TMI Blog2008 (2) TMI 423X X X X Extracts X X X X X X X X Extracts X X X X ..... The judgment of the court was delivered by SUDHIR AGARWAL, J. - In this Income Tax Reference, we are required to answer the following question : "Whether on the facts and in the circumstances of the case, the learned Income-tax Appellate Tribunal was justified and correct in law in holding the expenditure on account of commission paid to Government Doctors incurred by the assessee in contravention of the Public Policy, as allowable expenditure." 2. The assessee is dealing in Ayurvedic medicines. For the assessment year 1989-1990, he claims that he spent Rs. 2,46,254/- as business expenditure by paying commission to various Doctors at the rate of 25/- who were prescribing his medicines to the patients. The said Doctors/Vaids were both private as well as Government Doctors. The Assessing Officer disallowed the aforesaid amount as business expenditure, but Commissioner, Income Tax (Appeal) allowed payment made to private Doctors/Vaids but disallowed a sum of Rs. 1,08,678/- as business expenditure claimed to have been paid to Government Doctors. The assessee claimed that payment of said commission was a business necessity and was followed by him over the years. The Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession. 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 purposes of business or profession and no deductions or allowance shall be made in respect of such expenditure." 7. The aforesaid provision allows an expenditure wholly and exclusively incurred for the purpose of the business or the profession in computing the income chargeable under the head Profits or gains of business or profession. The explanation thereof disallowed an expenditure which is incurred by an assessee for a purpose which is an offence or which is prohibited by law. The explanation thus makes it clear that such an expenditure shall not be treated to be a business or professional expenditure. It is not in dispute between the parties and the learned counsel for the assessee also did not dispute that a Government Servant is not entitled to receive any amount in consideration of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his business of smuggling was regarded a business for the purpose of tax liability under 1922 Act, then confiscation of Rs. 65,500/- should be treated to be a "business loss" and he should have been allowed deduction of the said amount. The said contention was accepted by the Tribunal and it held that the assessee was carrying out a regular smuggling activity, which consisted of taking currency notes out of India and exchanging them with gold in Pakistan which was later smuggled into India. When for the purpose of Income Tax Act, the legality or illegality of the business was of no importance, then in such a case, a loss incurred in carrying out such illegal business was also liable to be treated to be a "business loss". On the reference made as to whether such deduction was permissible under Section 10(1), the High Court answered the same in affirmative. In appeal the Apex Court, confirming the view taken by the High Court, said that when the Income Tax Authority found that the assessee was carrying on business of smuggling and the income derived from such business was liable to income tax and on that basis his income was taxable, then in such case, if any loss is incurred in und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of the judgment in Piara Singh [1980] 124 ITR 40. 9. Similarly, in Dr. T.A. Quereshi v. CIT [2006] 287 ITR 547, we find that it is also a case of claiming deduction of "business loss" under Section 36 of the Act and not of "business expenditure" under Section 37. The High Court disallowed deduction by referring to Explanation, Section 37 of the Act, but the Apex Court clearly held that Explanation to Section 37 has no application since it was not a case of "business expenditure" but of "business loss" as is evident from the following : "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." 10. Further, while following it earlier decision in Piara Singh [1980] 124 ITR 40, the Court referred to the finding of fact recorded by the Tribunal that the heroin seized formed part of the stock-in-trade of the assessee and he was engaged in manufacture and selling of heroin. Once the said finding of fact has arrived at, then seizure and confiscation of heroin being a natural consequence of such business, the confiscation of heroin resulting in loss was liable to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here considering Section 10(1) (2) of 1922 Act, the Apex Court held that (page 801) : "It is undoubtedly true that profits and gains which are liable to be taxed under Section 10(1) are what are understood to be such under ordinary commercial principles. The loss for which the deduction is claimed must be one that springs directly from the carrying on of the business and is incidental to it." 13. Disallowing deduction on account of payment of penalty for infraction of law, the Court further held (page 801): ".....so far as the admissible deductions under Section 10(2) are concerned they cannot be claimed by the assessee if such expenses have been incurred in either payment of a penalty for infraction of law or the execution of some illegal activity. This, however, is based on the principle that an expenditure is not deductible unless it is a commercial loss in trade and a penalty imposed for breach of the law during the course of the trade cannot be described as such. Penalties which are incurred for infraction of the law are not a normal incident of business....." 14. The Apex Court also drew a distinction with respect to the deduction of "expenditure" and "loss" obser ..... X X X X Extracts X X X X X X X X Extracts X X X X
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