Holding

The loss incurred due to confiscation of currency notes in the smuggling business is deductible under section 10(1) of the Income‑Tax Act, 1922.

Summary

Piara Singh, a gold smuggler, was caught crossing the India‑Pakistan border in 1958 and Rs 65,500 in currency notes used to purchase gold abroad were confiscated by customs. He claimed that the confiscated amount was a loss incurred in his smuggling business and sought a deduction under section 10(1) of the Income‑Tax Act, 1922. The Income‑Tax Officer assessed most of the amount as undisclosed income, but the Income‑Tax Appellate Tribunal and the Punjab and Haryana High Court allowed the deduction, holding that the loss was a normal incident of the illegal business. The Revenue appealed to the Supreme Court, which affirmed the lower courts’ view, reasoning that a loss directly arising from the conduct of an illegal trade is deductible under section 10(1) and that the illegality of the business does not preclude the deduction. Consequently, the appeal was dismissed and the deduction of Rs 65,500 was upheld.

Issues considered

Whether the loss arising from the confiscation of currency notes used in a smuggling operation is an allowable deduction under section 10(1) of the Income‑Tax Act, 1922.

Legislation cited

Income Tax Act, 1922s. 10(1)

Subjects

Income taxDeductionLossIllegal businessSmugglingSection 10(1)ConfiscationTax liability

Judgment

1122

A COMMISSIONER OF INCOME TAX, PATIALA
v.
PIARASINGH
May 8, 1980
B [P. N. BHAGWATI, V. D. TULZAPURKAR AND R. S. PATHAK, JJ.] •
Losses in business-Deduction under section 10(1) of the Income Tax Act, .
1922.....:./s a smuggler who is taxed on his income from smuggling under the
Income Tax Act, 1922 entitled to a deduction under section 10(1) of the Act
on account of the confiscation of currency notes e1nployetl in the smuggling
activity.
c The respondent Piara Singh was apprehended in September 1958 by the
Indian Police while crossing the Inda-Pakistan border into Pakistan. A sum
o~ Rs. 65,500/r in currency notes was recovered from his person. On interro-
gation he stated that he was taking the currency notes to Pakistan to enilble him
to purchase gold in that country with a view to smuggling it into India. The
Collector of Central Excise and Land Customs ordered the confiscation of the
D currency notes.
In the proceedings initiated by the Income Tax -Officer, ho found that
Rs. 60,500/- constituted the income of tlle assesscc from undisclosed sources.
An appeal by the assessee was dismissed by the Appellate Assistant Commis-
sioner. In second appeal before the Income Tax Appellate Tribunal, the. assessee
represented that if he was regarded as engaged in the business of smuggli!lll
gold he was entitled to il deduction under section 10( 1) of the Income Tsx
E Act, 1922 of the entire sum of Rs. 65,500/, as a loss incurred in tho business
on the confiscation of the currency notes. The Tribunal upheld the claim to
dedliction. It proceeded- on the basis that the assessee was carrying on a
regular smuggling activity which consisted of taking currency notes out of
India and exchanging them with gold in Pakistan which was later smuggled
into India. The High Court on a reference at the instance of the Revenue
answered the· reference against the Revenue. Hence the appca:J.
F
Allowing the appeal, the Court. /
HEID : I. The assessee is entitled to the deduction of Rs. 65,500 ;, under sec-
tion 10(1) of the Income T&x Act, 1922. [1124 C, 1126 BJ
2. The assessce was Oarrying on the business of smuggling a.nd, therefore.
G was liable to income tax on income from that business. The currency notes
carried by the assessee across the border was an essential part of the smuggling
operation. If the activity of smuggling can be regarded as a business, those
who are ~rrying on that busine§s must be deemed to be aware that a necessary
incident involved in the business is detection by the Customs authorities tnd
the consequent confiscation of the currency notes. It is an incident as predict-
able in the course of carrying on the activity as any other feature of il Having
H regard to the nature of the activity possible detection by the Cus!oma autho-
ritiCS> constitutes a normal feature integrated into all !hat is implied and
involved in ir. The confiscation of the currency notea is a loss OOCll8ion<d in
pursuinJ the business; it is a Joss in much th• oam1 'fV•Y as if tho currency

