Income Tax Act, 1961 – Explanation to s.37(1) – ‘any expenditure’ in s.37 – Expenditure/loss incurred for any purpose which is an offence or prohibited by law, not deductible in terms of Explanation 1 to s.37 – High Court relying upon the decision of Supreme Court in Piara Singh case allowed the loss of confiscation of silver bars as a business loss – Sustainability of – Held: Not sustainable – Explanation to s.37(1) provides that any expenditure incurred by the assessee for any purpose which is an offence or prohibited by law is not an allowable business expense – In the present case, the main business of the assessee was dealing in silver – His business cannot be said to be smuggling of the silver bars as was the case in Piara Singh – Assessee was carrying on an otherwise legitimate silver business and in attempt to make larger profits, he indulged into smuggling of silver, which was an infraction of law – High Court erred in relying upon the Piara Singh case – Impugned judgment set aside – Order of the assessing officer, CIT(A) and ITAT rejecting theclaim of the respondent-assessee to treat the silver bars confiscated by the customs authorities as business loss restored – Per M.M. Sundresh. J (Supplementing)‘any expenditure’ mentioned in s.37 takes in its sweep loss occasioned in the course of business, being incidental to it – Thus, any loss incurred by way of an expenditure by an assessee for any purpose which is an offence or which is prohibited by law is not deductible in terms of Explanation
1 to s.37 – A penalty or a confiscation is a proceeding in rem, and therefore, a loss in pursuance to the same is not available for deduction regardless of the nature of business, as a penalty or confiscation cannot be said to be incidental to any business – Decisions in Piara Singh and Dr. T.A. Quereshi do not lay down correct law in light of the decision in Haji Aziz and the insertion of Explanation 1 to s.37 – Impugned judgment set aside – Finance (No.2) Act 1998 – Income Tax Act, 1922 – ss.10(1), (2). Allowing the appeals, the Court
HELD: 1.1 The provisions of Section 37(1) under the Act has been amended by Finance (No.2) Act, 1998 by introducing Explanation 1 thereto w.e.f. 01.04.1962 wherein any expenditure incurred by the assessee for any purpose which is an offence or prohibited by law is not an allowable business expense. It is true that in the present case the respondent - assessee did not claim value of silver bars confiscation as business expenses thus claimed as business loss. However, the amendment to Section 37 might have some bearing on the issue involved. [Para 6.1][98-C-D]
1.2 On going through the impugned judgment and order passed by the High Court, it appears that the High Court has simply relied upon the decision of this Court in the case of Piara Singh. The High Court has materially erred in relying upon the decision of this Court in the case of Piara Singh. [Para 6.2][98-E]
CIT, Patiala vs. Piara Singh 124 ITR 4 – held inapplicable.
1.3 In the present case the ownership of the confiscated silver bars of the assessee now cannot be disputed and even the assessee is not disputing the same. Even on that also there are concurrent findings by all the authorities below and including the customs authorities. Therefore, the next question which is posed for consideration before this Court is whether the assessee can claim the business loss of the value of the silver bar confiscated and whether the decision of this Court in the case of Piara Singh would be applicable? To answer to the aforesaid question, it can be seen that in the present case the main business of the assessee is dealing in silver. His business cannot be said to be smuggling of the silver bars as was the case in the case of Piara Singh. In the assessee’s case he was carrying on an otherwise legitimate silver business and in attempt to make larger profits, he indulged into smuggling of silver, which was an infraction of Civil law. In that view of the matter the decision of this Court in the case of Piara Singh which has been relied upon by the High Court while passing the impugned judgment and order and it has been relied upon by the assessee shall not be applicable to the facts of the case. On hand or the other hand the decision of this Court in the case of Haji Aziz and the decisions of the Andhra Pradesh High Court and the Bombay High Court which were pressed into service by the Revenue in Piara Singh would be applicable with full force. [Paras 6.7, 6.8][99-H; 100-A-D]
Haji Aziz & Abdul Shakoor Bros. v. CIT, AIR 1961 SC
663 : [1961] SCR 651 – relied on.
Soni Hinduji Kushalji & Co. vs. CIT, (1973) 89 ITR 112(AP); JS Parkar v. VB Palekar, (1974) 94 ITR 616 (Bom) – approved.
