Loss for purpose prohibited or offence not deductible irrespective of legality of business

Loss incurred for any purpose which is an offence or which is prohibited by law is not deductible irrespective of legality or illegality of the business – Supreme Court

ABCAUS Case Law Citation:
ABCAUS 3717 (2023) (04) SC

Important Case Laws relied upon:
CIT vs. Piara Singh 124 ITR 41
Haji Aziz & Abdul Shakoor Bros. v. CIT, AIR 1961 SC 663
Soni Hinduji Kushalji & Co. vs. CIT, (1973) 89 ITR 112 (AP) 
Chuharmal v. CIT (1988) 3 SCC 588
CIT v. K Chinnathamban (2007) 7 SCC 390
J S Parkar v. V B Palekar (1974) 94 ITR 616 (Bom)
T A Quereshi (Dr.) v. CIT, (2007) 2SCC 759
Badridas Daga v. CIT (1959) SCR 6904
Apex Laboratories (P) Ltd. vs. CIT (2022) 7 SCC 98
CIT v. S.C. Kothari, 1972 (4) SCC 402

In the instant case, the Revenue had challenged the order passed by the Hon’ble High Court in holding that that loss due to confiscation of gold by DRI official of Customs Department was a business loss allowable u/s 37(1) of the Income Tax Act, 1961 (the Act).

A Division Bench of Hon’ble Supreme Court consisting of Hon’ble Justice M. R. Shah and Hon’ble Justice M. M. Sundresh by separate concurring judgments decided the question in favour of the Reveue.  

No Distinction between illegal business and legitimate business.

The decision of the Hon’ble Supreme Court draws a distinction between a claim for deduction of a loss incurred in an illegal business, as against a claim of a   loss qua a legitimate business.

The respondent assessee was engaged in the business of purchase and sale of silver. He was arrested on the charges of the smuggling of silver/bullion. As a result, the said silver was confiscated by the Custom Authorities.

The allowability of the loss due to said confiscation was the subject matter of the litigation.

The Assessing Officer made addition under Section 69A read with section 115BBE of the Act being value of silver bars seized from the possession of the assessee. The order of addition was confirmed upto ITAT.

However, by the impugned judgment and order the High Court has answered the reference in favour of the assessee by holding that when the value of material is added to the income of the respondent, as a natural consequence, the loss by confiscation of the said material is required to be allowed as business loss.

Before the Hon’ble Supreme Court, the assessee inter alia contended that as the respondent –assessee was engaged in the business of trading of silver and the said   silver slabs were in possession of the assessee for the   purpose of trading, absolute confiscation of the said silver slabs would result in loss of stock in trade and the value thereof would be available as deduction as business/trading loss. It was submitted that therefore the decision of Apex Court in the case of T.A. Quereshi shall be clearly applicable.

Hon’ble Justice M. R. Shah observed that according to explanation to section 37(1) wherein any expenditure incurred by the assessee for any purpose which is an offence or prohibited by law is not an allowable business expense.

Hon’ble Justice M. R. Shah observed that the Hon’ble High Court had placed reliance on the judgment in Piara Singh case where 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.

Hon’ble Justice M. R. Shah pointed out that in the present case the main business of the assessee was 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.

Hon’ble Justice M. R. Shah held that the judgment in Piara Singh shall not be applicable to the to the facts of the case.  On hand or the other hand, the decision in the case of Haji Aziz and the decisions of other High Courts pressed into service by the Revenue would be applicable with full force.

Hon’ble Justice M. M. Sundresh though concurred with   the ultimate conclusion arrived at in overturning the decision of the High Court, added his valuable inputs on the issue involved.

Hon’ble Justice M. M. Sundresh opined that there cannot   be a situation where an assessee carrying on an illegal business can claim deduction of expenses or losses incurred in the course of that business, while another assessee carrying on a legitimate one cannot seek deduction for loss incurred on account of either a confiscation or penalty.

Hon’ble Justice M. M. Sundresh summarised his conclusions as under:

i. The word ‘any expenditure’ mentioned in Section 37 of the Act takes in its sweep loss occasioned in the course of business, being incidental to it.

ii. 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 the Act.

iii. Such an expenditure/loss incurred 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 made.

iv, 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.

v, The decisions of this Court in Piara Singh and Dr. T. A. Quereshi do not lay down correct law in light of the decision of this Court in Haji Aziz and the insertion of Explanation 1 to Section 37.

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