The Commissioner Of Income Tax Jaipur v. Prakash Chand Lunia (D) Thr. Lrs. & Anr

[2023] 7 S.C.R. 85 THE COMMISSIONER OF INCOME TAX JAIPUR PRAKASH CHAND LUNIA (D) THR. LRS. & ANR. (Civil Appeal Nos. 7689-90 of 2022) APRIL 24, 2023 [M. R. SHAH AND M. M. SUNDRESH, JJ.] Income Tax Act, 1961 – Explanation to s.37(1) – ‘anyexpenditure’ in s.37 – Expenditure/loss incurred for any purposewhich is an offence or prohibited by law, not deductible in terms ofExplanation 1 to s.37 – High Court relying upon the decision ofSupreme Court in Piara Singh case allowed the loss of confiscationof silver bars as a business loss – Sustainability of – Held: Notsustainable – Explanation to s.37(1) provides that any expenditureincurred by the assessee for any purpose which is an offence orprohibited by law is not an allowable business expense – In thepresent case, the main business of the assessee was dealing in silver– His business cannot be said to be smuggling of the silver bars aswas the case in Piara Singh – Assessee was carrying on an otherwiselegitimate silver business and in attempt to make larger profits, heindulged into smuggling of silver, which was an infraction of law –High Court erred in relying upon the Piara Singh case – Impugnedjudgment set aside – Order of the assessing officer, CIT(A) andITAT rejecting theclaim of the respondent-assessee to treat the silverbars confiscated by the customs authorities as business loss restored– Per M.M. Sundresh. J (Supplementing)‘any expenditure’ mentionedin s.37 takes in its sweep loss occasioned in the course of business,being incidental to it – Thus, any loss incurred by way of anexpenditure by an assessee for any purpose which is an offence orwhich is prohibited by law is not deductible in terms of Explanation1 to s.37 – A penalty or a confiscation is a proceeding in rem, andtherefore, a loss in pursuance to the same is not available fordeduction regardless of the nature of business, as a penalty orconfiscation cannot be said to be incidental to any business –Decisions in Piara Singh and Dr. T.A. Quereshi do not lay downcorrect law in light of the decision in Haji Aziz and the insertion ofExplanation 1 to s.37 – Impugned judgment set aside – Finance(No.2) Act 1998 – Income Tax Act, 1922 – ss.10(1), (2). 85 AAllowing the appeals, the Court HELD: 1.1 The provisions of Section 37(1) under the Acthas been amended by Finance (No.2) Act, 1998 by introducingExplanation 1 thereto w.e.f. 01.04.1962 wherein any expenditureincurred by the assessee for any purpose which is an offence orBprohibited by law is not an allowable business expense. It is truethat in the present case the respondent - assessee did not claimvalue of silver bars confiscation as business expenses thus claimedas business loss. However, the amendment to Section 37 mighthave some bearing on the issue involved. [Para 6.1][98-C-D] C1.2 On going through the impugned judgment and orderpassed by the High Court, it appears that the High Court hassimply relied upon the decision of this Court in the case of PiaraSingh. The High Court has materially erred in relying upon thedecision of this Court in the case of Piara Singh. [Para 6.2][98-E] DCIT, Patiala vs. Piara Singh124 ITR 4 – heldinapplicable. Section: FACTS 1.3 In the present case the ownership of the confiscatedsilver bars of the assessee now cannot be disputed and even theassessee is not disputing the same. Even on that also there areEconcurrent findings by all the authorities below and including thecustoms authorities. Therefore, the next question which is posedfor consideration before this Court is whether the assessee canclaim the business loss of the value of the silver bar confiscatedand whether the decision of this Court in the case of Piara Singhwould be applicable? To answer to the aforesaid question, it canFbe seen that in the present case the main business of theassessee is dealing in silver. His business cannot be said to besmuggling of the silver bars as was the case in the case of PiaraSingh. In