ORDER OF REFERENCE TO THIRD MEMBER
11. As we have differed in our views in the above mentioned income-tax appeal, we refer the below given points for the consideration of the Third Member as provided in sub-section (4) of section 255 of the Act and request the President accordingly.
12. Points for reference by V. K. SINHA (Accountant Member) :
“(1) Whether, the finding that the assessee was the “owner” of the primary gold and, therefore, its value thereof Rs. 1,38,000 should be included in the assessee’s income under section 69A of the Act, is relevant in coming to a decision that he was only a carrier ?
(2) Whether the fact that penalties levied by the Collector of Central Excise on Shri Ramjee Prasad and Shri Ashok Kumar Khatri for abetting the contravention of section 8(1) of the Gold (Control) Act, 1968, were set aside by the Appellate Tribunal, is relevant in coming to a decision that the assessee was only a carrier ?
(3) Whether, on the facts and evidence on record the loss of Rs. 1,38,000 suffered by the assessee on account of confiscation of gold bars is in the course of carrying on business in smuggled goods and, therefore, to be set off from the income of Rs. 1,38,000 computed by the Assessing Officer as income from other sources in terms of section 69A of the Income-tax Act, 1961 ?”
13. Point for reference by ABDUL RAZACK (Judicial Member)
“Whether, on the facts and evidence on record the loss of Rs. 1,38,000 suffered by the assessee on account of confiscation of gold bars is in the course of carrying on business in smuggled goods and, therefore, to be set off from the income of Rs. 1,38,000 computed by the Assessing Officer as income from other sources in terms of section 69 of the Income-tax Act, 1961 ?”
ORDER OF THIRD MEMBER
R.D. Agrawala (Judicial Member)
1. Under sub-section (4) of section 255 of the Income-tax Act, 1961 (hereinafter referred as the “Act” in brief), the President has nominated me to act as a Third Member on the following points due to a difference in the opinion of the two learned members who originally heard the appeal.
2. Points for reference by the Accountant Member :
“(1) Whether, the finding that the assessee was the ‘owner’ of the primary gold and, therefore, its value thereof Rs. 1,38,000 should be included in the assessee’s income under section 69A of the Act, is relevant in coming to a decision that he was only a carrier ?
(2) Whether the fact that penalties levied by the Collector of Central Excise on Shri Ramjee Prasad and Shri Ashok Kumar Khatri for abetting the contravention of section 8(1) of the Gold (Control) Act, 1968, were set aside by the Appellate Tribunal, is relevant in coming to a decision that the assessee was only a carrier ?
(3) Whether, on the facts and evidence on record the loss of Rs. 1,38,000 suffered by the assessee on account of confiscation of gold bars is in the course of carrying on business in smuggled goods and, therefore, to be set off from the income of Rs. 1,38,000 computed by the Assessing Officer as income from other sources in terms of section 69A of the Income-tax Act, 1961 ?”
3. Point for reference by the Judicial Member :
“Whether, on the facts and evidence on record the loss of Rs. 1,38,000 suffered by the assessee on account of confiscation of gold bars is in the course of carrying on business in smuggled goods and, therefore, to be set off from the income of Rs. 1,38,000 computed by the Assessing Officer as income from other sources in terms of section 69 of the Income-tax Act, 1961 ?”
4. Briefly stated, the facts are that during the course of assessment proceedings of the assessee, by status an individual, in respect of the assessment year 1986-87, the Assessing Officer noted that he was intercepted by the customs authorities, while enroute to Patna. On his personal search, gold bars of foreign origin weighing 599.200 gms. valued at Rs. 1,38,000, were found. The yellow metal was seized by the customs authorities and the accused arrested.
5. When asked by the Assessing Officer to explain the source of investment in the purchase of the gold, the assessee replied that it was known to his father. However, the father on being questioned tried to pass the buck to his son, i.e., the assessee. As observed by the Assessing Officer, however, both the assessee and his father did not deny the ownership of the gold, although in the written explanation which came from the assessee’s counsel, it was submitted that the gold did not belong to the assessee. Another stand which the assessee took was that if the gold was held to belong to him, deduction should be allowed for the loss arising by its confiscation by the customs authorities, in terms of the ratio of the apex court decision in the case of CIT v. Piara Singh [1980] 124 ITR 40.
6. None of these pleas found favour with the Assessing Officer according to whom smuggling could not be treated as the assessee’s business which fact alone distinguished the present case from the ratio of CIT v. Piara Singh [1980] 124 ITR 40 (SC). Since the assessee had failed to prove the source of investment in the obtainment of gold which was seized from him, an addition of Rs. 1,38,000 was made towards “unexplained investment”.
7. When the matter reached first appeal, certain other developments had intervened. It was noted by the first appellate authority that in his statement recorded by the customs authorities on July 12, 1985, the assessee had admitted that earlier also he had brought “foreign goods” by transporting them in his hawai chappal, which modus operandi was repeated by him this time. An order had also been rendered in the meantime on August 4, 1989, by the Collector, Central Excise. With reference to this order, the Commissioner (Appeals) observed that even the Collector of Customs had held that the assessee was engaged in smuggling business in contravention of the provisions of the Customs Act, 1962, and as such the case was squarely covered by a decision of the High Court of Madhya Pradesh in the case of Shri Vishnu Kumar Soni v. CIT [1985] 155 ITR 34.
