TMI Blog2012 (5) TMI 704X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of an audit objection; -The reassessment was beyond jurisdiction as no speaking order was passed against the objections raised by the appellant before proceedings with the reassessment. 2. It is prayed that the notice issued under s. 148 of the Act be quashed as being illegal and without jurisdiction and consequently or otherwise, the order passed by the Asstt. CIT under s. 143(3) r/w s. 148 of the Act be held to be void ab initio. 1. On the facts and circumstances of the case, the learned CIT(A) legally erred in disallowing a sum of ₹ 1,05,02,075 being the amount written off on account of confiscated silver stock as not being in the nature of business loss. 2. It is prayed that the Asstt. CIT be directed to allow the sum of ₹ 1,05,02,075 on account of write off of confiscated silver stock as business loss. III Without prejudice to ground II above 1. On the facts and circumstances of the case, the learned CIT(A) legally erred in not allowing a sum of ₹ 82,61,649 taken by him as the cost of confiscated silver stock written off, as not being business loss. 2. It is prayed that the Asstt. CIT be directed to allow the loss of ₹ 82,61,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dingly, CEGAT upheld the order of consideration by the customs officers. According to the assessee, this order of CEGAT was received by the assessee in April, 1996 and therefore, the assessee claimed the deduction of business loss of ₹ 1,05,02,075 which was the total cost of the silver confiscated in this year. Even the AO and the CIT(A) in income-tax proceedings have confirmed the disallowance on the ground that the silver was contraband and loss from such illegal activity cannot be allowed as a deduction. 7. Against the order of CEGAT, the assessee went in appeal before the Hon'ble Bombay High Court. However, the assessee had raised the question only about the purchases from M/s Dilipkumar Hirachand, Jalgaon. When the assessee realized the mistake, it sought permission for amending the question to encompass the issue of all the purchases of 1.913.295 kgs. including those made from the NRIs. However, the Hon'ble High Court did not accept the assessee's plea and held that the question once referred cannot be amended to encompass larger issues. It was also held that the purchases of 194.25 kgs. made from M/s Dilipkumar Hirachand, Jalgaon were genuine and they we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material on record, we find that the assessee is dealing in gold and silver items. The assessee has accounted for all the above purchases in question. The earlier decision of Tribunal for asst. yr. 1992-93 where the disallowance of purchases under s. 40A(3) was not sustained with respect to above purchases in the assessee's case reported in Rajmal Lakhichand v. Asstt. CIT [2001] 79 ITD 84 (Pune) which shows that it is not the case of unaccounted purchases. 10. Coming to the issue of crystallization of claim including loss, we find that the assessee has claimed the loss in the year under consideration, because the CEGAT order dt. 19th March, 1996 was received by him in April, 1996 and accordingly, the assessee reasonably apprehended that the stock confiscated would be irrecoverable. The business loss on account of confiscation could be claimed and allowed in the year in which the assessee prima facie loses the hope for recovery of the goods. In this background, we hold that the issue of claim of loss crystallized in the year under consideration when assessee received the order of CEGAT in April, 1996 as stated above. 11. Regarding claim of loss in course of business, we fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s contraband or it was illegally acquired. For set off against the other income, we find that Hon'ble Supreme Court in the case of CIT v. Piara Singh [1980] 124 ITR 40/3 Taxman 67 has held that the carriage of the currency note across the border was an integral 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. The confiscation of the currency notes was a loss occasioned in pursuing the business of smuggling. 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. It was a loss which sprang directly from the carrying on of the business and was incidental to it and its deduction had to be allowed, Hon'ble Rajasthan High Court (Jaipur Bench) in the case of CIT v. Hiranand [2005] 272 ITR 626/148 Taxman 281 wherein the entire facts of the case showed that the assessee had been carrying on illegal business of smuggling. The confiscation of the gold of the assessee was a loss therefrom which had to be deducted from the amount included as unexplained investment. In the case of Dr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n was made under s. 69A and which was confirmed by the Tribunal. The assessee filed a rectification application on the logic of Supreme Court decision in Piara Singh's case (supra) that the loss should be allowed and the same was rejected by holding that the issue in appeal was regarding the income while the rectification application was filed seeking reduction of loss. It was held that the question of claim of loss was not canvassed before the Tribunal and accordingly, the Hon'ble Supreme Court dismissed the appeal. Hence the ratio of M.B. Abdulla's case (supra) is not applicable to the facts of assessee. The other case relied on by the CIT(A) is Manharlal C. Soni v. CIT [1995] 215 ITR 634/[1996] 86 Taxman 