S. L. Sarap, J. - (1.) AT the instance of the assessee, the following question of law has been referred fay the Income-tax Appellate Tribunal, Lucknow, under section 256(2) of the Income-tax Act, 1961, for opinion of this court: "Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that the loss incurred by the assessee in confiscation of gold, etc., seized and confiscated by the Customs Department was not allowable deduction from the business income of the assessee, as determined ?"
(2.) THE facts in a nutshell are as follows : THE assessee is an individual and carries on business as a goldsmith. THE assessment year in question is 1971-72 and the relevant previous year ended on March 31, 1971. As a sequel to a raid carried on by the Customs and Central Excise authorities at the residence of the assessee on October 7, 1970, the Income-tax Officer made the following additions after giving an opportunity to the assessee to show cause as to why such addition should not be made. JUDGEMENT_146_ITR244_2000Html1.htm In appeal, the Appellate Assistant Commissioner upheld the action of the Income-tax Officer. Aggrieved by the order of the Appellate Assistant Commissioner, the assessee preferred a second appeal before the Income-tax Appellate Tribunal challenging the addition of Rs. 42,788. The Income-tax Appellate Tribunal dismissed the appeal of the assessee. At the time of hearing counsel for the assessee urged that by an order dated April 4, 1973, passed by the Collector of Central Excise, Allahabad, the aforesaid goods were confiscated, as such, the assessee suffered loss and it should be allowed to deduct the same from the income of the assessee. For this proposition, the assessee relied on a decision of the Supreme Court in the case of CIT v. Piara Singh [1980] 124 ITR 40. It was urged on behalf of the assessee that since the assessee had suffered loss in carrying on the business of goldsmith, the same was incidental to his business and should be deducted in determining his total income. The assessee further placed reliance on the other decisions of the Supreme Court in the case of Badridas Daga v. CIT [1958] 34 ITR 10 and CIT v. S. C. Kothari [1971] 82 ITR 794, where the Supreme Court has 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. Mr. Justice Grover, speaking for the court, observed as under (page 802) : "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 heard to say that he will bring the gross receipts to tax. He can only tax profits of a trade or business. That cannot be done without deducting the losses and the legitimate expenses of the business."
(3.) ON the basis of the said observation of the Supreme Court, it was argued that the tax collector cannot be heard to say that he will bring the gross receipts to tax but not the losses. He can only tax the profit of a trade or business and that cannot be done without deducting the losses and the legitimate expenses of the business. It was further submitted that admittedly the assessee was carrying on both legal and illegal business. These are two sides of the same coin. If the confiscation of gold and gold ornaments was a loss occasioned in pursuing the business, it is a loss inasmuch as the same way as if the same 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 incidential to it. On the contrary, the respondent's counsel urged before this court that the aforesaid facts of the case are covered by the decision reported in Haji Aziz and Abdul Shahoor Bros. v. CIT [1961] 41 ITR 350 (SC). In that case, the assessee had carried on the lawful business of importing dates from abroad and selling them in India. The import of dates by steamer was prohibited. None the less he imported dates from Iraq by steamer, and the consignments were confiscated by the customs authorities. But the dates were released subsequently on payment of fine. The assessee's claim to deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922, was rejected on the ground that the amount was paid by way of penalty for a breach of the law. An infraction of the law was not a normal incident of business carried on by the assessee, and the penalty was rightly held to fall on the assessee in some character other than that of a trader.;