Allahabad H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the cash and the value of the gold and gold ornaments confiscated by the Customs and Central Excise Department could not be allowed as a business loss or as an expenditure under s. 37(1) of the IT Act, 1961, in the computation of the assessee’s income for the asst. yr. 1974 75 ?

Counsel Appeared

None, for the Assessee : Shambhu Chopra, for the Revenue

JUDGMENT

The Tribunal has referred the following question of law : “Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the cash and the value of the gold and gold ornaments confiscated by the Customs and Central Excise Department could not be allowed as a business loss or as an expenditure under s. 37(1) of the IT Act, 1961, in the computation of the assessee’s income for the asst. yr. 1974 75 ?”

2. The facts relating to this reference are as under : The assessee is an HUF deriving income, inter alia, from sarrafa, money-lending and utensils business. In one shop sarrafa business was carried on, while in the other shop, utensils business was done. The preventive staff of the Customs and Central Excise Department searched both the shops on 31st May, 1973. They seized the following things from the two shops : Sarrafa shop Besides some pronotes and books of account were also found and seized. Utensils shop Gold ornaments 1,142 gms. Rolling machine to manufacture ornaments.

After the seizure, the assessee submitted its explanation that it is not dealing in gold or gold ornaments and some of the seized articles belonged to the relative of the assessee or the pawnors who had pledged the gold ornaments when they had taken loan from it. This explanation was not accepted by the Collector of Customs and the gold ornaments were seized. The ITO also assessed the seized gold and gold ornaments as income of the assessee. The assessee preferred an appeal before the CIT(A). The appeal was dismissed. He however, reduced the income of the asst. yrs. 1972-73 and 1973-74. The Department as well as the assessee both preferred appeals before the Tribunal. The Tribunal dismissed the appeals. The assessee filed an application for making reference to this Court arising out of the order of the Tribunal and the Tribunal has referred the question to us narrated above.

The admitted facts are that the primary gold and gold ornaments were seized from the petitioner by the Collector of Customs on the ground that the petitioner was carrying on the business without having any licence under the Gold (Control) Act. The ITO also did not accept the explanation submitted by the assessee that the primary gold and gold ornaments belong to others and it was not carrying on any business in gold and gold ornaments. The ITO, taking into account the value of the gold and gold ornaments assessed the income of the assessee. The question is whether in the facts and circumstances of the present case, the value of the gold and gold ornaments and cash confiscated by the Customs and Central Excise Department should be taken as

In CIT vs. S.C. Kothari 1974 CTR (SC) 137 : (1971) 82 ITR 794 (SC) : TC 46R.223, the assessee claimed business loss but he was not allowed the set off under the first proviso to s. 24 (1) of the Indian IT Act, 1922, on the ground that the assessee had entered into illegal transaction in contravention of s. 15(4) of the Forward Contracts (Regulation) Act, 1952. The Supreme Court held that if the business in which the loss was sustained was the same in which the profit was derived, then the loss had to be taken into account while computing the profits of the business under s. 10(1) of the Indian IT Act, 1922. Shri Shambhu Chopra, learned counsel for the respondent, urged that the assessee was carrying on the business of sarrafa. The seizure was made by the customs authorities in the shop and goods were confiscated. The fact remains that the petitioner was carrying on the business and such business was lawful and if the business was lawful but subsequently entered into illegal field by carrying on gold business, he is not entitled to claim any business loss. He has placed reliance upon the decision rendered in Haji Aziz & Abdul Shakoor Bros. vs. CIT (1961) 41 ITR 350 (SC) : TC 16R.514, wherein, the assessee, who carried on the business of importing dates from abroad and selling them in India, imported dates from Iraq partly by steamer, his goods were confiscated by the customs authorities and he was also made liable to pay fine. The assessee claimed that he was entitled to deduct the amount of fine paid by him as an allowable expenditure under s. 10(2)(xv) of the Indian IT Act, 1922. The Supreme Court held that an expenditure is not deductible unless it is a commercial loss in trade and a penalty imposed for breach of the law during the course of trade cannot be described as such because in conducting it he has acted in a manner which has rendered his liable to penalty for an infraction of the law.

The Haji Aziz & Abdul Shakoor Bros.’ case (supra) was considered and distinguished in CIT vs. Piara Singh (1980) 17 CTR (SC) 111 : (1980) 124 ITR 40 (SC) : TC 14R.700. In this case the assessee was assessed on the income in the business of smuggling gold. He, claimed deduction under s. 10(1) of the Indian IT Act, 1922. The currency notes which he was taking to Pakistan was confiscated by the customs authorities and was liable to be allowable expenditure. The Supreme Court held that if the income from smuggling was treated as income, he was also entitled for business loss from such income. The case of Haji Aziz and Abdul Shakoor Bros. (supra) was distinguished on the ground that in that case the amount was paid by way of penalty for breach of law.

In Shri Vishnu Kumar Soni vs. CIT (1985) 46 CTR (MP) 280 : (1985) 155 ITR 34 (MP) : TC 14R.718, the Tribunal found that the assessee was in possession of gold bar which was seized and confiscated by the customs authorities, and it was treated as an income. The High Court held that the confiscation of the gold was a loss incurred in the course of business and the view of the Tribunal to the contrary was not accepted.

The case of C. Krishnalal Jain vs. CIT (1987) 60 CTR (Kar) 190 : (1987) 163 ITR 747 (Kar) wherein the assessee was carrying on business of dealing in smuggled gold and the gold was confiscated by the customs authorities, it was held that the loss occasioned due to the confiscation of gold is a loss springing directly from carrying on the business and the assessee would be entitled to set-off the loss against the income of such gold. We do not see any reason to differ from the view taken in these decisions.

In view of the above, our answer, to the question referred, is in affirmative, i.e., in favour of the assessee and against the Department.

The reference is, accordingly, decided.

[Citation : 249 ITR 241]