Oza, Actg. C.J.
1. This is a reference made by the Income-tax Appellate Tribunal on a direction from this court issued in M.C.C. No. 405 of 1974, decided on January 11, 1980, for answering the question 'Whether, in the facts and circumstances of the case, the Tribunal was right in disallowing Rs. 40,000 as business loss ?'
2. The facts stated in the reference are that the assessee is an individual who is engaged in the manufacture of gold and silver ornaments and has also a small cloth trade. The relevant assessment year is 1966-67 for the year ending Diwali 1965. The applicant returned an income of Rs. 1,990 from his profession as a goldsmith and from his cloth trade. The ITO, however, estimated the applicant's income from his profession at Rs. 3,000 in the absence of any accounts. He further added a sum of Rs. 40,000 as the income of the applicant from undisclosed sources and in support of this he relied on the findings of the Additional Collector of Customs, Bombay. According to the ITO, the applicant had failed to explain and prove the source of acquisition of 280 tolas of gold which was found in the possession of the applicant and was confiscated by the Additional Collector of Customs.
3. The AAC rejected the contentions of the applicant and maintained the assessment made by the ITO. Against this order, the assessee preferred an appeal before the Tribunal. In the statement of case, the Tribunal has referred to its order in appeal which is paragraph 4 of the statement of case and in this the Tribunal found that as the applicant has failed to discharge the burden and show from where he got 280 tolas of gold (28 gold bars), it was held that the income of Rs. 40,000 was rightly added by the ITO as income from undisclosed sources. In this portion of the order which has been quoted in the statement of case, it is also observed 'it is not, therefore, quite improbable for the appellant to have indulged in these activities of carrying smuggled gold' and on this basis, therefore, the Tribunal accepted the addition of Rs. 40,000.
4. The contention advanced by the assessee before the Tribunal, alternatively, was that as this gold has been confiscated, he is entiled to deduction as expenses in trade. This contention of the applicant was not accepted by the Tribunal and, therefore, the assessee submitted an application for a direction to the Tribunal to make a reference to this court and inpursuance of an order of this court referred to above, this reference has been made.
5. Learned counsel appearing for the assessee contended that as this gold was confiscated by the Customs Department, it has to be exempted as expenses in the course of trade and in support of his contention, learned counsel placed reliance on the decision in CIT v. Piara Singh : 124ITR40(SC) .
6. Learned counsel for the Department, on the other hand, contended that the exemption could not be claimed as expenses in the course of business as it was not the case of the assessee that he was carrying on the business of smuggling gold. Learned counsel, however, contended that apart from : 124ITR40(SC) which is also reported as CIT v. Piara Singh : 124ITR40(SC) , there are other cases taking a similar view. They are Soni Hinduji Kushalji & Co. : 89ITR112(AP) , Parkar v. Palekar : 94ITR616(Bom) and CIT v. Kothari : 82ITR794(SC) . Learned counsel for the Department on the basis of CIT v. Kothari : 82ITR794(SC) attempted to contend that as there is no finding that the assessee was carrying on the trade of smuggling gold, it could not be held that confiscation of the gold was an expense incurred during the course of business and, therefore, is not entitled to exemption on that ground.
7. The Tribunal in the statement of case has referred to its decision in appeal and has found as a fact that 28 bars of gold weighing 280 tolas valued at Rs. 40,000 were recovered from the assessee and were confiscated by the Customs authorities. The Tribunal justified the ITO's order of adding Rs. 40,000 as income from undisclosed sources on the basis of the finding arrived at by the Customs authorities. It is, therefore, plain that the defence of the assessee that the gold was not in his possession was not accepted by the ITO. A reading of the order of the Tribunal and the portion quoted in the reference clearly goes to show that the Tribunal accepted the fact that the assessee was found in possession of 28 gold bars which were seized and confiscated by the Customs authorities and it is on this basis that the Tribunal in its order stated 'it is not, therefore, quite improbable for the appellant to have indulged in these activities of carrying smuggled gold'. Under these circumstances, on these findings, it could not be disputed that the Tribunal came to the conclusion that the assessee acquired 28 gold bars and indulged in smuggling activities and in that process was caught and his gold was confiscated. It is, therefore, plain from a reading of the Tribunal's order that the applicant was found to be indulging in smuggling activities and that could not be disputed to be the kind of business in which the assessee indulged.
8. In the decision to which reference is made by the learned counsel for the Department, i.e., CIT v. Kothari : 82ITR794(SC) , their Lord-ships observed that if the business in which the loss was sustained was the same as the business in which profit was derived, then the loss should be taken into account while computing the profits of the business under Section 10(1) even if the business was illegal, and, therefore, the decision does not help the contention of the learned counsel for the Department.
9. The main contention advanced by learned counsel for the Department was that there is no finding that this was the business of the assessee, i.e., smuggling of gold and, therefore, confiscation could not be said to be loss in the course of the business. As discussed earlier, the Tribunal maintained the addition of income of Rs. 40,000 on the basis of the finding that the applicant had acquired 28 gold bars and has not explained from what source he got the money to acquire those 28 bars. The Tribunal also accepted the Customs Department's decision that the assessee was caught in the process of smuggling and that this gold was confiscated and it was on this that the Tribunal observed that the assessee was indulging in the activity of smuggling. This, therefore, is a clear finding that the assessee had indulged in the business of smuggling gold which he had acquired and, therefore, if Rs. 40,000 could be added as income from undisclosed source, the confiscation of the gold will have to be given credit as a loss in the course of the business and this is what has been clearly stated by their Lordships of the Supreme Court in CIT v. Piara Singh : 124ITR40(SC) .
'In our judgment, the High Court is right. The income-tax authorities found that the assessee was carrying on the business of smuggling. They held that he was, therefore, liable to income-tax on the income from that business. On the basis that such income was taxable, the question is whether the confiscation of the currency notes entitles the assessee to the deduction claimed. The currency notes carried by the assessee across the border constituted 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 the smuggling operation. If the activity of smuggling can be regarded 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 customs authorities and the consequent confiscation of the currency notes. It is an incident as predictable in the course of carrying on the activity as any other feature of it. Having regard to the nature of the activity, possible detection by the customs authorities constitutes a normal feature integrated into all thatis 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 same way as if the currency notes had been stolen or dropped on the 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 Dago. v. CIT : 34ITR10(SC) , the deduction must be allowed.'
10. Their Lordships also quoted with approval CIT v. Kothari : 82ITR794(SC) and observed (at p. 42);
'In CIT v. Kothari : 82ITR794(SC) , this court held that for the purpose of Section 10(1) of the Indian I.T. Act, 1922, a loss incurred in carrying on an illegal business must be deducted before the true figure of profits brought to tax can be computed. Grover J., speaking for the court, observed (p. 802): 'If the business is illegal, neither the profits earned nor the losses incurred would be enforceable in law. But, that does not take the profits out of the taxing statute. Similarly, the taint of illegality of the business cannot detract from the losses being taken into account for computation of the amount which can be subjected to tax as 'profits' under Section 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 expenses of the business'.'
11. In this view of the matter, therefore, in our opinion, the Tribunal was not right in not allowing Rs. 40,000 as loss in business.
12. Our answer to the question, therefore, is in the negative, viz., that the Tribunal was not right in disallowing Rs. 40,000 as business loss. In the circumstances of the case, parties are directed to bear their own costs.