Decided on April 08,1971



Obul Reddi, J. - (1.) TWO questions have been referred to this court under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act ") and they are : " 1. Whether the Tribunal is justified in law in disallowing the sum of Rs. 56,978 claimed as a business loss for the assessment year 1963-64 ? 2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the loss of Rs. 56,978 should have been claimed in the year in which the Collector has passed the order, but not when the Supreme Court has passed the order ?
(2.) IF our answer to the first question is in the affirmative then the second question will not arise for consideration. The facts necessary for determination of the questions are these : The petitioner is a firm doing business under the name and style of M/s. Soni Hinduji Kushalji and Company at Adoni. It is registered both under the Partnership Act as well as under Section 26A of the Act and carries on business in gold, silver and jewellery. The customs authorities had information that the petitioner-firm was smuggling gold from Goa to Adoni and then despatching the same to Bombay to the shop of one Bhimaji Punamchand for disposal. They, therefore, kept watch on a suspect by name Rukmanna Lam-bade going to the said shop in Bombay. On October 28, 1955, the customs officials followed the said Rukmanna Lambade to the National Refinery Ltd., and after he had taken over some gold from the refinery, searched him and seized from him gold bullion and " rawa " weighing 251 tolas and 133 grams. He disclosed that he was a servant of the petitioner-firm and had brought the gold belonging to the firm. On the same day the customs officials intercepted an uninsured railway parcel sent by the assessee-firm which was opened at the shop of Bhimaji Punamchand and it was found to contain some more pieces of gold, 600 old rupee coins and silver scrap weighing 35 lbs. and 3 tolas. After seizing the gold from Rukmanna Lambade and the other items from the shop of Bhimaji Punamchand, a notice was issued on December 31, 1955, to the assessee-firm to show cause why the gold seized of the value of Rs. 56,978 should not be confiscated. The assessee-firm filed a detailed reply in answer to the notice. The Collector of Customs, after considering the reply, ordered the confiscation of the smuggled gold. The firm then unsuccessfully preferred an appeal to the competent authority and a further appeal to the Central Government. Thereafter the assessee moved the Supreme Court under Article 32 of the Constitution, contending, inter alia, that Section 178 of the Sea Customs Act is ultra vires of the Constitution and thus inoperative and that petition was also dismissed. As the sum of Rs. 56,978 represented the value of the gold seized by the customs officials on October 28, 1955, the firm in the assessment proceedings claimed this amount towards loss in vattay account. The Income-tax Officer rejected the claim of the assessee that this amount represented loss in the business of the firm to claim deduction, on the ground that it did not relate to the business carried on by it, but it is due to the confiscation of the gold under the Sea Customs Act. The subsequent appeals preferred by the assessee-firm to the Appellate Assistant Commissioner and to the Appellate Tribunal were also dismissed. It is after that that the assessee-firm moved the Tribunal under Section 256(1) for reference to this court.
(3.) MR. Swamy appearing for the assessee-firm strongly contended that when the profits earned from an illegal business are not exempt from tax, the loss sustained in such business should be allowed to be deducted from the profits or gains for purposes of computing the tax payable by the assessee. 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 0 AC 193, 98 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 pertaining to the business or incidental to the business the assessee was carrying on, is the real question.;

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