Income Tax Deduction and Confiscated Assets: Supreme Court Overturns High Court Ruling

The case of The Commissioner of Income Tax, Jaipur vs. Prakash Chand Lunia (D) Thr Lrs & Anr. involves the issue of whether the loss incurred due to the confiscation of smuggled goods can be claimed as a business loss under the Income Tax Act, 1961. The Supreme Court of India, in its judgment dated April 24, 2023, overturned the Rajasthan High Court’s ruling and restored the decisions of the Income Tax Appellate Tribunal (ITAT), Commissioner of Income Tax (Appeals) [CIT(A)], and the Assessing Officer.

The case centers on 146 slabs of silver recovered from the business premises of the respondent, Shri Prakash Chand Lunia, by the Directorate of Revenue Intelligence (DRI). The Collector of Customs found that the silver was of smuggled nature and imposed a penalty while also confiscating the silver. The dispute before the Supreme Court was whether the respondent could claim the value of the confiscated silver as a business loss for income tax purposes.

Background of the Case

The facts of the case are as follows:

• DRI officers conducted a search at a property in NOIDA rented by the respondent and found 144 slabs of silver.
• An additional 2 silver ingots were found at his business premises in Chandni Chowk, Delhi.
• The silver, weighing a total of 4641.962 kg and valued at ₹3.06 crores, was confiscated by the Collector of Customs.
• The respondent was arrested under Section 104 of the Customs Act for an offense punishable under Section 135.
• The Income Tax Department held that the respondent was the owner of the silver and had not accounted for it in his books of accounts.
• The Assessing Officer invoked Section 69A of the Income Tax Act, treating the value of the confiscated silver as unexplained investment and adding it to the respondent’s taxable income.

Arguments by the Parties

Revenue’s Submissions

Representing the Revenue, Additional Solicitor General Balbir Singh argued:

• The High Court erred in relying on the Supreme Court’s decision in Piara Singh v. CIT, as the case involved a professional smuggler, whereas the respondent in this case was engaged in an otherwise legitimate business.
• The confiscation of assets due to an illegal act is not a normal business loss and should not be allowed as a deduction.
• The High Court overlooked decisions such as Haji Aziz & Abdul Shakoor Bros. v. CIT and others, which hold that confiscation of contraband goods is not a business loss.
• Allowing such a deduction would effectively legalize illicit business activities by granting tax relief for penalties and confiscations.

Respondent’s Submissions

Senior Advocate Arijit Prasad, representing the respondent, contended:

• The respondent was engaged in the silver trading business, and the confiscated silver was part of his stock-in-trade.
• Since the value of the silver was added to his taxable income under Section 69A, he should be allowed to claim it as a business loss.
• The High Court correctly applied the ruling in Piara Singh and Dr. T.A. Quereshi v. CIT, which allow business loss deductions for confiscated assets.
• There was no claim for deduction of fines or penalties; rather, the claim was for the loss of trading stock.

Supreme Court’s Observations and Ruling

The Supreme Court Justices M.R. Shah and M.M. Sundresh ruled in favor of the Revenue, emphasizing:

• The High Court incorrectly applied the Piara Singh case, as the respondent was not in the business of smuggling but in legitimate silver trading.
• The confiscation of goods due to illegal activities is a legal penalty and cannot be treated as a normal business loss.
• The principle set in Haji Aziz & Abdul Shakoor Bros. is applicable, which states that a loss from confiscation due to legal infractions cannot be claimed as a deduction.
• Allowing such deductions would incentivize tax evasion and encourage illegal activities.

Final Judgment

The Supreme Court allowed the Revenue’s appeal, set aside the High Court’s decision, and restored the orders of the Assessing Officer, CIT(A), and ITAT. The judgment reaffirmed that confiscation of illegally acquired goods cannot be treated as a business loss for tax purposes.

Read also: https://judgmentlibrary.com/income-tax-assessment-under-section-153a-supreme-court-clarifies-scope-after-search/

Judges: M.R. Shah and M.M. Sundresh

Judgment Date: April 24, 2023

Petitioner Name: The Commissioner of Income Tax, Jaipur.
Respondent Name: Prakash Chand Lunia (D) Thr Lrs & Anr..
Judgment By: Justice M.R. Shah, Justice M.M. Sundresh.
Place Of Incident: NOIDA, Uttar Pradesh.
Judgment Date: 24-04-2023.

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