1.4 In view of the above and for the reason stated above and looking to the business of the assessee namely silver business and was not in the business of smuggling silver, the decision of this Court in the case of Piara Singh shall not be applicable and therefore the impugned judgment and order passed by the High Court quashing and setting aside the order passed by the Assessing Officer, CIT(A) and the ITAT rejecting the claim of the Assessee to treat the silver bars confiscated by the customs authorities as business loss and consequently value allowing the same as business loss is unsustainable and the same deserves to be 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 SCR 788; CIT v. K Chinnathamban, (2007) 7 SCC 390 : [2007] 8 SCR 496; TA Quereshi (Dr.) v. CIT, (2007) 2 SCC 759 : [2006] 10 Suppl. SCR 311; Apex
Laboratories (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 any possible doubts to reckon a loss suffered in the form of expenditure for any purpose which is an offence or one that is prohibited by law. There is no difficulty in holding that this explanation is clarificatory in nature. Applying the principle of literal interpretation with the intendment being very clear, giving no room for further doubts, coupled with the fact that there is no challenge to it, the meaning appears to be rather very clear. It seeks to prohibit a deduction of any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law. Due regard will have to be given to the words ‘any expenditure’ and ‘any purpose’. The reiteration being a legislative clarification of the main provision is required to be taken note of, as such, the power of judicial review over an explanation, which has been introduced to explain and remove the doubts of the main provision, is rather limited. [Para 12][103-G-H; 104-A-B]
1.2 Though the provision speaks of expenditure while not making a specific reference to loss, one has to press into service the accepted commercial practice and trading principles. If one is to treat the expenditure as a genus, a loss would become a specie. All losses would become expenditures but not vice versa. A commercial loss in trade arising out of a business being carried on and incidental to it would be a deductible loss. There is a similarity in the test qua a loss as laid down by this Court, and expenditure under Section 37 of the Act. Perhaps, there is a distinction when it comes to the accounting treatment of the two concepts. Thus, there is no difficulty in holding that the word ‘any expenditure’ mentioned in Section 37 of the Act takes in its sweep loss occasioned in the course of business, as well. Therefore, I agree with the view of my learned brother that Section 37 of the Act and Explanation 1 will have a bearing in the present case. [Para 13][104-C-E]
Badridas Daga v. CIT, [1959] SCR 690 – relied on.
1.3 A little bit of interplay between Section 115BBE and Section 37(1) of the Act might throw more light on both the provisions. If a loss in pursuance to an offence or prohibited business cannot be brought under Section 115BBE of the Act for income assessed under 68, 69 and 69A to 69D of the Act, which deals with unexplained income, expenditure etc., it can never be said that the same would be brought under Section 37(1) of the Act, despite the fact that the objective behind both the provisions are overlapping with some connection. Section 115BBE being a subsequent legislation, the true meaning of Section 37(1) can be understood 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 of business, being incidental to it.
II. As a consequence, any loss incurred by way of an expenditure by an assessee for any purpose which is an offence or which is prohibited by law is not deductible in terms of Explanation 1 to Section 37 of the Act.
III. Such an expenditure/loss incurred for any purpose which is an offence shall not be deemed to have been incurred for the purpose of business or profession or incidental to it, and hence, no deduction can be made.
IV. A penalty or a confiscation is a proceeding in rem, and therefore, a loss in pursuance to the same is not available for deduction regardless of the nature of business, as a penalty or confiscation 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 of this Court in Haji Aziz and the insertion of Explanation 1 to Section
37. [Para 26][132-F-H; 133-A-C]
Commissioner of Income Tax vs. Piara Singh, 1980 Supp SCC 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 SCR
950 – held inapplicable.
Haji Aziz & Abdul Shakoor Bros. v. CIT, [1961] 2 SCR
651 – relied on.
Soni Hinduji Kushalji & Co. vs. CIT, (1973) 89 ITR 112(AP); JS Parkar v. VB Palekar, (1974) 94 ITR 616 (Bom) – approved.
Maqbool Hussain v. State of Bombay etc. [1953] SCR
730 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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