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The Commissioner of Income Tax, Jaipur vs Prakash Chand Lunia (D) Thr. Lrs.

Civil Appeal · 2023 INSC 416Decided 24 Apr 2023
Civil Appeal Nos. 7689-7690 of 2022
M.R. Shah · M.M. Sundresh

Background

Customs officials seized 144 silver slabs and two silver ingots from premises linked to the assessee, Prakash Chand Lunia, who was in the silver business. The silver was confiscated as smuggled goods and a personal penalty was imposed on him. The tax department treated the value of this silver as the assessee's unexplained investment/income under Section 69A of the Income Tax Act. The assessee argued that, alternatively, the value of the confiscated silver should be allowed as a deductible "business loss," relying on an earlier Supreme Court decision (Piara Singh). The High Court of Rajasthan accepted the assessee's argument on this point and allowed the loss as a business deduction, and the Revenue (tax department) appealed to the Supreme Court.

Decision Breakdown

The Supreme Court allowed the Revenue's appeal, holding that the loss from confiscation of smuggled silver could not be claimed as a business deduction. Justice M.R. Shah reasoned that the assessee's actual, legitimate business was dealing in silver, not smuggling, so smuggling silver was an unlawful side venture, and Piara Singh (which concerned someone whose entire business was smuggling) did not apply; instead, the older ruling in Haji Aziz & Abdul Shakoor Bros. v. CIT applied, which denies deduction for losses arising from breach of law. In a separate concurring opinion, Justice M.M. Sundresh went further and held, as a broader principle, that Explanation 1 to Section 37(1) of the Income Tax Act bars deduction of any expenditure/loss incurred for a purpose that is an offence or prohibited by law, and that confiscation/penalty proceedings are "in rem," so no assessee, whether their whole business is illegal or only partly so, can deduct such a loss; he held that the earlier decisions in Piara Singh and Dr. T.A. Quereshi do not lay down correct law on this point.

Lesson Learnt

Losses suffered because goods were confiscated for smuggling or another legal offence cannot be written off as a "business loss" to reduce one's tax bill. The law does not allow taxpayers to get a tax benefit from the fallout of illegal activity.

Official source (sci.gov.in)View Judgment (PDF)

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