The Supreme Court of India in a recent judgement held that loss incurred for expenditure for an offence is not deductible tax and upheld the disallowance of smuggled silver as business loss.
The Revenue challenged the decision of the Division Bench of the Rajasthan High Court at Jaipur, distinguishing a claim for deduction of a loss incurred in an illegal business, as against a claim of a loss qua a legitimate business, though illegality is attached to it.
The Director of Revenue Intelligence set out a search at the business premises of the Respondent/assessee and recovered the silver slabs/silver ingots. The assessee was in the business of making jewellery.
The Respondent/assessee had filed his return for the Assessment Year 1989-1990 followed by a petition before the Income Tax Settlement Commission. The Collector of Customs vide order dated 18.12.1990 ordered confiscation of goods and imposed penalty. It was done on the premise that the goods were smuggled by the assessee.
A claim was made by the assessee that the loss on account of confiscation would be allowable as trading loss being incidental to the business, and hence, deductible. This argument was duly rejected as he was neither doing the business of smuggling, nor he owned the silver.
The plea of ownership was given up by the Respondent/assessee before the High Court, and therefore, the decision of the assessing officer in bringing the loss suffered under Section 69A of the Income Tax Act, 1961 had become final.
Section 37 of the Income Tax Act, being one of the provisions meant for computing income from profits or gains of business or profession, is a residuary and omnibus provision which intends to cover all expenditures to the exclusion of those mentioned under Sections 30 to 36 of the Income Tax Act, apart from being a capital expenditure or personal expenses of the assessee. Therefore, the object behind this provision is very clear as it includes ‘any expenditure’.
The second mandate of this provision is that the expenditure will have to be laid out or expended wholly and exclusively for the business or profession to come into the fold of income chargeable to tax as profit and gains of business or profession.
The interpretation of Section 37 of the Act given by the Court in Dr T.A. Quereshi Case leads to a situation where the expenditure incurred in manufacturing something illegal may not be allowable as a deduction given Explanation 1, however, if upon seizure, the manufactured goods are confiscated, in that case, the deduction will be allowable on commercial principles.
The word ‘any expenditure’ mentioned in Section 37 of the Act takes in its sweep loss occasioned during the business, being incidental to it. Consequently, any loss incurred by way of 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 Income Tax Act. Such an expenditure/loss incurred for any purpose which is an offence shall not be deemed to have been incurred for business or profession or incidental to it, and hence, no deduction can be made.
A two-judge Supreme Court Bench comprising Justices M R Shah and M M Sundresh observed that 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. The Apex Court set aside the judgment & order dated 22.11.2016 passed by the High Court of Rajasthan at Jaipur.
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