8. The learned Commissioner took the view that the confiscation of gold was a loss incurred by the assessee in the course of business entitling him to claim the entire amount of Rs. 1,38,000 as business loss.
9. Before the Tribunal (regular Division Bench) reliance was placed on behalf of the Department on a decision of the apex court in the case of Chuharmal v. CIT [1988] 172 ITR 250. In this case the search and seizure operation carried out by the customs authorities had led to the recovery of watches from the assessee’s bed room. No explanation being offered for the source, it was held that a legitimate inference could be drawn that the petitioner had income which he had invested in purchasing the wrist watches recovered, of which he could be held to be the owner and their value could be deemed to be his income by virtue of section 69A of the Act. The learned Departmental Representative also advanced an argument, in addition to the above, that the first appellate authority fell into a legal error in treating the amount of Rs. 1,38,000 as business loss as the only income assessed in this case was under the head “Other sources”. On behalf of the assessee, the view taken by the learned Commissioner (Appeals) was supported.
10. The learned Accountant Member who authorised the Tribunal’s order, held that on the facts and in the circumstances of the case, there was nothing to derive support from the ratio of Chuharmal’s case [1988] 172 ITR 250 (SC) as the dispute in the present case was as to whether there was a business of smuggling carried on by the assessee and a loss of Rs. 1,38,000 occurred to him, entitling a set off against “income from other sources”. He further held that the view taken by the Commissioner (Appeals) carried merit inasmuch as the assessee had brought gold in his “hawai chappal” in the past also and the Customs Collector had described the present transaction as sale and purchase of primary gold. The finding by the Assessing Officer that the assessee was the owner of the gold, followed that such gold partook of the character of his stock-in-trade. The case was, therefore, fully covered by the decision of the Madhya Pradesh High Court in the case of Shri Vishnu Kumar Soni v. CIT [1985] 155 ITR 34, in which reliance had been placed on the Supreme Court decision in the case of CIT v. Piara, Singh [1980] 124 ITR 40. He, therefore, took the view that the confiscation of gold amounted to a loss incurred by the assessee in the course of his business of smuggling entitling him to set it off against “income from other sources” of Rs. 1,38,000 added under section 69A of the Act.
11. However, when the proposed order went to the learned judicial Member, he expressed his inability to subscribe to the first member’s view.
12. The learned judicial Member held that the assessee did not carry on any business during the previous year relevant to the year under appeal in smuggling of gold bars and, therefore, the loss occasioned to him as a result of the confiscation of the yellow metal was not a business loss required to be set off against his income assessed in a sum of Rs. 1,38,000 in terms of section 69A of the Act.
13. Particularly with the aid of the order dated August 4, 1989, of the Collector, Central Excise, Patna, the statement of the assessee recorded on July 11, 1985, and other assessment records, the learned judicial Member came to the conclusion that the assessee was in no way involved in carrying on any business activity in smuggled goods, viz., gold bars.
14. The corner stone of the above finding is that the gold bars recovered from the assessee’s possession on July 11, 1985, were not confiscated under the Customs Act, 1962, nor was he or S/Shri Ram Ji Prasad or Ashok Kumar Khatri Tunchwala, the other two persons concerned with this episode penalised for violation of any provisions of the Customs Act. Instead, as was evident, the assessee was penalised by the Collector of Customs under section 74 of the Gold (Control) Act, 1968, for being in possession, custody and control of primary gold in contravention of section 8(1) of the Act. Copious reference has been made by him to the order of the Collector of Customs dated August 4, 1989, found at pages 7 to 11 of the assessee’s paper book. According to him, this legal aspect of the matter was very vital and made all the difference to the case. He thereafter referred to the confessional statement dated July 11, 1985, of the assessee as per which the gold bars in question were handed over to him by Ram Ji Prasad of Motihari for delivery to Ashok Kumar Khatri Tunchwala. Further, he had earlier delivered a similar consignment of gold to the said party a fort-night ago which gold was also given to him by the Motihari gentleman. The learned judicial Member also made a reference to the assessee’s reply dated August 17, 1987, in response to the notice issued by the Assessing Officer under section 131 of the Act as per which he had been falsely implicated in this case by the customs authorities as he had refused to sign certain papers. Not only this, the assessee going on a tangent took the stand that he was travelling in a bus in which a co-passenger was carrying smuggled gold. When caught by the customs authorities, the co-passenger was released by them after taking bribe and he was falsely implicated in the case. Similarly, the assessee replying to the show-cause notice dated December 5, 1985, issued by the Collector of Customs also claimed that he had nothing to do with the illegal import of gold and that he was arrested by the Customs Officers on suspicion. In the adjudication proceedings under the Gold (Control) Act before the Collector of Customs the assessee denied to have any connection either with Ram Ji Prasad of Motihari or Ashok Kumar Khatri Tunchwala and the recovery of gold bars from his “hawai chappal”. These facts, as per the learned judicial Member, are found narrated clearly in the Collector of Customs’ order dated August 4, 1989, about which no dispute was made before me. Reference was further made to this order as per which the assessee on the strength of his own admission dated July 11, 1985, was found to be in possession, custody and control of primary gold alleged to have been passed on to him by Ramji Prasad, to be delivered to Ashok Kumar Khatri Tunchwala. On these facts, the assessee was penalised under section 71 of the Gold (Control) Act and the gold bars confiscated under section 74 of the same Act.
