1. This is a reference under Section 256(2) of the I.T. Act, 196J, (hereinafter 'the Act'). In compliance with the direction given by this court, the Income-tax Appellate Tribunal, Delhi Bench 'C', Delhi, has stated the case and referred the following question of law for the opinion of this court:
'Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in not treating the value of the gold as a complete loss and in not adjusting the same against the assessed income, the act of possession and disposition occurring on the same date ?'
2. The brief facts are these. For the assessment year 1964-65 (the previous year ended on 31st March, 1964), the assessee, an individual, was assessed on an income of Rs. 29,000, Rs. 26,000 being unexplained investment in the acquisition of gold alleged to have been seized from the possession of the assessee on April 13, 1963, by the Central Excise authorities at Mathura Junction Railway Station, and Rs. 3,000, estimated income from sarrafa or other business. The assessee filed an appeal. The AAC sot aside the assessment order on the ground that no reasonable opportunity had been allowed to the assessee. The case was remanded to the ITO for making the assessment afresh.
3. After remand the ITO called upon the assessee to prove the source of investment made in gold. The assessee did not comply with those notices and hence the ITO completed the assessment under Section 144, the income determined being Rs. 29,000 as originally assessed which included a sum of Rs. 26,000, being the value of investment in the purchase of goldseized from his possession by the authorities of the Central Excise. Dept. on April 13, 1963.
4. Aggrieved, the assessee filed an appeal and contended that there was no material brought on record to prove that the assessee was the owner of the seized gold nor was there any basis to value the seized gold at Rs. 26,000. These submissions did not find favour with the AAC. He, however, reduced the addition on account of unexplained investment in gold to Rs. 24,000 and deleted the estimated income from sarrafa or other business altogether. Still aggrieved, the assessee took up the matter further in appeal before the Income-tax Appellate Tribunal and it was, inter alia, contended that the seized gold did not belong to the assessee and had not been recovered from his possession. The Appellate Tribunal repelled this contention and held that the assessee had been in possession of the gold and he had failed to prove that he was not the owner of the same. He, thus, failed to explain the source of income which he had made in the purchase of gold and since he did not maintain any books of account, the value of investment is to be deemed to be his income of the financial year in which he was found to be in possession of it.
5. An alternate plea was taken before the Appellate Tribunal on behalf of the assessee and it was that the assessee was carrying on this illegal business and any loss resulting in the normal course of such business should be allowed as a deduction. This contention, as well, was repelled by the Appellate Tribunal and in the result the appeal was dismissed.
6. Now, at the instance of the assessee, the question mentioned above has been referred for our opinion. It was submitted before us on behalf of the assessee by his learned counsel, Sri Janardan Sahai, that the income of Rs. 24,000 has been determined on account of unexplained investment in gold. In other words, the source of income is undisclosed, but so far as the assessee is concerned, the source is known to him. Since this gold was confiscated by the Central Excise Dept., it would be taken that it was a loss sustained by the assessee and, therefore, it should be set off against income under this or any other head in this year. Reliance was placed on a decision of the Supreme Court in CIT v. Piara Singh : 124ITR40(SC) . After hearing counsel for parties we do not find much substance in this contention. We may first discuss the legal aspect canvassed before us. Section 14 of the Act classifies income under six heads; none the less, income-tax is only one tax and is levied on the sum total of the income classified and chargeable under the various heads. It follows that a loss sustained in any year under one head should be set off against income under any other head in that year in order to arrive at the net figure chargeable under that head. Section 70 of the Act provides for setting off of loss against income under the same head and Section 71, for setting off of loss against income under another head. Except in the following three cases if the net result in respect of any source under any head is a loss, that loss may be set off under Section 70 against income from another source under the same head. The three exceptions are ; (a) a loss in speculation business, (b) a loss in respect of a capital asset other than a short-term capital asset, and (c) a loss incurred in any gambling activity. If after setting off losses against income under the same head the net result is still a loss, such loss may be set off under Section 71 against income of the same year under any Other head.