the assessee’s case he was carrying on an otherwiselegitimate silver business and in attempt to make larger profits,Ghe indulged into smuggling of silver, which was an infraction ofCivil law. In that view of the matter the decision of this Court inthe case of Piara Singh which has been relied upon by the HighCourt while passing the impugned judgment and order and it hasbeen relied upon by the assessee shall not be applicable to the facts of the case. On hand or the other hand the decision of thisCourt in the case of Haji Aziz and the decisions of the AndhraPradesh High Court and the Bombay High Court which werepressed into service by the Revenue in Piara Singh would beapplicable with full force. [Paras 6.7, 6.8][99-H; 100-A-D] Haji Aziz & Abdul Shakoor Bros. v. CIT, AIR 1961 SC663 : [1961] SCR 651 – relied on. Soni Hinduji Kushalji & Co. vs. CIT, (1973) 89 ITR112(AP); JS Parkar v. VB Palekar,(1974) 94 ITR 616(Bom) – approved. 1.4 In view of the above and for the reason stated aboveand looking to the business of the assessee namely silver businessand was not in the business of smuggling silver, the decision ofthis Court in the case of Piara Singh shall not be applicable andtherefore the impugned judgment and order passed by the HighCourt quashing and setting aside the order passed by theAssessing Officer, CIT(A) and the ITAT rejecting the claim ofthe Assessee to treat the silver bars confiscated by the customsauthorities as business loss and consequently value allowing thesame as business loss is unsustainable and the same deserves tobe quashed and set side. [Para 7][100-E-F] CIT Patiala vs. Piara Singh, 1980 Supp SCC 166 :[1980] SCR 1122 – held inapplicable. Chuharmal v. CIT,(1988) 3 SCC 588 : [1988] 3 SCR788; CIT v. K Chinnathamban, (2007) 7 SCC 390 :[2007] 8 SCR 496; TA Quereshi (Dr.) v. CIT, (2007) 2SCC 759 : [2006] 10 Suppl. SCR 311; ApexLaboratories (P) Ltd. v. CIT, (2022) 7 SCC 98 –referred to. Per M.M. Sundresh, J. (Supplementing) 1.1 Explanation-I makes a declaration to remove anypossible doubts to reckon a loss suffered in the form ofexpenditure for any purpose which is an offence or one that isprohibited by law. There is no difficulty in holding that thisexplanation is clarificatory in nature. Applying the principle ofliteral interpretation with the intendment being very clear, giving Ano room for further doubts, coupled with the fact that there is nochallenge to it, the meaning appears to be rather very clear. Itseeks to prohibit a deduction of any expenditure incurred by anassessee for any purpose which is an offence or which is prohibitedby law. Due regard will have to be given to the words ‘anyexpenditure’ and ‘any purpose’. The reiteration being a legislativeBclarification of the main provision is required to be taken note of,as such, the power of judicial review over an explanation, whichhas been introduced to explain and remove the doubts of themain provision, is rather limited. [Para 12][103-G-H; 104-A-B] 1.2 Though the provision speaks of expenditure while notCmaking a specific reference to loss, one has to press into servicethe accepted commercial practice and trading principles. If oneis to treat the expenditure as a genus, a loss would become aspecie. All losses would become expenditures but not vice versa.A commercial loss in trade arising out of a business being carriedDon and incidental to it would be a deductible loss. There is asimilarity in the test qua a loss as laid down by this Court, andexpenditure under Section 37 of the Act. Perhaps, there is adistinction when it comes to the accounting treatment of the twoconcepts. Thus, there is no difficulty in holding that the word‘any expenditure’ mentioned in Section 37 of the Act takes in itsEsweep loss occasioned in the course of business, as well.Therefore, I agree with the view of my learned brother thatSection 37 of the Act and Explanation 1 will have a bearing in thepresent case. [Para 13][104-C-E] Badridas Daga v. CIT,[1959] SCR 690 – relied on.F 1.3 A little bit