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TMI Blog2023 (4) TMI 1057X X X X Extracts X X X X X X X X Extracts X X X X ..... re concurrent findings by all the authorities below and including the customs authorities. Whether the assessee can claim the business loss of the value of the silver bar confiscated and whether the decision of this Court in the case of Piara Singh ( [ 1980 (5) TMI 2 - SUPREME COURT] ) would be applicable? - Looking to the business of the assessee namely silver business and was not in the business of smuggling silver, the decision of this Court in the case of Piara Singh (supra) shall not be applicable and therefore the impugned judgment and order passed by the High Court quashing and setting aside the order passed by the Assessing Officer, CIT(A) and the ITAT rejecting the claim of the Assessee to treat the silver bars confiscated by the customs authorities as business loss and consequently value allowing the same as business loss is unsustainable and the same deserves to be quashed and set side. The impugned judgment and order passed by the High Court is hereby quashed and set aside and the order passed by the assessing officer, CIT(A) and the ITAT are hereby restored. M. M. Sundresh, J Judgment: - Disallowance of illegal expenses - Whether a business, as defined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, a loss in pursuance to the same is not available for deduction regardless of the nature of business, as a penalty or confiscation cannot be said to be incidental to any business. V. The decisions of this Court in Piara Singh (supra) and Dr. T.A. Quereshi (supra) do not lay down correct law in light of the decision of this Court in Haji Aziz (supra) and the insertion of Explanation 1 to Section 37. Thus we are inclined to hold that the appeal of the Revenue deserves to be allowed, though conscious of the fact that Section 115BBE of the Act may not have an application to the case on hand being prospective in nature. - CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 7689-7690 OF 2022 - - - Dated:- 24-4-2023 - M. R. Shah And M. M. Sundresh , JJ. For the Appellant : Mr. Balbir Singh, ASG Mr. Samarvir Singh, Adv. Mr. Shyam Gopal, Adv. Mr. Naman Tandon, Adv. Mr. Rupesh Kumar, Adv. Mr. S. A. Haseeb, Adv. Mr. Divyansh H. Rathi, Adv. Mrs. Sunita Sharma, Adv. Mr. Raj Bahadur Yadav, AOR Mr. Prasenjeet Mohapatra, Adv. For the Respondent : Ms. Supriya Juneja, AOR JUDGMENT M. R. Shah, J. 1. Feeling aggrieved and dissatisfied with the impugned judgment and ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO for fresh examination. The AO re-examined the issue and addition was made. The CIT(A) also upheld the order of the AO. The Assessee preferred the appeal against the fresh order passed by the CIT(A) before the ITAT. The ITAT, in the second round as well upheld the order of the authorities below. A reference was made by the ITAT to the High Court with the following questions of law: (i) Whether on the facts and in the circumstances of the case, the Tribunal after construing and interpreting the provisions contained in section 69A of the Income Tax Act, 1961 was right in law, in holding that the assessee was the owner of the 144 silver bars found at premises no A 11 12 , Sector - VII, Noida and two silver bars found at premises of M/s Lunia Co Delhi and in sustaining addition of Rs.3,06,36,909/- being unexplained investment in the hands of the assessee under Section 69A of the Act? (ii) If the answer to the above question is in affirmative then, whether, on the facts and in the circumstances of the case, the Tribunal was right in law in distinguishing the ratio laid down by their Lordships of the Supreme Court in the case of Piara Singh v/s CIT, 124 ITR 41 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is submitted that in the case of Haji Aziz Abdul Shakoor Bros. v. CIT, AIR 1961 SC 663, the assessee s claim for deduction of fine paid by him for release of his dates confiscated by customs authorities, was rejected on the ground that the amount paid by way of penalty for breach of law was not a normal course of business carried on by it. In the other two cases, customs authorities had confiscated gold from assessees otherwise engaged in legitimate businesses. It is submitted that in two relied upon cases of Andhra Pradesh High Court and the Bombay High Court the assessees claimed the value of gold seized as a trading/business loss which is identical to the Respondent-Assessee s claim in the facts of the present SLP. It is submitted that therefore the decision of this Court in Haji Aziz Abdul Shakoor Bros. v. CIT, AIR 1961 SC 663, of the Andhra Pradesh High Court in the case of Soni Hinduji Kushalji Co. vs. CIT, (1973) 89 ITR 112(AP) and of the Bombay High Court in the case of JS Parkar v. VB Palekar, (1974) 94 ITR 616 (Bom) shall be applicable with full force to the facts of the case on hand. 3.2 It is submitted that the Andhra Pradesh High Court observed in para 10 