T ••
C.I.T, V., PIARA SINGH (Pathak, ].) 1123

nbtet bad been stolen or dropped on the way while carrying on the bll!iness. A
It is a lqss which springs directly from the carrying on of the business and is
incidental to it. Applying the principle laid down by this Court in Badridas
Daga v. Commissioner of Income Tax the deduction must be allowed.
' [1124 D-B]
Bodridas Daga v. Commissioner of Income Tax, [1958] 34 !TR 10; Com-
missioner of Income Tax, Gujarat v. S. C. Kothari [1971] 82 lTR 194; applied. B

.
f
Haji Az;iz and Abdul Shakoor Bros. v. Commi.r.sioner of Income Tax,
Bombay City IT, [1961] 41 ITR 350, Sari Hinduji K/wshalji & Co. v. Commr .
of Income Tax, A.P. (1973] 8' ITR 112; J. S. Parkar v. V. B. Palekar an<t
Ors. [1974] 94 !TR 616; distinguished and explained.

CivlL APPELLATE JURISDICTION : Civil Appeal No. 2752 of 1972.
Appeal by Certificate from the Judgment and Order dated the
c.
5th November, 1970 of the Punjab and Haryana High Court in
Income Tax Reference No. 38 of 1969.
G. A. Shah & Miss A. Subhashini for the appellant.
Naunit Lal & Mr. Kailash Yasudev for respondent.
D
The Judgment of the Court was delivered by
PA'THAK, J. Is a smuggler, who is taxed on his income from
smuggling under the Income Tax Act, 1922, entitled to a deduction
under Section 10(1) of the Act on account of the confiscation of cur-
rency notes employed in the smuggling activity ?
E
The respondent, Piara Singh, was apprehendei:J in September, 1958
by the Indian Police while crossing the Inda-Pakistan border into
Pakistan. A sum of Rs. 65,500/- in currency notes was recovered
from his person. On interrogation he stated that he was taking the
currency notes to Pakistan to enable him to purchase gold in that
country with a view to smuggling it into India. The Collector of F
Central Excise and Land Customs ordered the confiscation of 'thtj. cur-
rency notes.
The Income Tax Officer now took proceedings under the Indian
Income Tax Act, 1922 for assessing t11e assessee's income and deter-
mining his tax liability. He came to'the finding that out of Rs. 65,500/- G
an amount of Rs~ 60,500/- constituted the income of the assessee from
undisclosed sources. An appeal by the assessee was dismissed by the
. t-' Appellate Assistant Commissioner. In second api\ea! before ·the
Income Tax Appellate Tribunal the assessee represented that if be was
reprded as engaged in the business of smuggling gold he was entitled
to a deduction iinder Section 10 (1) of the Income Tax Act of the H
entire sum of Rs. 65,500/- as a loss incurred in the business on the
confiscation of the currency notes. The Appellate Tribunal upheld the

-:2: _,.-
MRB~E COURT REPORTS [1980) 3 s.c.R.

.&. cllloii!l tQi Qed~tiQn. lt pr~®d on the basis that. t~ ~ses~ ~
cauying oa a regular smuggling activity which consisted: of tllltiiJg
currency notes out of India and exchanging them for gold in Pakistan
which was later smuggled into India. At the instance of the Revenue,
a reference was made to the High Court of Punjab and Haryana on
the following question : •
» "Whether on the facts and in the circumstances of the
case the loss of Rs. 65,500/- arising from the confiscation
of the currency notes was an allowable deduction under ...
section 10 ( 1) of the Income-tax Act, 1922 ?" '
The High Court answered the question in the affirmative.
c And now this appeal by the Revenue.
In our Judgment, the High Court is right. The Income Tax autho-
rities found that the assessee was carrying on the business of smuggling
They held that he' was, therefore, liable to income-tax on income
from that business. On the basis that such income was mxable, the
D question is whether the confiscation of the currency notes entitles
the assessee to the deduction claimed. The currency notes clirried
by the assessee across the border constit.uted the means for acquiring
gold in Pakistan, which gold he subsequently sold in India at a profit.
The currency notes were necessary for acquiring the gold. The
carriage of currency notes across the border was an essential part of
E the smuggling operation. If the activity of smuggling can be regard-
ed as a business, those who are carrying on that business must be
deemed to be aware that a necessary incident involved in the business
is detection. by the Custom authorities and the consequent confisca-
tion of the currency notes. It is an incident as predictable in t41)
F COl;lrSe of cmrying on the activity as any other feature of it. Having
· regard to the nature of the activity possi\)le detection by the Custo,111s
authorities constitutes a normal feature integrated into all that is /

