http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 4  

PETITIONER: COMMISSIONER OF INCOME TAX, PATIALA

       Vs.

RESPONDENT: PIARA SINGH

DATE OF JUDGMENT08/05/1980

BENCH: PATHAK, R.S. BENCH: PATHAK, R.S. BHAGWATI, P.N. TULZAPURKAR, V.D.

CITATION:  1980 AIR 1271            1980 SCR  (3)1122  CITATOR INFO :  D          1990 SC1451  (7,8)

ACT:      Losses in business-Deduction under section 10(1) of the Income Tax  Act, 1922-Is  a smuggler  who is  taxed  on  his income  from  smuggling  under  the  Income  Tax  Act,  1922 entitled to  a deduction  under section  10(1) of the Act on account of  the confiscation  of currency  notes employed in the smuggling activity.

HEADNOTE:      The respondent Piara Singh was apprehended in September 1958 by  the Indian  Police while crossing the Indo-Pakistan border into  Pakistan. A  sum of  Rs. 65,500/-  in  currency notes was  recovered from  his person.  On interrogation  he stated that  he was taking the currency notes to Pakistan to enable him  to purchase  gold in that country with a view to smuggling it into India. The Collector of Central Excise and Land Customs ordered the confiscation of the currency notes.      In the proceedings initiated by the Income Tax Officer, he found  that Rs.  60,500/- constituted  the income  of the assessee from undisclosed sources. An appeal by the assessee was dismissed  by the  Appellate Assistant  Commissioner. In second appeal  before the Income Tax Appellate Tribunal, the assessee represented  that if  he was regarded as engaged in the  business  of  smuggling  gold  he  was  entitled  to  a deduction under section 10(1) of the Income Tax Act, 1922 of the entire  sum of  Rs. 65,500/-  as a  loss incurred in the business on  the confiscation  of the  currency  notes.  The Tribunal upheld  the claim to deduction. It proceeded on the basis that  the assessee was carrying on a regular smuggling activity which  consisted of  taking currency  notes out  of India and  exchanging them  with gold  in Pakistan which was later smuggled  into India. The High Court on a reference at the instance  of the  Revenue answered the reference against the Revenue. Hence the appeal.      Allowing the appeal, the Court. ^      HELD: 1.  The assessee  is entitled to the deduction of Rs. 65,500/-  under section  10(1) of  the Income  Tax  Act, 1922. [1124 C, 1126 B]      2.  The  assessee  was  carrying  on  the  business  of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 4  

smuggling and, therefore, was liable to income tax on income from that  business.  The  currency  notes  carried  by  the assessee across  the border  was an  essential part  of  the smuggling operation.  If the  activity of  smuggling can  be regarded as  a business,  those who  are  carrying  on  that business must  be  deemed  to  be  aware  that  a  necessary incident involved  in  the  business  is  detection  by  the Customs authorities  and the  consequent confiscation of the currency notes.  It is  an incident  as predictable  in  the course of  carrying on  the activity as any other feature of it. Having  regard to  the nature  of the  activity possible detection by  the Customs  authorities constitutes  a normal feature integrated  into all that is implied and involved in it. The  confiscation  of  the  currency  notes  is  a  loss occasioned in  pursuing the  business; it  is a loss in much the same way as if the currency 1123 notes had  been stolen  or dropped on the way while carrying on the  business. It  is a  loss which springs directly from the carrying  on of  the business  and is  incidental to it. Applying the  principle laid  down by this Court in Badridas Daga v.  Commissioner of  Income Tax  the deduction  must be allowed.                                                   [1124 D-E]      Badridas Daga  v. Commissioner of Income Tax, [1958] 34 ITR 10; Commissioner of Income Tax, Gujarat v. S. C. Kothari [1971] 82 ITR 194; applied.      Haji Aziz  and Abdul  Shakoor Bros.  v. Commissioner of Income Tax,  Bombay City II, [1961] 41 ITR 350, Sari Hinduji Khushalji 7  Co. v. Commr. of Income Tax, A.P. [1973] 89 ITR 112; J.  S. Parkar  v. V.  B. Palekar and Ors. [1974] 94 ITR 616; distinguished and explained.

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil Appeal No. 2752 of 1972.      Appeal by Certificate from the Judgment and Order dated the 5th  November, 1970 of the Punjab and Haryana High Court in Income Tax Reference No. 38 of 1969.      G. A. Shah & Miss A. Subhashini for the appellant.      Naunit Lal & Mr. Kailash Yasudev for respondent.      The Judgment of the Court was delivered by      PATHAK, J.  Is a  smuggler, who  is taxed on his income from smuggling under the Income Tax Act, 1922, entitled to a deduction under  Section 10(1)  of the Act on account of the confiscation of  currency notes  employed in  the  smuggling activity?      The  respondent,   Piara  Singh,   was  apprehended  in September, 1958  by the  Indian Police  while  crossing  the Indo-Pakistan border into Pakistan. A sum of Rs. 65,500/- in currency  notes   was  recovered   from   his   person.   On interrogation he  stated that  he was  taking  the  currency notes to  Pakistan to  enable him  to purchase  gold in that country  with  a  view  to  smuggling  it  into  India.  The Collector of  Central Excise  and Land  Customs ordered  the confiscation of the currency notes.      The Income  Tax Officer  now took proceedings under the Indian Income  Tax Act,  1922 for  assessing the  assessee’s income and  determining his  tax liability.  He came  to the finding that  out of  Rs. 65,500/- an amount of Rs. 60,500/- constituted the  income of  the  assessee  from  undisclosed sources. An  appeal by  the assessee  was dismissed  by  the Appellate Assistant  Commissioner. In  second appeal  before