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 390, on onus of proving ownership being on the person who denies ownership and who is in possession. It is submitted that ownership of confiscated silver fell on the Respondent-Assessee in the present case which he failed to discharge and which accordingly rendered the tax authorities concurrent findings on his ownership to be valid. It is submitted that when the assessee has been unable to deny possession and ownership and in fact admitted the same before the Settlement Commission as well as the High Court, and further claimed the value of confiscated silver as a trading loss before AO, CIT(A) and ITAT, to alternatively argue to the contrary and deny ownership in order to state that Section 69A cannot be applied in his case may not be accepted. 3.4 It is submitted by learned ASG that assessee shall also not be permitted to claim such loss as a business expenditure in view of the express prohibition under Explanation 1 to Section 37(1) of the Act which was added w.e.f.01.04.1962. Reliance is placed on the decisions of this Court in the case of TA Quereshi (Dr.) v. CIT, (2007) 2 SCC 759 as well as Apex Laboratories (P) Ltd. v. CIT, (2022) 7 SCC 98. It is submitted that Explanati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bars seized from the possession of the respondent. The said order of addition came to be confirmed upto ITAT, however by the impugned judgment and order the High Court has answered the reference in favour of the assessee by holding that when the value of material is added to the income of the respondent, as a natural consequence, the loss by confiscation of the said material is required to be allowed as business loss. It is submitted that it is through that before the High Court, the assessee did not press the argument regarding the ownership of the silver slabs and therefore, the said question was not answered by the High Court. 4.1 It is submitted that therefore present case is one where set off is claimed of the value of the 146 silver slabs as loss on account of absolute confiscation rather than claim of expenditure of any penalty and/or fine imposed for infraction of law. 4.2 It is submitted that as such the issue in the present appeals is fairly covered in favour of the assessee in view of the decision of this Court in the case of TA Quereshi (Dr.) (supra). In the said decision, it is held that the judgment of the High Court applying Section 37 of the Act to the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as no option of redeeming the goods for its onward trade. Thus, there is an evident distinction between a case where deduction is sought of any penalty and/or fine as allowable expenditure and a case where business loss is claimed on account of absolute confiscation of the goods which results in loss of stock in trade. It is submitted that present one is a case where the set off is claimed as business loss on account of absolute confiscation of the silver bars and not of any penalty and/or fine. The judgments cited during the course of hearing by the Petitioner are therefore rendered on distinct and distinguishable facts and would not be applicable to the facts of the present case. 4.7 It is submitted that the said distinction has also been statutorily recognized. As highlighted by the appellant, Section 37 which deals with allowance and deduction of expenditure, was amended vide Finance Act, 1998 w.e.f. 01.04.1962 whereby Explanation 1 was added to clarify that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C 663, and the decision in the case of Soni Hinduji Kushalji Co. vs. CIT, (1973) 89 ITR 112(AP) and not agreed with the decision of the Bombay High Court in the case of J.S. Parkar vs. VB Palekar, (1974 94 ITR 616 (Bom). It is to be noted that in all the aforesaid three cases which were relied upon by the Revenue in the case of Piara Singh (supra) were found to be involved in legitimate businesses and not smuggling business but however they were found to have smuggled goods contrary to law which resulted in an infraction of law and resultant confiscation by customs authorities. 6.4 In the case of Haji Aziz (supra) the assessee claimed for deduction of fine paid by him for release of his dates confiscated by customs authorities was rejected on the ground that the amount paid by way of penalty for breach of law was not a normal business carried out by it. In the case of Soni Hinduji Kushalji (supra) and JS Parkar (supra), the customs authorities had confiscated gold from assessees otherwise engaged in legitimate businesses. In the aforesaid two cases the assessee claimed the value of gold seized as a trading/business loss. It was held that the assessees are not entitled to the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd order and it has been relied upon by the assessee shall not be applicable to the facts of the case. On hand or the other hand the decision of this Court in the case of Haji Aziz (1961) 41 ITR 350 (SC) and the decisions of the Andhra Pradesh High Court and the Bombay High Court which were pressed into service by the Revenue in Piara Singh (supra) would be applicable with full force. 