The Supreme Court examined whether the assessee was entitled to claim the value of silver bars confiscated by the Customs authorities as a business loss, after the same value had been added to his income as unexplained investment under Section 69A of the Income Tax Act, 1961.

The assessee was engaged in the business of dealing in silver. A search conducted by the Directorate of Revenue Intelligence resulted in the recovery of 146 silver slabs from premises connected with the assessee. The Customs authorities held that the silver was of smuggled nature, ordered absolute confiscation of the goods, and imposed penalty. During income tax assessment proceedings, the Assessing Officer treated the assessee as the owner of the confiscated silver and made an addition of ₹3.06 crore under Section 69A of the Act, which was upheld by the appellate authorities and the Income Tax Appellate Tribunal.

Before the High Court, the assessee did not press the issue of ownership of the silver but contended that once the value of the silver was added as income, the loss arising from absolute confiscation ought to be allowed as a business loss. Relying on the decision of the Supreme Court in CIT v. Piara Singh, the High Court accepted the assessee’s contention and allowed the deduction.

The Supreme Court reversed the High Court’s judgment. The Court held that the reliance placed on Piara Singh was misplaced. In Piara Singh, the assessee was found to be engaged in the business of smuggling, and the confiscation of currency notes was held to be a loss directly arising from and incidental to such illegal business. In contrast, the assessee in the present case was carrying on a legitimate business of dealing in silver and was not engaged in the business of smuggling.

The Court held that where an assessee carrying on a lawful business indulges in smuggling as an infraction of law, the confiscation of goods cannot be regarded as a loss incidental to the carrying on of the assessee’s business. The loss arises due to a violation of law and falls on the assessee in a character other than that of a trader. Accordingly, such loss cannot be allowed as a business loss.

The Supreme Court relied upon and reaffirmed the principles laid down in Haji Aziz & Abdul Shakoor Bros. v. CIT, Soni Hinduji Kushalji & Co., and J.S. Parkar v. V.B. Palekar, which hold that losses resulting from confiscation of contraband goods in cases of legitimate business are not deductible, as they do not spring directly from the carrying on of business and are not incidental thereto.

The Court further observed that Explanation 1 to Section 37(1) of the Act, which disallows expenditure incurred for any purpose that is an offence or prohibited by law, reinforces the legislative intent that losses arising from illegal acts cannot be treated as allowable business deductions.

Accordingly, the Supreme Court held that the assessee was not entitled to claim the value of confiscated silver as a business loss, set aside the judgment of the High Court, and restored the orders passed by the Assessing Officer, the Commissioner (Appeals), and the Income Tax Appellate Tribunal.

Source Link - https://api.sci.gov.in/supremecourt/2017/34527/34527_2017_4_1502_43795_Judgement_24-Apr-2023.pdf

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