2006 (12) TMI 91 - SC - Income Tax

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 - 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

Summary

Issues:
1. Whether possession of heroin can be treated as stock-in-trade for a medical practitioner?
2. Whether a medical practitioner can deduct the value of seized heroin as a business loss?
3. Whether the Tribunal's order was considered perverse and illegal?

Issue 1: Possession of Heroin as Stock-in-Trade
The case involved an assessee who claimed that the heroin seized from him, which he alleged was part of his stock-in-trade, should be considered a deductible business loss. The Tribunal initially rejected this claim but later accepted it, allowing the deduction. The High Court, however, set aside the Tribunal's order based on the Explanation to section 37 of the Income-tax Act. The High Court's emotional and moral stance was criticized as not being legally sound, as the possession of heroin was found to be part of the assessee's stock-in-trade, making the loss a business loss. The Supreme Court agreed with the Tribunal's decision, emphasizing that business losses are allowable on commercial principles, and the heroin being part of the stock-in-trade warranted the deduction.

Issue 2: Deducting Seized Heroin Value as Business Loss
The Tribunal's order allowed the deduction of the value of seized heroin as a business loss, considering it part of the assessee's stock-in-trade. The Supreme Court upheld this decision, stating that once it is established that the seized heroin formed part of the stock-in-trade, the confiscation should be treated as a business loss. The Court referred to legal precedents and commercial principles to support this conclusion, emphasizing the distinction between business expenditure and business loss in the context of the Income-tax Act.

Issue 3: Legitimacy of Tribunal's Order
The Tribunal's order, which initially rejected the deduction but later allowed it, was challenged for being considered perverse and illegal by the Revenue. The Tribunal's final decision to permit the deduction as a business loss was based on factual findings regarding the nature of the assessee's activities. The Supreme Court found that the Tribunal's decision was legally sound, as it was supported by the assessee's engagement in the manufacturing and selling of heroin for material gain, making any resulting loss a business loss. The Court upheld the Tribunal's order, setting aside the High Court's judgment and restoring the Tribunal's decision.

In conclusion, the Supreme Court's judgment clarified that the possession of heroin by the assessee was part of his stock-in-trade, justifying the deduction of the seized heroin's value as a business loss. The Court emphasized the legal basis for allowing business losses and rejected emotional or moral considerations in legal decisions. The Tribunal's decision to permit the deduction was upheld, and the High Court's judgment was set aside.