7. In view of the above and for the reason stated above and looking to the business of the assessee namely silver business and was not in the business of smuggling silver, the decision of this Court in the case of Piara Singh (supra) shall not be applicable and therefore the impugned judgment and order passed by the High Court quashing and setting aside the order passed by the Assessing Officer, CIT(A) and the ITAT rejecting the claim of the Assessee to treat the silver bars confiscated by the customs authorities as business loss and consequently value allowing the same as business loss is unsustainable and the same deserves to be quashed and set side. 8.1 In view of the above and for the reason stated above present appeals succeed. The impugned judgment and order passed by the High Court is her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the judgment of this Court in Commissioner of Income Tax v. Piara Singh (1980) Supp. SCC 166, inter alia contended that smuggling by itself being prohibited in law, any loss occurred thereunder is liable for deduction. The aforesaid argument made, found acceptance at the hands of the High Court, which is sought to be impugned by the Revenue before us. RELEVANT PROVISIONS OF THE INCOME TAX ACT, 1961 2. Definitions.- In this Act, unless the context otherwise requires, xxx xxx xxx (13) business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture; 7. This provision being a definition clause merely defines various activities which could be termed as a business. Section 2(13) of the Act gives a broad definition to business . Section 28 of the Act comes under the heading Profits and Gains of Business or Profession . Various types of income enumerated thereunder are made chargeable to income tax. The income, as referred in Section 28 of the Act, has to be computed in the manner as prescribed under Section 30 to 43D of the Act, which is accordingly provided under Section 29 of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purposes of business or profession and no deduction or allowance shall be made in respect of such expenditure. This amendment will result in disallowance of the claims made by certain assessees in respect of payments on account of protection money, extortion, hafta, bribes etc. as business expenditure. It is well decided that unlawful expenditure is not an allowable deduction in computation of income. 20.2 This amendment will take effect retrospectively from 1st April, 1962 and will, accordingly, apply in relation to the assessment year 1962-63 and subsequent years. 12. Explanation-I makes a declaration to remove any possible doubts to reckon a loss suffered in the form of expenditure for any purpose which is an offence or one that is prohibited by law. There is no difficulty in holding that this explanation is clarificatory in nature. Applying the principle of literal interpretation with the intendment being very clear, giving no room for further doubts, coupled with the fact that there is no challenge to it, the me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (i). (2) Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the assessee under any provision of this Act in computing his income referred to in clause (a) and clause (b) of sub-section (1). 14. Section 115BBE of the Act deals with levy of tax on income as mentioned in Section 68, 69, and 69A to 69D of the Act. If a case comes under Section 115BBE sub-section (1) of the Act, the rate of income tax shall be at 60%. 15. The object of this provision is to fill up the loopholes and to make sure unaccounted money either generated or used, more so in the nature of Black Money, is penalized. When this provision was introduced in the year 2012, the rate of tax was fixed at the rate of 30%. The Bill also speaks about the objective behind not allowing any deduction to the assessee in computing deemed income under Section 68, 69 and 69A to 69D of the Act. That was the reason why a decision was made to impose greater tax burden. The rate of tax was increased b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us, the Court has made it clear that in the absence of any prohibition, as stated above, a claim for deduction of a loss is allowable so long as it emanates directly from the carrying on of the business, being incidental to it. In other words, it does not include loss of any nature even if it has some connection with the business, if the same cannot be said to be incidental to the business. 19.2 The court went on to hold that the payment of salary to an employee being paid for the purpose of business, is deductible under the general provision, therefore, logically any loss occasioned on the action of an employee would be incidental to the business. 