2006-VIL-11-SC-DT

Equivalent Citation: Other Citation: [2006] 287 ITR 547 (SC), 2007 AIR 1916, 2006 (10) Suppl. SCR 311, 2007 (2) SCC 759

Supreme Court of India

C.A. 5635 OF 2006

Date: 06.12.2006

DR. TA QUERESHI

Vs

COMMISSIONER OF INCOME-TAX

BENCH

Judge(s)  : S. B. SINHA. and MARKANDEY KATJU.

JUDGMENT

The judgment of the court was delivered by MARKANDEY KATJU J.-Leave granted.

This appeal has been filed against the impugned judgment dated November 29, 2004, passed by the Madhya Pradesh High Court in I. T. A. No. 33 of 1999 (CIT v. Dr. T. A. Qureshi [2005] 275 ITR 352 (MP))

Heard learned counsel for the parties and perused the record.

The appellant is an assessee. He is a doctor by profession at a place called "Garoth" in District Mandsaur. On July 18, 1985, CBI sleuths arrested the appellant while transporting a huge quantity of a contraband article (the narcotic drug heroin) in a jeep Gonga) RSO 3592. This led to further raid in his residential premises. In this raid, one clandestine laboratory to manufacture heroin powder along with several contraband drugs was recovered. All these contraband articles were seized and proceedings under the Narcotic Drugs and Psychotropic Substances Act, 1985 were initiated against the assessee. We are not concerned with these proceedings.

So far as proceedings under the Income-tax Act are concerned, with which we are concerned, the assessee-appellant filed his return for the assessment year 1986-87. In this assessment the assessee claimed that since the heroin seized from him forms part of his stock-in-trade hence its loss on account of seizure is an allowable deduction while computing his profits and gains of business/profession. The Assessment Officer by order dated March 28, 1989, did not accept the contention of the assessee and added a sum of Rs. 5,50,000, being the assessed value of the heroin seized, as an income from undisclosed source. In an appeal filed by the assessee the Commissioner of Income-tax (Appeals) upheld the order of the Assessment Officer by his order dated February 1, 1990. The assessee then filed a second appeal before the Tribunal. By its order dated March 31, 1993, the Tribunal reduced the value of the heroin seized to Rs. 2 lakhs, but refused to deduct this amount from the assessee's income as a business loss, since according to the Tribunal the assessee had not claimed it as a business loss. However, subsequently on an application under section 254(2) the Tribunal by order dated April 26, 1994, accepted that the assessee had in fact claimed it as a loss, and consequently it recalled its order dated March 31, 1993. Ultimately, the Tribunal by order dated October 14, 1998, allowed the appeal and held that the assessee is entitled to claim the deduction as a business loss,. In other words, the Tribunal was of the view that since the seizure has resulted in loss in trade hence, relying upon the law laid down by this court in CIT v. Piara Singh [1980] 124 ITR 40, the Tribunal allowed the deduction of Rs. 2lakhs out of the gross total income of the assessee. It is against this view of the Tribunal that the Revenue felt aggrieved and filed the appeal before the High Court which, as stated above, was admitted for final hearing on the following questions of law.

"1. Whether possession of heroin in contravention of provisions of the Narcotic Drugs and Psychotropic Substances Act, 1985, can be treated to be stock-in-trade possessed by a medical practitioner?

2. Whether such medical practitioner can be permitted to deduct Rs. 2 lakhs from such stock of heroin as loss during the trade?

3. Whether the order passed by the Income-tax Appellate Tribunal, Indore Bench, in I. T. No. 272 of 1989-90 for the assessment year 1986-87 is perverse and illegal?"

By the impugned order the High Court allowed the appeal and set aside the order of the Tribunal. Hence, this appeal.

In paragraph 7 of its judgment, the High Court has relied on the Explanation to section 37 of the Income-tax Act which states:

"Explanation.-For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure."

