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

(CIVIL APPEAL NOS.7689-90 OF 2022)

(2JB, M.M. SUNDRESH and M. R. Shah JJ., delivered by M. R. Shah J.)

Facts: Appeal preferred by the Revenue against judgment and order passed by the High Court of Judicature for Rajasthan at Jaipur by which the High Court has allowed the said appeals.

Issue: Whether the High Court has 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 CIT Patiala vs. Piara Singh, 1980?

Arguments on behalf of counsel for appellant: Shri Balbir Singh, learned ASG

It is submitted that the High Court has materially erred in relying upon the decision of this Court in the case of Piara Singh. Relying upon the cases Andhra Pradesh High Court and the Bombay High Court in Haji Aziz & Abdul Shakoor Bros. v. CIT and JS Parkar v. V B Palekar respectively, it is submitted that the assessees claimed the value of gold seized as a trading/business loss which is identical to the Respondent-Assessee’s claim in the facts of the present SLP. Therefore, they shall be applicable with full force to the facts of the case on hand. It is submitted that when the assessee has been unable to deny possession and ownership and in fact admitted the same before the Settlement Commission as well as the High Court, and further claimed the value of confiscated silver as a trading loss before AO, CIT(A) and ITAT, to alternatively argue to the contrary and deny ownership in order to state that 27 Section 69A cannot be applied in his case may not be accepted. It is submitted that thus neither can the Respondent Assessee claim business loss due to him not being in the smuggling business nor can he claim business expenditure as the same is prohibited under Explanation 1 to Section 37(1). Making above submissions and relying upon the above submissions, it is prayed to allow the present appeals and restore the ITAT orders.

 Arguments on behalf of counsel for respondents: Shri Arijit Prasad

It is submitted that the present case is one wherein set off is claimed of the value of the 146 silver slabs as loss on account of absolute confiscation rather than claim of expenditure of any penalty and/or fine imposed for infraction of law. It is submitted that as such the issue in the present appeals is fairly covered in favour of the assessee in view of the decision of this Court in the case of TA Quereshi (Dr.), in which it was held that the judgment of the High Court applying Section 37 of the Act to the case of business loss on account of absolute confiscation of the goods was erroneous. It is submitted that in the case of T.A. Quereshi, this Court has drawn a distinction between claim of deduction as expenditure of penalty/fine as against claim of business loss on account of confiscation of goods which are unaccounted stock in trade, stating that in case of claim of deduction as expenditure of any fine and/or penalty, the Courts have held that such deduction would not be available to the assessee as it would defeat the very purpose behind such penal action. It is submitted that the said distinction has also been statutorily recognized. Making above submissions it is prayed to dismiss the present appeals.

Held: The court while allowing the present appeal, set aside the judgment and order passed by the high court and restored the order passed by the assessing officer, CIT(A) and the ITAT. Though the verdict arrived at by the court is the same, yet the judges have given separate reasoning for it.

Justice M.R. Shah has observed that, “looking to the business of the assessee namely silver business and was not in the business of smuggling silver, the decision of this Court in the case of Piara Singh shall not be applicable and therefore the impugned judgment and order passed by the High Court quashing and setting aside the order passed by the Assessing Officer, CIT(A) and the ITAT rejecting the claim of the assessee to treat the silver bars confiscated by the customs authorities as business loss and consequently value allowing the same as business loss is unsustainable and the same deserves to be quashed and set side.”

Justice M.M. Sunderesh has on the other hand, observed that, “The interpretation of Section 37 of the Act given by the Court in Dr. T.A. Quereshi leads to a situation where the expenditure incurred in manufacturing something illegal may not be allowable as a deduction in view of the Explanation 1, however, if upon seizure, the manufactured goods are confiscated, in that case deduction will be allowable on commercial principles. This classification being artificial not borne out by statute, which mischief is sought to be clarified by the explanation, has no legal basis.”