19.3 Considering the aforesaid, it can be said that there is a similarity between the test laid down for deduction of an expense in the residuary omnibus provision under Section 10(2)(xv) of the Old Act and the test for deduction of loss based on commercial practices and trading principles. The decision is therefore supporting the above stated interpretation of Section 37 of the Act. 19.4 Relevant paragraphs: The question whether monies embezzled by an agent or employee are allowable as deduction in computing the profits of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxable under s. 10(1). In Income Tax Commissioner v. Chitnavis [(1932) LR 59 IA 290, 296, 297] the point for decision was whether a bad debt could be deducted under s. 10(1) of the Act, there having been in the Act, as it then stood, no provision corresponding to s. 10(2)(xi) for deduction of such a debt. In answering the question in the affirmative, Lord Russel observed: Although the Act nowhere in terms authorizes the deduction of bad debts of business, such a deduction is necessarily allowable. What are chargeable in income tax in respect of a business are the profits and gains of a year; and in assessing the amount of the profits and gains of a year account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains. It is likewise well settled that profits and gains which are liable to be taxed under s. 10(1) are what are understood to be such according to ordinary commercial principles. The word profits is to be understood , observed Lord Halsbury in Gresham Life Assurance Society v. Styles [(1892) AC 309, 315 : 3 TC 185, 188] in its natural and proper sense in a sense which no commercial man would misu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings directly from the carrying on of the business and is incidental to it and not any loss sustained by the assessee, even if it has some connection with his business. If, for example, a thief were to break overnight into the premises of a moneylender and run away with funds secured therein, that must result in the depletion of the resources available to him for lending and the loss must, in that sense, be a business loss, but it is not one incurred in the running of the business, but is one to which all owners of properties are exposed whether they do business or not. The loss in such a case may be said to fall on the assessee not as a person carrying on business but as owner of funds. This distinction, though fine, is very material as on it will depend whether deduction could be made under s. 10(1) or not. (emphasis supplied) 20. Haji Aziz Abdul Shakoor Bros. v. CIT, (1961) 2 SCR 651 20.1 The three-Judge bench of this Court in the aforesaid case was concerned with two principal issues which we are dealing with at present. In clear terms it has been held that an expenditure is not deductible unless it is a commercial loss in trade. A penalty incurred for an infra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is only a proceeding in rem and the penalty is enforced against the goods. On the other hand, if it imposes a penalty against the person concerned, it is a proceeding against the person and he is punished for committing the offence. It follows that in the case of confiscation there is no prosecution against the person or imposition of a penalty on him. In Maqbool Hussain s case [(1953) SCR 730] the question for decision was whether after proceedings had been taken under the Sea Customs Act an accused person could be prosecuted and could or could not rely upon the plea of double jeopardy, it was held that he could not. In Shewpujanrai case [(1959) SCR 821 at p. 836] the contention raised was that after proceedings had been taken under the Foreign Exchange Regulation Act it was not open to the Customs Authorities to take any action under the Sea Customs Act. The other two cases were similar to Maqbool Hussain case [(1953) SCR 730] . The contention now raised before us is quite different. What is to be decided in the present case is whether the penalty which was paid by the appellant firm was an allowable deduction within s. 10(2)(xv) of the Income-tax Act which provides: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. Ltd. [(1920) 2 KB 553] where also in similar circumstances by consent of the assessee penalty of 3,000 was paid and the penalty plus the costs were claimed as deduction in arriving at the profits. The Special Commissioners had found that the penalty and costs were incurred by the assessee in the course of carrying on their trade and so incidental thereto and were admissible deductions. Rowlatt, J., on a reference held it to be a non-deductible item. This judgment was affirmed on appeal by the Court of Appeal. Lord Sterndale, M.R., was of the opinion that it was immaterial whether technically the proceedings were criminal or not. The money that was paid was paid as a penalty and it did not matter if in the information it was called a forfeiture. It was argued by the assesses in that case that no moral obliquity was attributed to them and that it did not matter whether the expense was