7. It would thus be seen that if the net result in respect Of any source under a particular head is a loss, that loss must first be set off against income from another source under the same head and if even then, the net result is still a loss, such loss may be set off against income of the same year under any other head. In the instant case, a sum of Rs. 24,000 has been determined as the assessee's income under the head ' Undisclosed sources' on account of unexplained investment made in gold. There appears to have been no other source of income to the assessee under this head. The ITO had assessed an income of Rs. 3,000 from sarrafa or other business but on appeal the AAC, accepting the assessee's contention that he had no other source of income whatsoever, deleted this income. The Department did not challenge that finding. It was the assessee who took up the matter in further appeal before the Appellate Tribunal and contended that the impugned gold had not been recovered from his possession and did not belong to him. The Appellate Tribunal did not accept that contention. Then an alternative contention was urged that the assessee was carrying on an illegal business and any loss resulting in the normal course of that business should be allowed as a deduction. It is correct that the gold recovered from the assessee's possession was confiscated by the Central Excise authorities but before any set-off could be allowed to the assessee, it was for him to prove that the confiscation of the gold amounted to a business loss. This could have been done by showing that that gold was his stock-in-trade, that he had been carrying on illegal business in gold and that the carriage of gold and its detection and confiscation by the Central Excise authorities amounted to a normal incidence of this business. The judgment in the case was written by the learned Accountant Member who, relying on the decision of the Bombay High Court in J. S. Parkar v. V. B. Palekar : 94ITR616(Bom) , held that the confiscation of the gold being in the nature of a penalty or fine, could not be treated as an admissible deduction. The learned Judicial Member agreed with the view but added:
' That the assessee failed to show that the loss of gold was on account of trading activity. He has no such activity. '
8. It would be seen that there is no concurrent finding by the two learned Members, who constituted the Bench of the Appellate Tribunal which decided the assessee's appeal, that the assessee had failed to show that the loss of this gold was a business loss. The Appellate Tribunal did not say that this alternative contention which had been raised before them for the first time by the assessee could or could not be entertained. There was no concurrent finding recorded on the question as to whether the confiscation of the gold amounted to a business loss. Therefore, this matter has to be examined by the Appellate Tribunal again.
9. In this behalf we may refer to the decision in Piara Singh's case : 124ITR40(SC) . In that case it was the assessee's own.case that he had been carrying on smuggling activity. It was in the course of such activity that he was apprehended by the Indian Police while crossing the Indo-Pakistan border into Pakistan, and a sum of Rs. 65,000 in currency notes was recovered from his possession. On interrogation, he stated that he was taking the currency notes to Pakistan to enable him to purchase gold there and smuggle it into India. The Customs authorities confiscated the currency notes. The I.T. authorities found that the assessee was carrying on the business of smuggling and that he was liable to income-tax on income from the business and such income was assessed to tax. The question was whether the assessee was entitled to deduction, under Section 10 of the Indian I.T. Act, 1922, of the loss of Rs. 65,000 arising by the confiscation of the currency notes. It was held by the court that confiscation of the currency notes was a loss occasioned in pursuing the business of smuggling and it was a loss in much the same way as if the currency notes had been stolen or dropped on the way while carrying on the business. The carriage of the currency notes across the border was an essential part of the smuggling operation and detection by the Customs authorities and consequent confiscation was a necessary incident and constituted a normal feature of such an operation. On this view, the loss was held as incidental to business and as such an allowable deduction under Section 10.
10. Since in the present case the question as to whether or not the confiscation of the gold amounted to a business loss has not been decided by the Appellate Tribunal, we cannot give an answer to the question referred in the affirmative or in the negative. We, therefore, answer the question by saying that the Income-tax Appellate Tribunal was not correct in holding that the assessee was not entitled to an adjustment of the loss against the assessed income for the reasons recorded by it. The Appellate Tribunal would go into this question afresh and in doing so would keep in view the observations which we have made in this judgment.
11. In the circumstances of the case, there will be no order as to costs.