N.D. Ojha, C.J. - (1.)THE Income-tax Appellate Tribunal, Nagpur Bench, Nagpur, has referred the following two questions to this court for its opinion, under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as " the Act ").
" (1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the imposition of fine of Rs. 5,000 under the Gold (Control) Act of 1968 in lieu of confiscation is only compensatory in nature and was not imposed for infringement of Gold (Control) Act and, therefore, allowable deduction under Section 37 of the Income-tax Act, 1961 ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee was entitled to claim deduction of the value of the goods which were not recovered in the assessment year 1976-77 ? "

(2.)THE facts in brief necessary for answering the aforesaid two questions are that the assessee during the relevant assessment year was carrying on business in purchase and sale of precious metal. THE relevant assessment year in this case was 1976-77, the previous year with regard to which was the period between November 14, 1974, and November 3, 1975, the accounts being maintained on the basis of Diwali year. Certain gold was seized from the petitioner for violation of the Gold Control Regulations. In the proceedings for confiscation of the seized gold, a fine in the sum of Rs. 5,000 was imposed on the assessee in lieu of confiscation. THE assessee claimed deduction of this sum of Rs. 5,000. Another item of dispute was with regard to a theft which had taken place in the business premises of the assessee on August 13, 1974. THE first information report was lodged by the assessee on August 14, 1974, indicating the extent of the property which had been stolen. THE police was successful in recovering a major portion of the property stolen which was returned to the assessee. THE second first information report was lodged by the assessee on September 22, 1974, giving details of such of the properties which had yet to be recovered. A final report, however, was made by the police in the matter on November 21, 1974. THE assessee claimed deduction of Rs. 25,000 as value of unrecovered goods which had been stolen. THE Income-tax Officer disallowed both these deductions claimed by the assessee and the order of the Income-tax Officer was upheld in appeal by the Commissioner of Income-tax (Appeals) in this behalf. On second appeal having been filed by the assessee, however, the Tribunal accepted the plea of the assessee with regard to both these items and allowed the deductions as claimed. On an application being made by the Department thereafter, the Tribunal referred the aforesaid two questions to this court for its opinion.
It was urged by learned counsel for the Department that the sum of Rs. 5,000 which the assessee had to pay as fine in lieu of confiscation of the gold seized for the contravening of the Gold Control Regulations could not, in law, have been allowed by the Tribunal. In support of this submission, reliance has been placed on the decision of the Supreme Court in Haji Aziz and Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350. In that case, the assessee was carrying on the business of importing dates from abroad and selling them in India. It imported dates from Iraq partly by steamer and partly by country draft, at a time when import of dates by steamer was prohibited. The dates which were imported by steamer were confiscated by the Customs authorities under Section 167 of the Sea Customs Act (item 8) and the assessee being given an option under Section 183 of that Act to pay a fine, paid the fine and had the dates released. In computing its profits, the assessee sought to deduct the amount paid as fine as an allowable expenditure under Section 10(2)(xv) of the Indian Income-tax Act, 1922. It was held that no expense which was paid by way of penalty for a breach of the law, even though it might involve no personal liability, could be said to be an amount wholly and exclusively laid out for the purpose of the business of the assessee within the meaning of Section 10(2)(xv) of the Indian Income-tax Act, 1922, and the fine paid by the assessee was not an allowable deduction under that section. The provision of law whereunder the petitioner had to pay the fine of Rs. 5,000 contained in Sub-rule 8(a) of Rule 126(h) of the Miscellaneous provisions under the Gold (Control) Act which contemplated that whenever confiscation of any gold is authorised by this part, the officer confiscating it may give to the owner of the gold an option to pay in lieu of confiscation such fine as the said officer thinks fit is in pad materia with Section 183 of the Sea Customs Act which came up for consideration before the Supreme Court in the case of Haji Aziz and Abdul Shakoor Bros. [1961] 41 ITR 350. In this view of the matter, the law laid down by the Supreme Court in the aforesaid case is squarely applicable to the facts of the instant case.