incurred in consequence of an infraction of the law or whether it was a penalty for doing an illegal act. At p. 565 Lord Sterndale said: Now what is the position here? This business could perfectly well be carried on without any infraction of the law. This penalty was imposed because ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness, but was a fine imposed upon the company personally, so far as a company can be considered to be a person, for a breach of the law which it had committed. It is perhaps a little difficult to put the distinction into very exact language, but there seems to me to be a difference between a commercial loss in trading and a penalty imposed upon a person or a company for a breach of the law which they have committed in that trading. For that reason I think that both the decision of Rowlatt, J., in this case, and his former decision in Inland Revenue Commissioners v. Warnes Co. [(1919) 2 KB 444] which he followed were right, and that this appeal should be dismissed with costs. In Spofforth and Prince v. Glider [(1945) 26 TC 310] the assessee was a firm of chartered accountants, who claimed a deduction for certain legal costs paid in connection with a successful defence of one of the partners in a Police Court. The assessee Firm also sought legal advice in regard to matters connected with some proceedings. Summons were issued against the assessee firm but were eventually dismissed. The assessee contended that the whole of the costs incurred in connection with the proceeding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Warne s case [(1919) 2 KB 444] and Von Glehn s case [(1920) 2 KB 553] held that the amount did not constitute an expenditure falling within Section 10(2)(xii). The Madras High Court in Senthikumara Nadar Sons v. Commissioner of Income-tax (1957) 32 ITR 138] held that payments of penalty for an infraction of the law fell outside the scope of permissible deductions under s. 10(2)(xv). In that case the assessee had to pay liquidated damages which was akin to penalty incurred for an act opposed to public policy a policy underlying the Coffee Market Expansion Act, 1942, and which was left to the Coffee Board to enforce. Reference was also made during the course of arguments to Commissioner of Incometax v. Hirjee [(1953) SCR 714]. In that case the assessee was prosecuted under the Hoarding and Profiteering Ordinance but was finally acquitted and claimed the amount spent in defending himself under s. 10(2)(xv) in his assessment. It was held that the distinction between the legal expenses on a successful and unsuccessful defence was not sound and that the deductibility of such expenses under s. 10(2)(xv) must depend on the nature and purpose of the legal proceedings in relation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpose of the business. Can it be said that a penalty paid for an infraction of the law, even though it may involve no personal liability in the sense of a fine imposed for an offence committed, is wholly and exclusively laid for the business in the sense as those words are used in the cases that have been discussed above. In our opinion, no expense which is paid by way of penalty for a breach of the law can be said to be an amount wholly and exclusively laid for the purpose of the business. The distinction sought to be drawn between a personal liability and a liability of the kind now before us is not sustainable because anything done which is an infraction of the law and is visited with a penalty cannot on grounds of public policy be said to be a commercial expense for the purpose of a business or a disbursement made for the purposes of earning the profits of such business. 21. CIT v. S.C. Kothari, 1972 (4) SCC 402 21.1 The decision rendered in Badridas Daga (supra) was quoted with approval. However, it was the view expressed that if the profit is to be taken for the taxable income, a resultant expenditure/loss cannot be avoided, notwithstanding the nature of busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits or gains for purposes of computing the tax payable by the assessee. 5. What are chargeable to tax in respect of a business carried on by the assessee are the profits or gains of a particular assessment year. While assessing the profits, necessarily loss incurred in the business during the year should be taken into account, as otherwise it is not possible to arrive at the true profits earned by the assessee. It is well-settled that the taint of illegality associated with profits or income is immaterial for the purpose of taxation. As observed by Lord Haldane in Minister of Finance v. Smith [[1927] A.C. 193, 198.] , Income-tax Acts are not necessarily restricted in their application to lawful business only. One who contravenes a statute and trades in business prohibited by law while being liable for prosecution for the offence committed by him will, at the same time, be liable to pay tax out of the income or profits earned from the illegal trade or business. We are now concerned with the loss representing the value of gold on account of the confiscation of the gold for contravention of the provisions of the Customs Act. Can that loss be regarded as a commercial loss per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carries on and not every sort or kind of loss, which has absolutely no nexus or connection with his trade or business. 