of interplay between Section 115BBE andSection 37(1) of the Act might throw more light on both theprovisions. If a loss in pursuance to an offence or prohibitedbusiness cannot be brought under Section 115BBE of the Act forincome assessed under 68, 69 and 69A to 69D of the Act, whichGdeals with unexplained income, expenditure etc., it can never besaid that the same would be brought under Section 37(1) of theAct, despite the fact that the objective behind both the provisionsare overlapping with some connection. Section 115BBE being asubsequent legislation, the true meaning of Section 37(1) can beHunderstood on that basis. [Para 17][106-A-C] 1.4 Conclusions: I. The word ‘any expenditure’ mentioned in Section 37 of the Act takes in its sweep loss occasioned in the course ofbusiness, being incidental to it. II. As a consequence, any loss incurred by way of anexpenditure by an assessee for any purpose which is an offenceor which is prohibited by law is not deductible in terms ofExplanation 1 to Section 37 of the Act. III. Such an expenditure/loss incurred for any purposewhich is an offence shall not be deemed to have been incurredfor the purpose of business or profession or incidental to it, andhence, no deduction can be made. IV. A penalty or a confiscation is a proceeding in rem, andtherefore, a loss in pursuance to the same is not available fordeduction regardless of the nature of business, as a penalty orconfiscation 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 ofthis Court in Haji Aziz and the insertion of Explanation 1 to Section37. [Para 26][132-F-H; 133-A-C] Commissioner of Income Tax vs. Piara Singh, 1980 SuppSCC 166 : [1980] SCR 1122; Dr. T.A. Quereshi v.Commissioner of Income Tax, Bhopal(2007) 2 SCC 759: [2006] 10 Suppl. SCR 311 – held not correct law. CIT v. S.C. Kothari,1972 (4) SCC 402: [1972] 1 SCR950 – held inapplicable. Haji Aziz & Abdul Shakoor Bros. v. CIT, [1961] 2 SCR651 – relied on. Maqbool Hussain v. State of Bombay etc. [1953] SCR730 – referred to. Case Law Reference In the judgment of M. R. Shah J. CIVIL APPELLATE JURISDICTION : Civil Appeal Nos.7689-7690 of 2022. From the Judgment and Order dated 22.11.2016 of the High Courtof Judicature for Rajasthan at Jaipur in DBITA No.96 of 2003 andDBITR No.6 of 1996. Balbir Singh, ASG, A. K. Shrivastava, Sr. Adv., Rupesh Kumar,Shyam Gopal, S. A. Haseeb, Divyansh H. Rathi, Ms. Monica Benjamin,FMs. Sunita Sharma, Raj Bahadur Yadav, Advs. for the Appellant. Arijit Prasad, Sr. Adv., Ms. Supriya Juneja, Paritosh Gupta, AdityaSingla, Ms. A. Sahitya Veena, Advs. for the Respondents. The Judgment of the Court was delivered by M. R. SHAH, J.G 1. Feeling aggrieved and dissatisfied with the impugned judgmentand order dated 22.11.2016 passed by the High Court of Judicature forRajasthan at Jaipur passed in DBITA No.96/2003 and DBITR No.6/1996 by which the High Court has allowed the said appeals, the Revenuehas preferred the present appeals.H 2. The facts leading to the present appeals in nutshell are as under: 2.1 A search was conducted by the Directorate of RevenueIntelligence (DRI) officers at the premises situated at A-11, 12, Sector -VII, NOIDA taken on rent by the assessee, Shri Prakash Chand Lunia.The DRI recovered 144 slabs of silver from the premises and two silveringots from the business premises of the assessee at 1397, ChandniChowk, Delhi. The assessee was arrested under Section 104 of theCustoms Act for committing offence punishable under Section 135 ofthe Customs Act. The Collector, Customs held that the assessee ShriPrakash Chand Lunia is the owner of silver/bullion and the transactionthereof was not recorded in the books of accounts. The Collector ofCustoms, New Delhi ordered confiscation of the said 146 slabs of silverweighing 4641.962 Kilograms valued at Rs.3.06 Crores. The CollectorCustoms further imposed a personal penalty of Rs.25 Lakhs on Sh.Prakash Chand Lunia under Section 112 of the Customs Act. TheCollector held that the silver under reference was of smuggled nature.