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 4  

the Income  Tax Appellate  Tribunal the assessee represented that if  he was  regarded as  engaged  in  the  business  of smuggling gold  he was entitled to a deduction under Section 10(1) of  the Income  Tax Act  of  the  entire  sum  of  Rs. 65,500/-  as   a  loss  incurred  in  the  business  on  the confiscation of  the currency  notes. The Appellate Tribunal upheld the 1124 claim to  deduction. It  proceeded on  the  basis  that  the assessee was  carrying on a regular smuggling activity which consisted  of   taking  currency  notes  out  of  India  and exchanging  them  for  gold  in  Pakistan  which  was  later smuggled into  India. At  the instance  of  the  Revenue,  a reference was  made to  the High Court of Punjab and Haryana on the following question:           "Whether on  the facts and in the circumstances of      the case  the loss  of Rs.  65,500/- arising  from  the      confiscation of  the currency  notes was  an  allowable      deduction under  section 10(1)  of the  Income-tax Act,      1922?" The High Court answered the question in the affirmative.      And now this appeal by the Revenue.      In our  Judgment, the  High Court  is right. The Income Tax authorities  found that the assessee was carrying on the business of  smuggling They  held that  he  was,  therefore, liable to  income-tax on  income from  that business. On the basis that  such income was taxable, the question is whether the confiscation of the currency notes entitles the assessee to the  deduction claimed. The currency notes carried by the assessee  across   the  border  constituted  the  means  for acquiring gold  in Pakistan, which gold he subsequently sold in India  at a profit. The currency notes were necessary for acquiring the  gold. The  carriage of  currency notes across the border was an essential part of the smuggling operation. If the  activity of smuggling can be regarded as a business, those who are carrying on that business must be deemed to be aware that  a necessary incident involved in the business is detection by  the  Custom  authorities  and  the  consequent confiscation of  the currency  notes. It  is an  incident as predictable in the course of carrying on the activity as any other feature  of it.  Having regard  to the  nature of  the activity  possible  detection  by  the  Customs  authorities constitutes a  normal feature  integrated into  all that  is implied and involved in it. The confiscation of the currency notes is a loss occasioned in pursuing the business, it is 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. It is  a loss which springs directly from the carrying on of the business and is incidental to it. Applying the principle laid down  by this Court in Badridas Daga v. Commissioner of Income-tax the deduction must be allowed.      In Commissioner  of Income-tax, Gujarat v. S.C. Kothari this Court held that for the purpose of Section 10(1) of the Income Tax  Act, 1922  a loss  incurred in  carrying  on  an illegal business must be 1125 deducted before  the true  figure of  profits brought to tax can  be  computed.  Grover,  J.,  speaking  for  the  Court, observed:           If the  business is  illegal, neither  the profits      earned nor  the losses incurred would be enforceable in      law. But,  that does  not take  the profits  out of the      taxing statute.  Similarly, the  taint of illegality of      the business cannot detract from the losses being taken      into account for computation of the amount which can be

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 4  

    subjected to  tax as  "profits" under  Section 10(1) of      the Act  of 1922.  The tax collector cannot be heard to      say that  he will  bring the  gross receipts to tax. He      can only  tax profits  of a  trade  or  business.  That      cannot be  done without  deducting the  losses and  the      legitimate expenses of the business."      Reliance was  placed by  the Revenue  on Haji  Aziz and Abdul Shakoor  Bros. v.  Commissioner of  Income-tax, Bombay City II.  In that case, however, the assessee carried on the lawful business  of importing  dates from abroad and selling them  in   India.  The   import  of  dates  by  steamer  was prohibited. Nonetheless  he  imported  dates  from  Iraq  by steamer,  and  the  consignments  were  confiscated  by  the customs   authorities.   But   the   dates   were   released subsequently on  payment of  fine. The  assessee’s claim  to deduction under  s. 10(2)  (xv) of  the Income  Tax Act  was rejected on  the ground  that the  amount was paid by way of penalty for  a breach  of the  law. An infraction of the law was not  a normal  incident of  business carried  on by  the assessee, and  the penalty  was rightly  held to fall on the assessee in  some character  other than  that of  a  trader. Reference was made by the Revenue to Soni Hinduji Kushalji & Co. v. Commissioner of Income-tax, A.P. The assessee’s claim to the  deduction of  the value  of gold  confiscated by the customs authorities  was found  unsustainable by  the court. The decision  in that  case can  be explained  on the ground that the assessee was carrying on a lawful business in gold, silver and  jewellery and committed an infraction of the law in smuggling  gold into  the country. Our attention has also been invited  to J.  S. Parkar  v. V.  B. Palekar and Others where on  a difference of opinion between two learned Judges of the  Bombay High  Court a third learned Judge agreed with the view  that the  value of gold confiscated by the customs authorities in  smuggling operations  was  not  entitled  to deduction against  the estimated and assessed income from an undisclosed source.  It was  observed that the loss arose by reason of an infraction 1126 of the  law and  as it  had not  fallen on the assessee as a trader or  business man  a deduction  could not  be allowed. Apparently, the true significance of the distinction between an infraction  of the  law committed in the carrying on of a lawful business  and an infraction of the law committed in a business  inherently  unlawful  and  constituting  a  normal incident of  it was  not pointedly  placed before  the  High Court in that case.      We hold  that the assessee is entitled to the deduction of Rs. 65,500/-, and accordingly we affirm the view taken by the High Court on the question of law referred to it.      The appeal fails and is dismissed with costs. S.R.                                       Appeal dismissed. 1127