11. It is well to remember that confiscation of contraband gold is an action in rem and not a proceeding in personam. As observed by Bhagwati J. in Maqbool Hussain v. State of Bombay [[1953] S.C.R. 730, 742 (S.C.), AIR 1953 S.C. 325.] confiscation is no doubt one of the penalties which the customs authorities can impose but that is more in the nature of proceedings in rem than proceedings in personam, the object being to confiscate the offending goods which have been dealt with contrary to the provisions of the law. To the same effect is the view expressed by S.K. Das J. in Shewpujanrai Indrasanrai Ltd. v. Collector of Customs [[1959] S.C.R. 821, 836 (S.C.), AIR 1958 S.C. 845.] that, so far as the confiscation of the goods is concerned, it is a proceeding in rem and the penalties are enforced against the goods whether the offender is known or not known and the order of confiscation under section 182 of the Sea Customs Act operates directly upon the status of the property and under section 184 transfers an absolute title to the Government. Subba Rao J. (as he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (C.A.).] , an expenditure is not deductible unless it is a commercial loss in trade and 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 assessee in proceedings launched against him for an infraction of the law cannot be called commercial losses incurred by an assessee 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 the business itself. They cannot be deducted if they fall on the assessee in some character other than that of a trader. Therefore, where a penalty is incurred for the contravention of any specific statutory provision, it cannot be said to be a commercial loss falling on the assessee as a trader, the test being that the expenses which are for the purpose of enabling a person to carry on trade for m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (H.L.).] , They cannot be deducted if they are mainly incidental to some other vocation or fall on the trader in some character other than that of trader. The nature of the trade is to be considered. 23. This court in Commissioner of Income-tax v. Chakka Narayana [[1961] 43 I.T.R. 249 (A.P.).] , in a case of loss sustained by an assessee on account of theft at a railway station, held that the loss resulting thereof was not incidental to the assessee's business and was not an allowable deduction and that the mere fact that there was some remote connection between the loss and the business would not bring the loss within the expression loss incidental to the the . The loss sustained by confiscation of the smuggled gold is absolutely foreign to the vocation or business of the assessee-firm. It is a loss incurred in some character other than that of a trader. The confiscation of the gold, being the result of a proceeding in rem, falls completely outside the trade or business which the assessee was carrying on. Confiscation of contraband goods is one of the penalties provided under the Sea Customs Act and the penalty is enforced against the goods irrespective of the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts was necessary. It is, therefore, not possible to know if the Tribunal was reluctant to allow set off for loss tainted with patent illegality, against the income, source of which was not shown to be illegal or it treated the loss by confiscation as capital loss and, therefore, was reluctant to deduct the same from the income from capital gains as required under section 71. Be that as it may, I have no hesitation in saying that if it were a pure question of law capable of being adjudged on the material on record, the Tribunal was under a statutory obligation to entertain and decide the same. I, however, think that, on the admitted facts, the petitioner is not entitled to claim any set-off. The loss suffered by the assessee consequent on the confiscation of the gold for infraction of law cannot be said to be a commercial loss liable to set off under any provision of the Act. It will be enough to refer to the judgment of the Supreme Court in Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax. The Supreme Court upheld the view of this court in the same case. Dates were imported from abroad by the assessee in contravention of the provisions of the Sea Customs Act. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when incurred or suffered in the course of prohibited trade or business still cannot be said to be the normal incident even of such unlawful business and the loss so suffered can still be not said to be a commercial loss in the trade for the same reason as gains of theft, dacoity, misappropriation or cheating cannot be treated as taxable income from any business or commerce. The claim of Mr. Albal for deduction of value of gold confiscated by way of set-off cannot, therefore, be entertained. 