Commissioner of Income Tax vs Bandaru Subba Rao

Syed Shah Mohammed Quadri, J.—On the application by the revenue, filed u/s 256(2) of the income tax Act, 1961 the following questions were directed to be referred. Accordingly, the Tribunal made a statement of the case and referred the following questions:

Whether on the facts and in the circumstances of the case, the Appellate Tribunal is correct in entertaining the plea for the first time for allowance of the amount of Rs. 26,275 as loss occasioned in carrying on of business u/s 37 of the income tax Act, 1961?

Whether on the facts and in the circumstances of the case and particularly in view of the assessee''s submission that he was doing only shady business and money-lending business in a small scale and therefore gold and silver seized from him could not have belonged to him, the finding of the Appellate Tribunal that the assessee carried on business in primary gold is perverse and whether such a finding is based on any evidence or material?

Whether on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law in holding that the decision of the Supreme Court in Commissioner of Income Tax, Patiala Vs. Piara Singh, is applicable to the facts of this case?

Whether on the facts and in the circumstances of the case, the Appellate Tribunal is correct in deleting the addition of Rs. 26,275 made under the head ''Other sources''?

The assessee claims to have been carrying on the business of money- lending. In the assessment year 1975-76, shells of primary gold and some silver articles, which were valued at Rs. 26,275 were seized by the Central Excise Authorities from the assessee. On the basis of that information, the ITO treated the said amount as income from the undisclosed sources and accordingly assessed the tax u/s 69 of the Act. The appeal filed by the assessee before the AAC having failed, he approached the Tribunal. Before the Tribunal, the assessee took the plea that as the business itself was illegal, the value of the gold and silver articles should be allowed as deduction as they were confiscated by the Central Excise Authority. This argument was given effect to and the Tribunal held that confiscation of gold and silver articles by the Central Excise Authorities was a business loss allowed u/s 37 of the Act. Accordingly, the Tribunal allowed the appeal on 18-7-1991. From that judgment, the abovesaid questions arose.

Shri S.R. Ashok, the learned standing counsel for the income tax contends that the Tribunal was not justified in permitting the petitioner to raise the plea for the first time before it as the said plea was not available to the assessee. We are unable to accept the contention of the learned standing counsel. The necessary material was available before the Tribunal as pointed out by the Tribunal and what was raised before the Tribunal was the question of law. In that view of the matter, the Tribunal was right in allowing the plea to be raised.

It was then contended that the finding of the Tribunal that the petitioner was carrying on business in smuggling is a finding without any basis and ought not to have been arrived at and that finding without any material cannot be accepted in reference. A perusal of the order of the Tribunal shows that the plea the assessee was carrying on business in smuggling was never the case of the assessee. What all the Excise Authorities under the Central Excise Act found was that the story set up by the assessee of manufacture of gold by a specialist was baseless. The gold was confiscated on the ground that possession of primary gold itself was liable for confiscation. On this material, the finding that the assessee was carrying on smuggling business does not follow. Therefore, the finding arrived at by the Tribunal with regard to the nature of the illegal business carried on by the assessee is without any material evidence.

Shri S.R. Ashok further contends that Commissioner of Income Tax, Patiala Vs. Piara Singh, ) has been wrongly applied by the Tribunal and, therefore, the deduction could not have been allowed.

The facts in Piara Singh''s case (supra) are that admittedly the assessee in that case was carrying on business of smuggled goods. As a part of his business, he was crossing the border going over to Pakistan with moneys for purchasing gold and coming back to India for selling the gold. During the course of that business he was caught by the authority and currency notes of Rs. 65,000 found in his possession were confiscated. On those facts, it was held that the confiscation of currency notes was a loss occasioned in pursuing the business of smuggling and that it was 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. The loss was described as one which sprang directly from the carrying on of the business and was incidental to it and, therefore, its deduction had been allowed u/s 10 of the Act. The principle which can be deduced from this judgment of the Supreme Court is that where the very nature of the business is illegal and during the course of that illegal business the assessee loses the assets either by way of confiscation or otherwise, that becomes a business loss, which has to be allowed.

In the instant case, that has never been the case of the assessee and the losing of the money or the assets when the petitioner has indulged into some illegal activity would not justify deduction of the amount as a business loss. To the same effect, there is a decision of our High Court in Commissioner of Income Tax, Andhra Pradesh Vs. Kodandarama and Company, Bhupathiraju Gopal Krishanraju, C. Surayanrao and Company and Venkata Satyanarayana, . In that case, some business men were paying regularly certain amount towards police welfare fund for getting permission. Those amounts were sought to be deducted as a business expenditure. The claim was turned down by this Court. In view of the above discussion, the first question is answered in the affirmative, that is, in favour of the assessee and against the revenue. The 2nd and 3rd questions are answered in the negative, that is, in favour of the revenue and against the assessee. Question No. 4 is a consequential question. Therefore, it has to be answered in the negative, that is, in favour of the assessee and against the revenue.

The referred case is, accordingly, answered.