MAY 02, 2023

By Salil Arora, Advocate (Amicus Rarus)

THE Apex Court in its recent judgment in the matter of The Commissioner of Income Tax, Jaipur versus Prakash Chand Lunia (D) Thr.Lrs. & Anr. (Civil Appeal Nos. 7689-90 OF 2022) - 2023-TIOL-40-SC-IT while distinguishing its judgment in Commissioner of Income Tax v. Piara Singh (1980) Supp. SCC 166 - 2002-TIOL-245-SC-IT-LB and quashing the order of the Hon'ble Rajasthan High Court has held that any expenditure/loss incurred by an assessee for any purpose which is an offence shall not be deemed to have been incurred for the purpose of business or profession or incidental to it and hence no deduction can be claimed in respect of it.

In the instant matter, a search was conducted by the Directorate of Revenue Intelligence (DRI) officers wherein they recovered 144 slabs of silver and two silver ingots from two premises Shri Prakash Chand Lunia.

The Collector, Customs held that Shri Prakash Chand Lunia was the owner of silver/bullion and the transaction thereof was not recorded in the books of accounts. The Collector of Customs, New Delhi ordered confiscation of the said 146 slabs of silver valued at Rs.3.06 Crores and imposed a personal penalty of Rs.25 Lakhs on Sh. Prakash Chand Lunia under Section 112 (Penalty for improper importation of goods, etc.) of the Customs Act, 1962. The Collector held that the silver under reference was of smuggled nature.

During the course of the assessment proceedings before Income Tax authorities, the Assessing Officer observed that the assessee, Shri Prakash Chand Lunia was not able to explain the nature and source of acquisition of silver and investment in this regard was not found recorded in the books of accounts and therefore the Assessing Officer made an addition of Rs.3,06,36,909/- under Section 69A (Unexplained money, etc.) of the Income Tax Act, 1961.

In appeals preferred by the assessee against the assessment order, the CIT(A) dismissed the appeal of the assessee. The ITAT, Jaipur also upheld the order of the CIT(A) insofar as Section 69A was concerned. In the appeal filed by the assessee before the Hon'ble Rajasthan High Court, the court upheld the additions made under Section 69A but held that loss of confiscation by the DRI official of Customs Department is business loss by placing reliance on the Apex Court's judgment in Commissioner of Income Tax v. Piara Singh. Aggrieved by the order of Hon'ble Rajasthan High Court, the Commissioner of Income Tax preferred an appeal before the Apex Court.

The question posed before the Division bench for consideration was whether the Hon'ble Rajasthan High Court had erred in law in allowing the respondent - assessee, the loss of confiscation of silver bars by DRI officials as a business loss, relying upon the decision of this Court in the case of Commissioner of Income Tax v. Piara Singh (1980) Supp. SCC 166 - 2002-TIOL-245-SC-IT-LB ?

While both the judges held that the confiscation loss incurred by an assessee while carrying out illegal business is not allowed, both judges passed separate judgments providing separate reasons for arriving at such conclusion.

Hon'ble Justice M R Shah while rejecting the claim of the assessee to treat the silver bars confiscated by DRI as business loss and setting aside the order of Hon'ble Rajasthan High Court held that in the case of Piara Singh (supra), the assessee was found to be in the business of smuggling of currency notes and to that it was found that confiscation of currency notes was a loss occasioned in pursuing his business i.e. a loss which sprung directly from carrying on of his business and was incidental to it. Due to this, the assessee in the said case was held entitled to deduction under Section 10(1) of the Income Tax Act, 1922. However, in the instant case the main business of the assessee is dealing in silver. His business cannot be said to be smuggling of the silver bars as was the case in the case of Piara Singh (supra). Assessee was carrying on an otherwise legitimate silver business and in attempt to make larger profits, he indulged into smuggling of silver, which was an infraction of law. In that view of the matter, the decision of the Apex Court in the case of Piara Singh (supra) which was relied upon by the Hon'ble Rajasthan High Court shall not be applicable to the facts of this case.

The Apex Court also discussed the provision of Explanation 1 to Section 37(1) of the Income Tax Act, 1961 which expressly disallows any expenditure incurred by an assessee for any purpose which is an offence or is prohibited by law, which may be claimed as an expenditure incurred for the purpose of business/profession. Section 37 which deals with allowance and deduction of expenditure, was amended vide Finance Act, 1998 w.e.f. 01.04.1962 whereby Explanation 1 was added. The Explanation 1 being clarificatory in nature was held to be applicable retrospectively. It is to be noted that the instant mater pertains to the period prior to addition of Explanation 1 and the retrospective applicability of the same was not challenged before the Apex Court.

Explanation 1 to Section 37(1) of the Income Tax Act, 1961 reads as follows:

Section 37 of Income Tax Act, 1961

"Explanation 1.-For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure."

Hon'ble Justice M M Sundresh while observing that the decision in Piara Singh does not lay down the correct law in light of insertion of Explanation 1 to Section 37 (General) of Income Tax Act, 1961 held that the word ‘any expenditure' mentioned in Section 37 of Income Tax Act, 1961 takes in its sweep loss occasioned in the course of business, being incidental to it. As a consequence, any loss incurred by way of an expenditure by an assessee for any purpose which is an offence or which is prohibited by law is not deductible in terms of Explanation 1 to Section 37 of Income Tax Act, 1961. Such an expenditure/loss incurred for any purpose which is an offence shall not be deemed to have been incurred for purpose of business or profession or incidental to it, and hence, no deduction can be made. A penalty or a confiscation is a proceeding in rem, and, therefore, a loss in pursuance to the same is not available for deduction regardless of the nature of business, as a penalty or confiscation cannot be said to be incidental to any business.

The Hon'ble Apex Court has rightly distinguished the judgment of Piara Singh (supra) as the same is no longer applicable in the light Explanation 1 added to Section 37 (General) of Income Tax Act, vide Finance Act, 1998.

[The views expressed by the author are strictly personal.]