Tax Law| Loss In Pursuance To Penalty Is Not Available For Deduction Regardless Of Nature Of Business- SC Clarifies
A Supreme Court Bench of Justice MR Shah and Justice MM Sundresh have allowed an appeal preferred by the Revenue Department, which challenged the decision of the High Court drawing a distinction between 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.
It was held 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.
ASG Balbir Singh appeared for the Revenue, while Senior Advocate Arjit Prasad appeared for the assessee.
In this case, the question posed for consideration before the Apex Court was whether the High Court had erred in law by allowing the respondent the loss of confiscation of silver bars by the Directorate of Revenue Intelligence officials as a business loss, relying upon the decision in the case of CIT Patiala vs. Piara Singh.
Justice MR Shah took the considered opinion that the High Court had materially erred in relying upon the decision passed in the Piara Singh case. In that context, it was said that "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 law. In that view of the matter the decision of this Court in the case of Piara Singh (supra) 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".
Concurring with Justice Shah's judgment, Justice MM Sundresh further observed that since the word "any expenditure" mentioned in Section 37 of the Income Tax Act takes in its sweep the loss occasioned in the course of business being incidental to it, "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".
In the same vein, it was 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".
Consequently, the appeal was allowed. No orders were passed as to costs.
Cause Title: The Commissioner of Income Tax Jaipur v. Prakash Chand Lunia (D) Thr.Lrs. & Anr