1. This reference is made under sub-s. (1) of s. 256 of the I.T. Act, 1961 (the Act). The assessee in this case is a firm which runs its business in the name and style of M/s. Satyanarayana Rice Mill, Amadalavalasa (the miller). The reference in the case arose in the following circumstances : In exercise of the powers under the Essential Commodities Act (10 of 1955) the State of Andhra Pradesh promulgated on November 17, 1967, an order known as 'Rice Procurement (Levy) and Restriction on Sale Order, 1967'. Under the order, rice-millers in the state were obliged to deliver a specified quantity of their turnover as levy rice to the Food Corporation of India-the agent of the State. The miller (assessee), defaulted to deliver the levy relevant to the period between November 1, 1972, and February 23, 1973. Thereupon, a specified quantity of rice was seized from the miller and subsequently, after an enquiry, under Act 10 of 1955, the seized rice was confiscated. The value of the confiscated rice is shown to be Rs. 43,974. The miller before the taxing authorities under the I.T.Act, 1961 (the Act), claimed the sum of Rs. 43,974 as a trading loss incurred in business under sub-s. (1) of s. 28 or an amount expended in carrying out milling business under sub-s. (1) of s. 37 of the Act. This claim of the miller was rejected by the authorities including the Appellate Tribunal. Thereupon, at the instance of the miller, the following question is referred to this court for its opinion :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the sum of Rs. 43,974 could not be treated as business loss under section 28(1) of the Income-tax Act, or that the expenditure of Rs. 43,974 was not laid out wholly and exclusively for the purpose o carrying on business under section 37(2) of the Act ?'
2. The learned counsel for the miller referred to cls.3, 5, 7 and 8 of the 1967 Levy Order, the provisions in the Act 10 of 1955 and argued that the order of confiscation is not in the nature of penalty or punishment and contended that, in truth, the rice confiscated was not confiscated and the order was not a penalty order. This aspect was elucidated by the counsel showing that the order of confiscation is not punishment and cited the case of Mahalakshmi Sugar Mils Co. v. CIT : 123ITR429(SC) . The Delhi High Court ( : 85ITR320(Delhi) ) in that case held that demands made under the U.P. Sugar Cane Cess Act, 1956, was a penalty. This conclusion was reversed by the Supreme Court having considered the incidents of payments under the Sugar Cane Cess Act (at page 434). The court held 'in truth, the interest provided for under s. 3(3) is in the nature of compensation paid to the Government for delay in the delay in the payment of cess' and, therefore, was not a penalty. A like argument is sought to be advanced by the miller to adopt a similar investigation to conclude that the rice seized, later confiscated by the authorities from the miller under Act 10 of 1955, in truth, is not a penalty and should not be understood as a measure of punishment against the miller, for it is argued that the miller was not guilty of any infraction of the levy order.
3. The attempt on the part of the miller cannot be countenanced in these proceedings. In the instant case, after the rice was seized, the confication order was affirmed in appeal by the Sessions Judge. Further, in revision, this court held that the order of confiscation was a proper order. Therefore, the miller cannot now be heard to contend that the confiscation order was passed without any justification or the miller had sufficient explanation for not delivering the rice between November 1, 1972, and February 23, 1973. The counsel for the miller, to support his contention, relied on the observations made in Arbind Kumar Debi v. Rex : AIR1949All473 and Government of the Province of Bombay v. Laxman Govind Deshmukh : AIR1950Bom257 , to emphasise that what was defaulted was not a wilful default to result in confiscation. The case in Government of the Province of Bombay v. Laxman Govind Deshmukh, was referred to emphasise that what was defaulted was not a deliberate default. These contentions should have been urged in the crimal revision case referred to earlier and cannot be investigated by this court in this court in this case for more than one reason. The reasons are so obvious that they need not be recounted in these proceedings.
4. The counsel for the miller, next, with reference to the provisions of the I.T. Act, 1961, attempted to rely on the 'distinction' extrapolated in two cases. In one case, the discussion (at page 742) shows in Maqbool Hussain v. State of Bombay : 1983ECR1598D(SC) , that when in law a penalty arises in a judgment in rem-'where option is given to an owner of goods to pay compensation in lieu of confiscation', it was held to be a judgment in rem. In another case, the discussion shows that when a fine is imposed it is a judgment in personam. (vide Sewpujanrai Indrasanarai Ltd. v. Collector of Customs : 1958CriLJ1355 . The distinction elucidated in the two cases were relied on by the miller to infer that the loss of rice in the instant case arose in a judgment in rem and, therefore, the loss be allowed as a commercial loss or business loss.