15. About the assessee’s assertion that on earlier occasions he carried gold bars in his hawai chappal to be delivered from Ram Ji Prasad to Ashok Kumar Khatri Tunchwala which was equivalent to his carrying on business in smuggled goods the learned judicial Member observed that even this stand which was a part of the assessee’s confessional statement dated July 11, 1985, did riot go to establish the carrying on of business in contraband or smuggled goods by him. He also observed that the Collector of Customs had nowhere recorded any finding that the assessee and the other two persons referred to hereinbefore at several points were indulging in purchase and sale of primary gold.
16. At no point of time the assessee claimed that he was carrying on business activity in smuggled or contraband goods which also stood proved from the fact that in his return of income in Form No. 2 statutorily verified as per the provisions of the statute (Income-tax Act, 1961), filed on March 8, 1990, the assessee did not declare carrying on of the business or the business loss in smuggling activities nor did he claim set off of the same.
17. On the basis of the aforesaid facts, the learned judicial Member took the view that reliance placed on the ratio of the apex court in Piara Singh’s case [1980] 124 ITR 40 and that of Shri Vishnu Kumar Soni’s case [1985] 155 ITR 34 of the Madhya Pradesh High Court was out of context.
18. I have considered the matter carefully by going through the records of the case and hearing the rival submissions. Although the assessee’s case is that he was entitled to claim set off of the amount of Rs. 1,38,000 being business loss that occurred to him because of confiscation of gold bars, the learned Departmental Representative placing reliance on the view taken by the learned judicial Member urged that all the proceedings against the assessee and the two abettors took place under the Gold (Control) Act and not under the Customs Act. This according to him went a long way to prove that the assessee was merely acting as a carrier and was not indulging in any smuggling activities.
19. The facts, as have got unfolded, drive me to concur with the view taken by the learned judicial Member for the reasons given hereinafter.
20. The findings recorded by the learned judicial Member are based mostly, inter alia, on the following documents, which apart from being relevant are very vital to the present case.
(i) The statement dated July 11, 1985, of the assessee recorded by the customs authorities;
(ii) The findings recorded by the learned Collector (Customs) in his order dated August 4, 1989;
(iii) The contents of the return of income-tax in. Form No. 2 filed by the assessee on March 8, 1990; and
(iv) Reply dated August 17, 1987, of the assessee in response to the notice issued by the Assessing Officer under section 131.
21. Even at the cost of repetition it may be stated that from the categorical admission of the assessee in his statement dated July 11, 1985, it is abundantly clear that he was acting as a carrier of gold bars, on behalf of Ram Ji Prasad of Motihari to be delivered to Ashok Kumar Khatri Tunchwala. The income-tax return filed by the assessee on March 8, 1990, duly verified by him also nowhere indicated the incurring of any business loss in smuggling activities nor any set off in respect thereof was claimed. His reply dated August 17, 1987, also claimed that he had been falsely implicated by the customs authorities when he refused to sign some papers. This categorical stand taken by the assessee in the three different situations on different occasions, in my opinion, put a seal on the fate of his claim that he was engaged in smuggling activities by himself. Even that part of the statement that a fortnight ago he had successfully taken the yellow metal in his hawai chappal is neither here nor there as in respect of his earlier misdemeanour, the assessee in his statement dated July 11, 1985, stated that (when translated in English) “Even before this, about 15 days ago, I had brought gold and given to him like that”. This sentence is suffixed to averments of the assessee that the gold covered by the impugned transaction had to be delivered by him to Ashok Kumar Khatri Tunchwala. Such a statement is capable of conveying only one meaning that the assessee in respect of the present transaction also acted as a carrier. It was on the appreciation of all these facts that the learned Collector (Customs) penalised the three persons, including the assessee and confiscated the gold under the provisions of the Gold (Control) Act without taking any action under the Customs Act. The theory of the assessee that he was entitled to set off Rs. 1,38,000, being loss incurred by him in carrying on the smuggling activities stands fully belied and falls flat to the ground because he was only a carrier and used as a conduit pipe for the transportation of the gold.
22. In the result, my reply to the questions referred to me is as under :
Questions Nos. 1 By the learned Accountant Yes
and 2 Member
Question No. 3 By the learned Accountant Assessee not entitled
Member and the lone to set off from the
question by the learned income of Rs. 1,38,000
Judicial Member as assessed income
from other sources.
23. File will go back to the regular Bench for disposal of the case in terms of the provisions of sub-section (4) of section 255 of the Act.