407 (Guj.) wherein the assessee was in possession of contraband gold in a hotel room. The gold was confiscated and the addition was made under s. 69A. The assessee was not found to be dealing in gold and hence, the question of allowing the business loss did not arise. In a case, wherein the contraband does not constitute the stock-in-trade of the assessee, the loss on confiscation is not allowable because it is not a business loss. In the case before us, the silver s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f assessee because assessee has undisputedly showed the same in stock-in-trade being the business of trade of silver for number of years. We also find that in the case of Bank of America NT SA v. Dy. CIT [2009] 27 SOT 97 (Mum.), the Tribunal has held that the losses incurred by the assessee in security transactions, in violation of s. 15 of the Securities Contracts (Regulation) Act, 1956, undisputedly borne out of books of assessee were eligible for set off against the profits from comparable transactions. The assessee has prayed for set off of ₹ 1,05,62,075 of confiscated silver stock as business loss. The confiscated silver was weighing 1,913.295 kgs. out of which the assessee has purchased silver of 194.25 kgs. from Dilipkumar Hirachand, Jalgaon, and the balance of 1,713.80 kgs. through agents in Bombay who showed the purchase of this quantity from 18 NRIs who had claimed to have brought it from Middle East country. As discussed above, in para 7 of this order the purchase of 194.25 kgs. from Dilipkumar Hirachand, Jalgaon was held genuine and same being legal, was directed to be released by Hon'ble High Court. So the issue before us remains with regard to allowability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation was modified as stated above and the same has not been disturbed by the Supreme Court. Consequent to the order of the CEGAT and considering the uncertainties involved in the matter, the assessee has written off the cost of the confiscated silver in the year under consideration. According to the AO the matter being subjudice before the Hon'ble Bombay High Court at the relevant point of time, the deduction claimed by the assessee on account of loss of silver was added to the total income of the assessee. Therefore, considering the income chargeable to tax had escaped assessment and the case was opened under s. 147 of the Act and taken up for scrutiny. Order under s. 143(3) r/w s. 147 of the Act was passed on 13th March, 2002 disallowing the claim of the assessee in respect of the confiscated silver of ₹ 1,05,02,075. It was also held that the assessee's claim was neither allowable under s. 28(i) of the Act nor under s. 37 of the Act as claimed. Consequently, penalty proceedings under s. 271(1)(c) of the Act were also initiated by AO who found that by claiming wrong set off of loss of illegal business (smuggling of silver) in regular course of business, assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wrongly adjusted the loss on account of confiscated stock of silver. It is not clear as to how the AO has also stated in the penalty order that the loss of stock of silver is a short-term capital loss, as there is no such finding in the assessment order and it is also not clear as to how such a finding has helped the AO, in levying the penalty under s. 271(1)(c) r/w Expln. 1. One of the reasons stated by the AO is that the loss claimed by the appellant has been arrived on account of indulgence of illegal activities. Another observation made by the AO is that the stock of silver has not been confiscated on permanent basis. It has also been observed that loss or expenditure incurred due to illegal activity or violation of other statutory act is not allowable as business expenditure. In this background, the AO has held that the assessee has wrongly debited the above-referred amount to the P L a/c instead of showing the same in the return of income as stock in the custody of Government Department. 5.1 It is an undeniable fact that the stock of silver under consideration was consistently being held by the appellant as 'stock-in-trade' since 1993 which has been written off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he CIT(A) has passed the order after taking into consideration made on behalf of the assessee. 19. After hearing the submissions of both the parties and perusing the material on record, we find that while disallowing the claim of the assessee for set off of loss on account of confiscation of stock, the AO has stated that in view of the fact that the assessee is in appeal against the confiscation of stock as a result of order of the CEGAT and the decision of Hon'ble High Court was still awaited, at the relevant point of time. The AO at relevant point of time had same apprehension about the outcome of the High Court's decision and in case same is decided in favour of the assessee. In that situation the assessee being entitled to receive the goods back. In view of these facts, it was also held by him that the loss claimed by the assessee could not be stated as trading loss and hence could not be allowed under s. 28(i) of the Act. Now, the position is clear that the order of the CEGAT has achieved finality as observed above with certain modification as mentioned above. Accordingly, he added the amount of ₹ 1,05,02,075 on account of disallowance of loss claimed by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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