Loss due to Confiscation of stock by Customs is allowable

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ITAT PUNE BENCH ‘B’

Rajmal Lakhichand

v.

Assistant Commissioner of Income-tax

IT Appeal Nos. 1382 (Pune) of 2003 & 476 (Pune) of 2006
[ASSESSMENT YEAR 1997-98]

Date of Pronouncement- 25.05.2012

 

The facts of the case are that the assessee is a jeweller and it is in this business for the last number of years. There was a search at the assessee’s premises by the DRI on 13th Feb., 1993 in which they found that the assessee had purchased silver weighing 1,913.295 kgs. and the same was seized. The stand of the assessee was that it had purchased silver of 194.25 kgs. from M/s Dilipkumar Hirachand, Jalgaon and the balance 1,713.80 kgs. through the agent in Mumbai who arranged the purchases of this quantity from 18 NRIs who had brought it from Middle-East countries. The DRI did not accept the contention of the assessee and seized the entire silver on the contention that the assessee did not prove that it was a legal purchase.

Regarding allowability of loss on confiscation of the stock although it was 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 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 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. T.A, Quereshi v. CIT [2006] 287 ITR 547. Hon’ble Supreme Court observed that the assessee was a medical doctor. Some stock of heroine was seized and confiscated. Hon’ble Supreme Court held that it was a business stock and the assessee was dealing in it and therefore the loss on confiscation was allowed to be set off against the business income. In the case of Ram Saran Nar Singh Prasad v. CIT [2001] 249 ITR 241, the Allahabad High Court observed that the assessee was a jeweller and the loss on confiscation of stock was allowed to be set off. In this background, it is clear that it was the business stock of the assessee and the assessee is in this business for years together. Considering the assessee’s business line, silver was acquired as stock in course of business. Accordingly the business of a trader is set up when the first purchase is made. The business losses are to be allowed as a deduction which occurred in course of its business.