CASE LAWS

CA Rajalakshmi B
1. CIT v. Piara Singh:
➢ Carriage of the currency notes across the border was an essential part of the smuggling operation and
detection by the customs authorities and consequent confiscation was a necessary incident and constituted
a normal feature of such an operation.

➢ The confiscation of the currency notes was a loss occasioned in pursuing the business of smuggling. 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.

➢ It was a loss which sprang directly from the carrying on of the business and was incidental to it and its
deduction had to be allowed.

Conclusion: The decision of the Supreme Court was that the assessee carrying on smuggling activity and the
court held that the loss arising out of confiscation of currency notes must be allowed as a business loss.

where the assessee is carrying on illegal business, there is no bar for deduction of loss or expenses as decided.
(Business : illegal then loss of such business would be allowed)
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.

Facts of the case:

• 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.
• The assessee is entitled to the deduction of Rs. 65,500/- under section 10(1) of the Income Tax Act, 1922.
• The assessee was carrying on the business of 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 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.

Conclusion: The decision of the Supreme Court was that the assessee carrying on smuggling activity and the court held that
the loss arising out of confiscation of currency notes must be allowed as a business loss.

where the assessee is carrying on illegal business, there is no bar for deduction of loss as decided.
(Business : illegal then loss of such business would be allowed)
2. Dr. T A Qureshi v. CIT Loss Expenditure on illegal activity—
➢ The assessee was a doctor by profession. There took place a raid in his residential premises. In this raid, a
clandestine laboratory to manufacture heroin powder along with several contraband drugs was recovered. All
these contraband articles were seized and proceedings under the Narcotic Drugs and Psychotropic
Substances (NDPS) Act, 1985, were initiated against the assessee.

➢ The assessee filed return for the relevant assessment year. In this assessment, he claimed that since the
heroin seized from him forms part of the stock-in-trade, hence, its loss on account of seizure is an allowable
deduction while computing his profits and gains of business/profession. The revenue authorities rejected the
assessee's claim.

➢ However, the Tribunal accepted the assessee's claim.

➢ Held: the judgment passed by the Supreme Court, loss of illegal business can be set off and carried forward
against the profit of legal business, if so claimed by assessee. One may think Government is providing
incentive to hide the illegal business but it is to so. Government needs to follow this law because otherwise it
cannot tax the income of illegal business. Therefore, to keep consistency in law such judgment has been
passed.
CIT Vs Dr. T A Qureshi:
Facts of the case:
• The respondent is an assessee. He is a doctor by profession at a place called "Garoth" in District Mandsour.
• On July 18, 1985, CBI sleuths arrested the respondent while transporting a huge quantity of contraband article--narcotic
drugs--heroin in jeep (Jonga) RSO 3592. This led to further raid in his residential premises.
• In this raid, one clandestine laboratory to manufacture heroin powder along with several contraband drugs were recovered.
All these contraband articles were seized and proceedings under the Narcotic Drugs and Psycho-tropic Substances Act,
1985, were initiated against the assessee.
• The assessee (respondent) filed his return for the assessment year 1986-87 and the assessee claimed that the value of the
contraband articles (heroin) seized from his possession works out to Rs. 5,50,000.
• He, therefore, claimed that since heroin seized from him forms part of the stock-in-trade and hence, its loss on account of
seizure is an allowable deduction while computing his profits and gains of business/profession.
• The Assessing Officer did not accept the contention of the assessee and added a sum of Rs. 5,50,000 as an income from
undisclosed sources.
• In appeal, filed by the assessee the Commissioner of Income-tax (Appeals) upheld the order of the Assessing Officer
• The assessee then filed second appeal before the Tribunal. However, the Tribunal by the impugned order allowed the
appeal and held that the assessee is entitled to claim the benefit of loss. In other words, the Tribunal was of the view that
since the seizure has resulted in loss to an assessee to the extent of its value (Rs. 5,50,000) in his stock-in-trade and hence
relying upon the law laid down by the Supreme Court in the case of CIT v. Piara Singh [1980] 124 ITR 40, the Tribunal
allowed the deduction of Rs. 5,50,000 out of the gross total income of the assessee.

"Section 37. Explanation.--For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for
any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of
business or profession and no deduction or allowance shall be made in respect of such expenditure.“
A mere reading of the Explanation quoted supra would clearly indicate that any expenditure incurred by an assessee for any
purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of
business or profession and that no deduction or allowance shall be made in respect of such expenditure.

Held: the judgment passed by the Supreme Court, loss of illegal business can be set off and carried forward against the profit
of legal business, if so claimed by assessee. One may think Government is providing incentive to hide the illegal business but
it is to so. Government needs to follow this law because otherwise it cannot tax the income of illegal business. Therefore, to
keep consistency in law such judgment has been passed.
The Hon'ble Supreme Court held that the Explanation to section 37 is applicable in case of business expenditure and not
business loss.