30. It is true, as observed by the Punjab and Haryana High Court in Piara Singh's case, the risk of confiscation of goods and incurring of penalties is inherent in any unlawful trading or business. So is the risk of conviction and fine. It does not, however, necessarily follow that every kind of damage suffered in such trading falls under the category of commercial loss. It shall have to be held, at any rate, on the authority of the Supreme Court in Haji Aziz and Abdul Shakoor Bros. that the confiscation of property or penalty incurred while indulging in prohibited trading activities does not amount to commercial loss though it happens in fact to be a loss according to the ordinary me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n noticed by the learned judges of the Supreme Court themselves. Ratio of this judgment is applicable to all contingencies where such non-commercial loss is sought to be deducted on any count whatsoever. That the assessee in that case claimed deduction of penalty under section 10(2)(xv) cannot make any difference to the ratio of the case. I do not find it possible to agree with the view of the Punjab High Court. I do not think that the Gujarat High Court's judgment in Kothari's case supports its view. On the contrary, the ratio of the two Supreme Court judgments run counter to the ratio of the Punjab case. Justice Tulzapurkar: 179. I have already indicated above that in Haji Aziz's case1 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee earned even from unlawful business, the assessee is also entitled to insist on deduction of loss arising out of such unlawful business. There could be no quarrel with this statement of law which has been approved by the Supreme Court. But even there, the loss in respect of which deduction could be claimed while computing the profits of the unlawful business must be a trade loss or commercial loss or loss incidental thereto but suffered by the assessee in his character as a trader and not loss suffered as a result of confiscation of goods for an infraction of law which would be a loss suffered by him in some capacity other than as a trader. Besides, in S.C. Kothari's case neither 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 Rs. 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision of the Bombay High Court certainly falls in line with the one rendered in Haji Aziz (supra). The cogent reasons given by taking penalty and confiscation out of the purview of Section 10(1) of the Old Act appears to be the correct view. 24. Commissioner of Income Tax v. Piara Singh, (1980) Supp. SCC 166 24.1 This Court did not differ with the view expressed by a co-ordinate bench in Haji Aziz (supra). In fact, it gave its approval to the said decision. However, reliance was placed on S.C. Kothari (supra) by drawing a distinction between an infraction of law committed in carrying out a lawful business, as against one committed in an inherently unlawful business. It was done upon a legitimate anticipation that in an illegal business there will be many pitfalls resulting in expected loss, which cannot be factored into a normal business. 24.2 Law as laid down in Haji Aziz (supra) on both the issues have not been taken note of by inadvertence, particularly the nature of proceedings involved in the imposition of confiscation or penalty, being proceedings in rem. This Court did not have the benefit of the explanation as available under Section 37 of the Act, while inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntal to it. II. As a consequence, any loss incurred by way of an expenditure by an assessee for any purpose which is an offence or which is prohibited by law is not deductible in terms of Explanation 1 to Section 37 of the Act. III. Such an expenditure/loss incurred for any purpose which is an offence shall not be deemed to have been incurred for the purpose of business or profession or incidental to it, and hence, no deduction can be made. IV. A penalty or a confiscation is a proceeding in rem, and therefore, a loss in pursuance to the same is not available for deduction regardless of the nature of business, as a penalty or confiscation cannot be said to be incidental to any business. V. The decisions of this Court in Piara Singh (supra) and Dr. T.A. Quereshi (supra) do not lay down correct law in light of the decision of this Court in Haji Aziz (supra) and the insertion of Explanation 1 to Section 37. 27. In view of the aforesaid discussion, I am inclined to hold that the appeal of the Revenue deserves to be allowed, though conscious of the fact that Section 115BBE of the Act may not have an application to the case on hand being prospective in nature. Accordingly, the ..... 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