges of the Full Bench, namely, Iqbal Ahmed J. and Allsop J. dealt with the effect of illegality of the transaction on the assessability to tax. Iqbal Ahmed J. said : The question of the legality or illegality of transactions entered into by a firm is totally irrelevant in calculating the net profits or the loss incurred by the firm in a particular year. For example if the assessee-firm had entered into a wagering contract which resulted in huge loss, it would not have been open to the income-tax department to decline to take that loss into account simply because the contract by way of wager was void in law. The income assessable to tax is the actual income of an individual or of a firm irrespective of the manner in which the income was derived. Legality or illegality of transaction culminating in profit or loss is, therefore, foreign to the scope of an enquiry into the income of an individual or of a firm for the purpose of taxing the same . Allsop J. also observed : I am also inclined to agree with my ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d any ground to sustain the order of the Income Tax Appellate Tribunal. Accordingly the order dated 25-10-2002 is set aside and both the tax cases are allowed. The substantial questions of law are decided in favour of the revenue. 23. The Hon ble Supreme Court addressed this question in Commissioner of Income Tax v. Piara Singh (1980 SUPP. SCC 166). The substantial question of law before the Supreme Court was as to whether the loss which arose from the confiscation of the currency notes was an allowable deduction under Section 10(1) of the Income-tax Act, 1922 and while upholding the judgment of the High Court and dismissing the appeal filed by the revenue, the Hon ble Supreme Court observed thus :- 5. In our judgment, the High Court is right. The Income Tax Authorities found that the assessee was carrying on the business of smuggling. They held that he was, therefore, liable to income tax on income from that business. On the basis that such income was taxable, the question is whether the confiscation of the currency notes entitles the assessee to the deduction claimed. The currency notes carried by the assessee across the border constituted the means for acquiring gold in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cated goods shifts to the Government. However, under Section 125, the person from whom the goods are seized may be given an opportunity of redeeming them on payment of a fine if the goods are prohibited and shall be given an opportunity of redeeming them if they are other goods. This section reads as follows : SECTION 125. Option to pay fine in lieu of confiscation. - (1) Whenever confiscation of any goods is authorised by this Act, the officer adjudging it may, in the case of any goods, the importation or exportation whereof is prohibited under this Act or under any other law for the time being in force, and shall, in the case of any other goods, give to the owner of the goods or, where such owner is not known, the person from whose possession or custody such goods have been seized, an option to pay in lieu of confiscation such fine as the said officer thinks fit : Provided that where the proceedings are deemed to be concluded under the proviso to sub-section (2) of section 28 or under clause (i) of sub-section (6) of that section in respect of the goods which are not prohibited or restricted, the provisions of this section shall not apply : Provided further that, witho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of title in goods or immovable property, by way of sale, gift or in any other manner; or (ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of Article 366 of the Constitution; or (iii) a transaction in money or actionable claim; (b) a provision of service by an employee to the employer in the course of or in relation to his employment; (c) fees taken in any Court or Tribunal established under any law for the time being in force. (51) taxable service means any service on which service tax is leviable under section 66B; SECTION 66B. Charge of service tax on and after Finance Act, 2012. - There shall be levied a tax (hereinafter referred to as the service tax) at the rate of fourteen per cent, on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed. 30. Nothing in this Finance Act, 1994 says that the service must be legal for it to be covered as a taxable service just as the Income-tax Act, 1922 and the Income-tax Act, 1961 nowhere ..... X X X X Extracts X X X X X X X X Extracts X X X X
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