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TMI Blog2008 (12) TMI 78X X X X Extracts X X X X X X X X Extracts X X X X ..... hether in the facts and circumstances of the case, the Tribunal was right in holding that amounts earned fraudulently cannot be treated as income and taxed?" Factual Matrix:- 2. The asessment relates to the years 1987-88 and 1988-89. The assessee is engaged in tax consultancy and audit work. In a search conducted in the residential premises as well as in the office of the assessee on 14.3.1989, certain incriminating documents were seized. From the documents so seized by the Income Tax Department, it was revealed that the assessee had been claiming and receiving income tax refunds by filing bogus TDS certificates along with return of income prepared by him even in the names of non-existent persons. The assessee has filed his return of income for the assessment year1987-88 originally on 30.11.1987 reporting an income of Rs.29,700/-. However on the basis of the information available after the search of his premises, the assessment was reopened under section 147 of the Income Tax Act and after considering the explanation submitted by the assessee, a sum of Rs.7,29,424/- was arrived at by the Department, being the TDS certificates encashed by the assessee during the previous yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g by treating it as the income of the assessee. Accordingly, by holding that the entire refunds collected illegally by the assessee could under no circumstances be his income, allowed the appeal preferred by the assessee and dismissed the appeal filed by the Revenue. Accordingly, the Revenue is now before us. Contention: 7. The learned standing counsel for the Revenue contended that the Tribunal was of the opinion that the assessee had indulged in making illegal claim from the Department and as such the Tribunal should have treated the refunds received by the assessee as his income. The learned counsel by placing reliance on the decisions in K.P.G.B.U.G.M.S.S.A. Mohamad Abdul Kareem and Co. v. CIT [1948]16 ITR 412 (Mad) and CIT v. S.C. Kothari [1968] 69 ITR 1 (Guj) submitted that even if the income was not earned in a legal manner, still such income is taxable and it is not the concern of the Income Tax Department as to how the assessee earned his income. 8. The learned counsel appearing on behalf of the assessee contended that the Department was not justified in assessing the income, when admittedly it was the case of the Revenue that the income was earned onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "the burglar and the swindler are also liable to tax as honest businessman is and in addition they may also reap their deserts elsewhere'. As against the whole world except the true owner the embezzler is the legal owner. His complete dominion over the funds to the extent of his ability to dispose of every pie is of undoubted economic and realisable value. The appellant has collected such refunds not only during the assessment year 1988-89 but also in the earlier and subsequent assessment years. This kind of continuity and recurrence in obtaining such refunds will constitute a source giving the receipts the character of income. It is of course not possible to attribute the source the quality of a business or profession. The income from such refunds could only be regarded as an income under a residuary head. Though the appellant has denied that he has obtained illegal refunds he has not substantiated with any acceptable evidence that such refunds were claimed by the respective persons who filed the TDS claims before the Department. He has not produced any of the parties on whose behalf he is supposed to have rendered professional service for getting refunds. Since he has acted on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on "income" is very wide and the object of the Income Tax Act being one to tax income it has to be given an extended meaning. Any kind of income earned by the assessee attracts income tax at the point of earning and tax law is not concerned about the ultimate event as to how the income was expended. Of course statutory exemptions and deductions as permitted by relevant provisions of the Income Tax Act could be availed of by a taxpayer. However the fact remains that Income Tax Act makes an obligation to pay tax on all income received. 13. The taxability of income earned by the assessee by resorting to unlawful means came up for consideration before a Division Bench of this court in K.P.G.B.U.G.M.S.S.A. Mohamad Abdul Kareem and Co. v. CIT [1948]16 ITR 412. In the said case, several persons formed into a partnership agreeing that all the arrack shops leased in the names of those persons should be run by the partnership. The application submitted for registration of the said partnership was rejected on the ground that the formation of a partnership with regard to arrack and toddy shops were prohibited by abkari law without the prior permission of the District Collector. However ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... illegality or wrong-doing associated with income, profits and gains is immaterial for the purpose of taxation. Even if a trade is illegal, it is still a trade within the meaning of the Income-tax Act, and its income, profits and gains are chargeable with income-tax." 15. In S.C. Kothari's case [1968] 69 ITR 1 (Guj) the decision of the Court of Sessions, Scotland in Lindsay vs. Commissioner of Inland Revenue [1932] 18 Tax Case 43 was also relied on by the Division Bench. In the said case, a partnership for bootlegging was entered into between three persons with an intention to transport whisky into the United States, but in breach of law of Great Britain as well as United States and the issue before the Court of Sessions was about the nature of income and its taxability, and the point was decided in favour of the Revenue by adding ill-gotten wealth in the tax net and in the said context Lord Sands observed thus (page 24): "The tax is imposed upon profits of trade. Crime, such as house-breaking, is not trade and therefore the proceeds are not caught by the tax. It does not follow, however, that there cannot be a business answering to the description of trade, albeit it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 trade have to be taxed, and they say: "Give us the tax". It is not to the purpose in my judgment to say: 'But the same State that you represent has said they are unlawful': that is immaterial altogether and I do not see that there is any contact between the two propositions. It was said in the Irish case that alleganus suam turpitudinem non est audiendus. I cannot see that the State are alleging their own turpitude; it is the appellant who is alleging his own turpitude. The State says: ' t is a business'; the appellant says: 'It is an unlawful one'; he is alleging his own turpitude. It is said again: 'Is the State coming forward to take a share of unlawful gains?' It is mere rhetoric. The State is doing nothing of the kind; they are taxing the individual with reference to certain facts. They are not partners; they are not principals in the illegality or sharers in the illegality. They are merely taxing a man in respect of those resources. It think it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Pakistan, which gold he subsequently sold in India at a profit. The currency notes were necessary for acquiring the gold. The carriage of currency notes across the border was an essential part of the smuggling operation. If the activity of smuggling can be regarded as a business, those who are carrying on that business must be deemed to be aware that a necessary incident involved in the business is detection by the Customs authorities and the consequent confiscation of the currency notes. It is an incident as predictable in the course of carrying on the activity as any other feature of it. Having regard to the nature of the activity possible detection by the Customs authorities constitutes a normal feature integrated into all that is implied and involved in it. The confiscation of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res extra commercium, otherwise known as trade in crime, or income earned by way of selling Khadhi products, are one and the same for the tax authorities. The assessee having acquired income by unethical manner or by resorting to acts forbidden by law, cannot be heard to say that the State cannot be a party to such sharing of ill-gotten wealth. In case of allowing such income to escape the tax net would be nothing but a premium or reward to a person for doing an illegal trade. In the event of taxing the income of only those who acquired the same through legal manner, the tendency of those who acquired income by illegal means would increase. It is not possible for the income tax authorities to act like police to prevent the commission of unlawful acts but it is possible for the tax machinery to tax such income. During such process strict rules of evidence are not applicable to the income tax authorities. Those piece of evidence which are not sufficient in ordinary legal proceedings to prove a particular fact would be sufficient for the tax officials to assess the income of an individual. 23. The income tax Act considers the income earned legally as well as tainted income alike ..... X X X X Extracts X X X X X X X X Extracts X X X X
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