Case Note & Summary
The case involves an income tax reference by the Revenue against the order of the Income Tax Appellate Tribunal (ITAT) for the assessment year 1982-83. The assessee, an individual, was proceeding to Hong Kong on 8th August 1981 when he was apprehended by customs authorities at Bombay Airport. Foreign currency equivalent to Rs.4,56,980/- was seized from his custody. The Additional Collector of Customs, by order dated 16th August 1982, confiscated the foreign currency and imposed a fine of Rs.1,50,000/- on the assessee for contravening the Foreign Exchange Regulation Act (FERA). The order of confiscation was confirmed by the Customs, Excise and Gold Control Appellate Tribunal (CEGAT) on 2nd May 1984. In the income tax assessment, the ITO treated the confiscated amount of Rs.4,56,980/- as the assessee's income from undisclosed sources under Section 69 of the Income Tax Act, 1961, but rejected the assessee's claim for loss. The CIT (Appeals) upheld the ITO's order. However, the ITAT allowed the assessee's claim for loss, holding that the confiscation resulted in a loss incidental to the assessee's business of dealing in foreign exchange. The Revenue challenged this decision before the High Court. The High Court framed the question of law: whether the foreign currency of Rs.4,56,980/- confiscated from the assessee was allowable as a loss. The court examined the facts and noted that the assessee was carrying on business in foreign exchange and that the confiscation was due to contravention of FERA, not due to any personal illegal act. The court relied on the principle that losses incidental to business are allowable deductions, even if the business itself is illegal, as long as the loss is not due to the assessee's own illegal act. The court distinguished cases where the loss arose from the assessee's own illegal act, such as smuggling, and held that here the confiscation was a real loss suffered by the assessee in the course of his business. The court also noted that the amount had been treated as income from undisclosed sources, but that did not preclude the allowance of the loss. The court answered the question in the affirmative, in favor of the assessee and against the Revenue, holding that the confiscated amount was allowable as a loss.
Headnote
A) Income Tax - Allowability of Loss - Confiscation of Foreign Currency - Section 28, Section 29, Section 37, Income Tax Act, 1961 - The assessee, an individual dealing in foreign exchange, had foreign currency confiscated by customs authorities for contravention of FERA. The court held that the confiscation resulted in a real loss to the assessee, which was incidental to his business of dealing in foreign exchange, and therefore allowable as a deduction. The court distinguished cases where the loss arose from the assessee's own illegal act, noting that here the confiscation was due to contravention of FERA, not a personal illegal act. (Paras 2-5) B) Income Tax - Undisclosed Income - Loss on Confiscation - Section 69, Income Tax Act, 1961 - The ITO had treated the confiscated amount as income from undisclosed sources under Section 69. The court held that even if the amount was treated as undisclosed income, the subsequent confiscation resulted in a loss that was allowable, as the assessee was in the business of dealing in foreign exchange and the loss was incidental to that business. (Paras 2-5)
Issue of Consideration
Whether the foreign currency of Rs.4,56,980/- confiscated from the assessee was allowable as a loss to the assessee under the Income Tax Act, 1961.
Final Decision
The High Court answered the question in the affirmative, holding that the foreign currency of Rs.4,56,980/- confiscated from the assessee was allowable as a loss to the assessee. The reference was disposed of accordingly.
Law Points
- Confiscation of foreign currency by customs authorities constitutes a loss allowable under the Income Tax Act
- 1961
- even if the currency was from undisclosed sources
- provided the assessee was carrying on business in foreign exchange and the confiscation was not due to the assessee's own illegal act but due to contravention of FERA.