5. The views expressed in the above two cases by the Supreme Court were not stated in tax cases. When the two distinctions were offered in a tax case for acceptance, the Supreme Court rejected them outright as 'erroneous distinctions', in Haji Aziz and Abdul Shakoor Bros. v. CIT : 1983ECR1942D(SC) . Instead, the test of public policy was adumbrated by the Supreme Court to adopt 'an expense which is paid by way of penalty for breach of law' was not a business loss and added that if such a principle is not accepted, the decisions would run counter to public policy. Therefore, it is not necessary to further consider the distinction as to when a penalty is a judgment in rem or when a penalty is judgment in personam.
6. Yet another attempt was made by the counsel for the miller to hold that the loss of Rs. 43,974 either as a (a) loss known in commercial practise, or (b) a loss known in trading principles as categorised in Badridas v. CIT : 34ITR10(SC) . These two categories were referred to show that the loss in the instant case is not covered by any provision in the Act. Therefore, the loss incurred should be permitted to be deducted under the Act. In that case, the Supreme Court held that when no provision is found in the Act to attract the facts in such a case, commercial practice and trading principles are to previal and the loss is to be deducted. We cannot hold on the facts that the instant case is not attracted by any provision of the I.T.Act, 1961. Therefore, the above case has no application to the facts of the case.
7. The entire law on this subject is broadly classified in a recent case in two categories from the standpoint of business, one (a) inherently unlawful, and the other (b) lawful business. The law affecting 'inherently unlawful business' was dealth with in CIT v. Piara Singh : 124ITR40(SC) . The cases arising in lawful business due to infraction of law underwent a series of undulations. The history of the tests prescribed shows the tests with reference to the orders in rem when 'compensation' paid in lieu of confiscation was not approved in later cases. When a judgment is in personam, the penalty order was not allowed as business loss. The test of 'commercial practice' and 'trading principles', the two princples remained for long obscure and esoteric. The principle of public policy is yet to be assimilated in 'unlawful business'. It is seen that in one of the earliest cases of the Madras High Court in Marks and Co. v. CIT : 11ITR454(Mad) the assesee was found to have disregarded an undertaking and suffered damages. Because he disregarded the the undertaking tendered by him, he was held to be 'dishonest' and, therefore, the resulting loss was not permittrf to be deducted. In two cases of rice millers, the Madras High Court and the Orissa High Court, viz., Senthikumara Nadar & Sons v. CIT : 32ITR138(Mad) and Govind Choudhury and Sons v. CIT : 79ITR493(Orissa) , considered the principles affecting millers. The discussion shows the loss deducted, though the loss was attributed to the violation of an agreement. In Govind Choudhury & Sons' case : 79ITR493(Orissa) , the penalty order was contrued as integrally connected with business and, therefore, the loss was allowed to be deducted. In Soni Hinduji Kushalji & Co. v. CIT : 89ITR112(AP) this court held that violation of law is not a 'normal incident' in trade, therefore, a loss suffered as a result of violation of law was not permitted to be deducted. The ratio in the decided cases shows that diverse principles are being tested and the tests may have to be reviwed and reconciled to evolve a common test.
8. The discussion shows that where business is 'lawful', the principle of public policy governs the losses as laid down in Haji Aziz and Abdul Shakoor Bros. v. CIT : 1983ECR1942D(SC) . As held in that case, a loss suffered as a result of a penalty was construed to have resulted due to infraction of the law and this test holds the field as of today.
9. In the instant case, the test of public policy governs the facts of the case. The miller in the instant case defaulted in delivering the levy rice between November 1, 1972, and February 23, 1973. As a consequence thereof, rice worth Rs. 43,974 was seized and confiscated. The loss suffered by the miller, we hold, resulted due to infraction of law and, therefore, under s. 28 of the Act, such a loss cannot be treated as a business loss and also not as an 'expense' under sub-s. (1) of s. 37 of the Act.
10. For the aforesaid reasons, we remit the answer in favour of the Revenue, that is to say, against the assessee. No costs.
11. After we have pronounced the judgment in this case, the learned counsel for the assessee sought oral leave to the Supreme Court of India. Oral leave is refused, for, on the facts of the case, no substantial question of law arises which is required to be decided by the Supreme Court of India. This cannot, therefore, be certified as a fit case for leave to appeal under s. 261 of the Act.