Learned counsel for the assessee in this connection invited our attention to a later decision of the Supreme Court in CIT v. Piara Singh [1980] 124 ITR 40. In our opinion, that case is clearly distinguishable. There the respondent was carrying on smuggling activity and was apprehended by the Indian police while crossing the border into Pakistan, and a sum of Rs. 65,000 in currency notes was recovered from his person which was confiscated by the Customs authorities. The Income-tax Officer found that the assessee was carrying on the business of smuggling and that he was liable to income-tax on income from that business and such income was assessed to tax. A question arose as to whether the assessee was entitled to deduction under Section 10 of the Indian Income-tax Act, 1922, of the loss of Rs. 65,000 arising from the confiscation of the currency notes. It was held that the carriage of the currency notes across the border was an essential part of the smuggling operation and detection by the Customs authorities and consequent confiscation was a necessary incident and constituted a normal feature of such an operation. Consequently, the confiscation of the currency notes was a loss occasioned in pursuing the business of smuggling ; it was a loss in much the same way as if the currency notes had been stolen or dropped on the way while carrying on the business and was thus a loss which sprang directly from the carrying on of the business and was incidental to it, so that its deduction had to be allowed under Section 10.

(3.)IN the instant case, it cannot be said that breach of the Regulations under the. Gold (Control) Act, which was an offence, was an essential part of the business of the assessee. IN this view of the matter, question No. (1) referred to us has to be answered in the negative. IN regard to question No. (2), the INcome-tax Officer and the Commissioner of INcome-tax (Appeals) took the view that since the assessment year 1976-77 in the instant case corresponded to the period between November 14, 1974, and November 3, 1975, and since the theft had taken place on August 13, 1974, and the assessee was following the mercantile system of accounting, the loss could be claimed by him not in the assessment year 1976-77 but in the assessment year 1975-76. The Tribunal, on the other hand, relied upon a decision of the Allahabad High Court in U. P. Vanaspati Agency v. CIT [1968] 68 ITR 120 and held that the loss was rightly claimed in the assessment year 1976-77. IN that case, it was held that a dispossession would become a loss only after the recovery becomes impossible or the chances of recovery become very remote. IN that case, a theft of Rs. 13,100 had taken place on January 4, 1960, and only Rs. 1,100 was recovered. The balance of Rs. 12,000 was claimed by the assessee as if the theft had taken place in the year 1961-62. The deduction was disallowed on the ground that the loss had not occurred in the assessment year 1961-62, but in the assessment year 1960-61. The High Court took the view that three months could not be held to be an excessive period to make efforts to recover the money and, consequently, the consciousness of the loss should be attributed to the assessee only after April 1, I960. IN the instant case, the second first information report was lodged by the assessee on September 22, 1974, indicating the extent of the properties which had not yet been recovered. This indicates that the assessee was still hopeful of the recovery being made even of the remaining properties. As seen above, the final report was made by the police on November 21, 1974. Consequently, it cannot be said that the petitioner was unjustified in entertaining the hope that the remaining properties would also be recovered till November 21, 1974, On the final report being made, he finally came to know that there was, at any rate, little chance of recovery. Since November 21, 1974, in the instant case, fell within the assessment year 1976-77, the Tribunal was right in holding that the claim for deduction of Rs. 25,000 was rightly made in the year 1976-77. On this view, the Tribunal cannot be said to have committed any error in allowing this deduction.
In view of the aforesaid discussion, our answer to question No. (1) is that, on the facts and in the circumstances of the case, the Tribunal was not justified in law in holding that the imposition of fine of Rs. 5,000 under the Gold (Control) Act of 1968 in lieu of confiscation is only compensatory in nature and was not imposed for infringement of the Gold (Control) Act and, therefore, an allowable deduction under Section 37 of the Income-tax Act, 1961. Our answer to question No. (2), on the other hand, is that, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee was entitled to claim deduction of the value of the goods which were not recovered in the assessment year 1976-77. In other words, our answer to question No. (1) is in the negative, in favour of the Department and against the assessee and our answer to question No. (2) is in the affirmative, in favour of the assessee and against the Department.