Learned senior counsel for the appellant Mr. M. L. Verma, contended that section 37 of the Act has no application in this case since section 37 relates to business expenditure, and in this case we are not concerned with business expenditure but with business loss. We agree with this contention.

No doubt, it was initially contended by the assessee before the income tax authorities that the apparatus for manufacturing heroin from opium did not belong to the assessee but belonged to one V. T. Madan. However, the Assessing Officer did not agree with this contention and the Tribunal in its earlier order dated March 31, 1993, has recorded a finding (in paragraph 7 of its order) that the assessee was involved in the manufacture and selling of heroin for material gain. Thus, it has been held by the income-tax authorities that the appellant was engaged in manufacture of heroin and selling it for material gain.

No doubt, the assessee had contended that he was only earning income from his medical profession and was not doing any illegal activity of manufacturing and selling of heroin. However, the finding of fact of the Tribunal in its order dated March 31, 1993, is that the assessee was engaged in manufacture and selling of heroin. Thus the income-tax authorities themselves have recorded a finding that the assessee was engaged in manufacture and selling of heroin. No doubt the order of the Tribunal dated March 31, 1993, was subsequently recalled by the Tribunal, but since with the ultimate order dated October 14, 1998, the Tribunal has held that the heroin seized was the assessee's stock-in-trade it is implicit that the Tribunal reiterated the view that the assessee was doing the business of manufacture and sale of heroin.

Once the income-tax authorities record such a finding of fact, it follows that any loss from such a business is a business loss.

The facts of this case are squarely covered by the decision of this court in CIT v. Piara Singh [1980] 124 ITR 40; AIR 1980 SC 1271 which was the case of an assessee carrying on smuggling activity and this court held that the loss arising out of confiscation of currency notes must be allowed as a business loss.

In the order of the Tribunal dated October 14, 1998, there is a finding of fact in paragraph 8 to the effect that the heroin forms part of the stock-intrade of the assessee. In view of this finding, the Tribunal allowed the assessee's claim of deducting the loss of 5 kg. of heroin whose value was assessed by the Tribunal at Rs. 2 lakhs as a business loss.

We fully agree with the view taken by the Tribunal.

The High Court, however, in paragraph 10 of its judgment observed:

"The assessee in this case was engaged in the profession of doctor. He had nothing to do with the contraband article-heroin for carrying on his profession. It is an admitted fact that the possession of heroin is an offence under the Narcotic Drugs and Psychotropic Substances Act.

In this view, the rigour of the Explanation to section 37 was fully satisfied and hence the question of claiming any deduction for the value of the seized article did not arise nor was the assessee entitled to claim any such deduction who was found indulging in such heinous and illegal business unconnected with his pious professional activity. Indeed, it was a disgrace for the doctor community where one doctor vyas found indulging in such kind of activities against the humanity."

In our opinion, the High Court has adopted an emotional and moral approach rather than a legal approach. We fully agree with the High Court that the assessee was committing a highly immoral act in illegally manufacturing and selling heroin. However, cases are to be decided by courts on legal principles and not on one's own moral views. Law is different from morality, as the positivist jurists Bentham and Austin pointed out.

As already observed above, the facts of the case are squarely covered by the decision of this court in CIT v. Piara Singh [1980] 124 ITR 40 ; AIR 1980 SC 1271.

The Explanation to section 37 has really nothing to do with the present case as it is not a case of a business expenditure, but of business loss. Business losses are allowable on ordinary commercial principles in computing profits. Once it is found that the heroin seized formed part of the stock-intrade of the assessee, it follows that the seizure and confiscation of such stock-in-trade has to be allowed as a business loss. Loss of stock-in-trade has to be considered as a trading loss vide CIT v. S. N. A. S. A. Annamalai Chettiar [1972] 86 ITR 607 ; AIR 1973 SC 1032.

For the reasons given above, the impugned judgment of the High Court cannot be sustained and it is hereby set aside and the order of the Tribunal stands restored. The appeal is allowed. No costs.

 

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