implied and involved in it. The confiscation of the currency notes {
is a loss occasioned in pursuing the business, it is a loss in much the
sMD.e way as if the currency notes had been stolen or dropped on the
G way while carrying on the business. It is a loss which springs directly
from the carrying on of the business and is incidental to it. Applying
the principle laid down by this Court in Badridas Daga v. Commis-
sioner of Income-tax(') the deduction must be allowed. .·~
In Commissioner of Income-tax, Gujarat v. S.C. Kothari(') this
Co1,1It held that for the purpose of Section 1Q( 1 ) of the Inc0tne Tax
H A~t, 1922 a loss incurred in carrying on an illegal business wust be .
(I) (l9S8) 34 I. T. R. 10.
(2) (1971) BZ I. T. R. 794·
tJ.t v.' iilAilA SINGH (f>atJiak, J.) .

deducted before the true figure of profits brought to tax caa ~ A
Wlllputed. Grover, J., speaking for the Court, observed :

M the business is illegal, neither the profits earned HOr
the lesses mourred woold be enforceable .in law. But, tl!at
dCJes not take the profits out of the taxing statute. Similarly,
• the taint of illegality of the business cannot detract from the

..
f
losses being taken into account for computation of the
·llilJ.ount Which <.-.ill be subjected to tax as ''t>rofits" under sec-
tion 10(1) of the Act of 1922. The tax cOllector cannot ·be
heard to say that he will bring the gross receipts to tax. He
can only tax profits of a trade or business. That cannot
be done without deducting the losses and the legitimate
.. e11penses of the business."

Reliance was placed by the Revenue on Haji Aziz and Abdul
Shakoor Bros. v. Commissioner of Income-tax, Bombay City fl(') In
that case, however, the assessee carried on the lawful business of
importing dates from abroad and selling them in India. Thei D
import of dates by steamer was prohibited. Nonetheless he im-
ported dates from Iraq by steamer, and the eonsignments were confis-
cated by the customs authorities. But the dates were released subse-
quently on payment of fine. The assessee's claim to deduction under
s. 10(2) (xv) of the Ineome Tax Act was rejected on the ground that
the amount was Nid by way of penalty for a breach of the law. An E
infraction of the law was not a normal incident of business carried on
by the assessee, and the penalty was rightly held to fall on the assessee
in some character other than that of a trader. Reference w,as made
by the Revenue to Soni Hinduji Kushalji & Co. v. Commissioner of
Income-tax, A.P( 2 ). The assessee's claim to the deduction of the value
of gold confiscated by the. customs authorities was ~ound unsustainable F
by the court. The decision in that case can b~ explained on the ground
that the assessee was carrying on a lawful business in gold, silver and
jewellery and committed an infraction of the law h1 smuggling gold
into the country. Our attention has also been invited to J. S. Parkar v.
V. B. Palekar and Others(') where on a difference of opinion between
two learned Judges of the Bombay High Court a third learned Judge G
agreed with the view that the value of gold confiscated by the cus-
toms authorities in smuggling operations was not entitled to deduc-
tion against the estimated and assessed income. from an undisclosed
'ource. It was observed that the Joss arose by reason of an infraction

I
.·~.·.·.· (J) (1961) 41 I. T. R. 350. H
•f (2) (1973) 89 I. T. R. 112.
(3) (1974) 941. T. R. 616. I
·.'---
1126 SUPREME COURT REPORTS [1980] 3 s.c.R.

A of the Jaw and as it had not fallen on the assessee as a trader or busi-
ness man a deduction could not be allowed. Apparently, the true
significance of the distinction between an infraction of the law "com-
mitted in the carrying on of a lawful business and an infraction of the
law committed in a business inherently unlawful and constituting a
normal incident of it was not pointedly placed before the High Court
B in that case.
We hold that the assessee is entitled to the deduction of ...
Rs. 65,500/-, and accordingly we affirm the view taken by the High '
Court on the question of law referred to it.
The appeal fails and is dismissed with costs.
c

S.R. Appeal dismissed.