Any Expenditure Incurred By Assesse Which Is Prohibited By Law Cannot Be Considered As Business Loss As Per Explanation 1 Of Section 37(1) Of The Customs Act

CASE TITLE

The Commissioner of Income Tax Jaipur VS. Prakash Chand Lunia (D) Thr.Lrs. & Anr

COURT

THE SUPREME COURT OF INDIA 

DATE OF ORDER 

BENCH

 HON’BLE JUSTICE MR M.R.SHAH 

SUBJECT

 The court deals with the question that whether allowing  assesse the confiscation of silver bars as business law was erroneous or not.

OVERVIEW

• The present appeals is preferred by the appellant i.e the revenue against the impugned judgement and order passed by the High Court of Rajasthan dated 22.11.2016.
• The facts are such that a search was conducted at the office premises and residential premises on rent of the assesse (herein, respondent) by the Directorate of Revenue Intelligence (DRI) and 144 slabs from the premises along with 2 solver ingots from business premise were covered.
• The assesse was arrested under Section 104 of the Customs Act. He was charged for committing offence punishable under section 135 of the said act.
• The collector, customs imposed a personal penalty of Rs. 25Lakh on the assesse under Section 112 of the Customs Act. During the assessment proceedings, the Assessing Officer upheld respondent under Section 69A of the Income Tax Act,1961. The same was upheld by the CIT(A), ITAT,AO. 
• The respondent filed an appeal before the HC wherein it was held that the loss of confiscation by the revenue department was a business loss. Aggrieved by this, present appeal is filed before the apex court.

ARGUMENTS ADVANCED BY APPELLANT 

• The learned counsel submitted that considering the facts and circumstances of the present case, the High Court has materially erred in its decision. 
• The counsel contended that the ITAT,AO have rightly distinguished that in the present case the loss of confiscation by the Department was not a business loss.
• It was submitted before the court that when a claim of deduction is made, it needs to be attentively considered that the loss must be directly incidental to the business that is being  carried by the assesse.
• The counsel referred to the judgement of Andhra Pradesh High Court in the Soni Hinduji Kushalji & Co. vs. CIT, wherein the assesse’s claim for deduction was rejected on the ground that the penalty paid due to violation of law was not a normal course of business carried on by it.
• It was submitted by the counsel that in light of the explanation 1 of section 37(1) of the Act the assesse shall not be permitted to claim the loss as business loss.
• The counsel prayed to allow the appeal and restore the orders of ITAT.

ARGUMENTS ADVANCED BY RESPONDENT 

• The counsel vehemently submitted that the absolute confiscation of the 146 silver slabs were proposed to be added as deemed income of the assesse under Section 69A of the Income Tax Act.
• The counsel prayed that in alternative the value of the confiscated silver slabs should be allowed as loss.
• The counsel submitted that the High Court has answered in the favor of the respondent by recognizing the value of the material as a consequence of natural income of the respondent and thus was considered as business loss.
• The counsel referred to the judgement in the case of TA Quereshi (Dr.) v. CIT, (2007) wherein it was held that applying section 37 of the Customs Act to the matter of business loss on account of absolute confiscation was erroneous.
• It was submitted that the as the respondent is involved in business of silver and said silver slabs and the material was found in possession of the assesse, the confiscation in absolute terms of the silver slabs would amount as business loss.
• The counsel prayed to dismiss the appeal.

JUDGEMENT 

• The Supreme Court allowed the present appeals and quashed the impugned order and judgement passed by the High Court. The orders passed by CIT(A) and ITAT were restored.
• Court held that there is no dispute to the fact that the ownership of the silver bars was with the assesse. 
• Court said that in the present case the assesse had main business of dealing with silver and for making larger profits he indulged into smuggling of silver, which is prohibited by law.
• The court rejected the claim of the respondent- assesse to treat the confiscation of silver bars as business loss.
• The judgement of the High Court was held unsustainable.

CONCLUSION 

The court, thus established that any and every expenditure made in relation to the business can be considered as business loss. It is necessary to ensure that no violation of law has taken place.