JUDGMENT

R. S. PATHAK, J.:— Is a smuggler, who is taxed on his income from smuggling under the Income Tax Act, 1922, entitled to a deduction under Section 10 (1) of the Act on account of the confiscation of currency notes employed in the smuggling activity ?

2. The respondent, Piara Singh, was apprehended in September, 1958 by the Indian Police while crossing the Indo-Pakistan border into Pakistan A sum of Rs.65,500/- in currency notes was recovered from his person. On interrogation he stated that he was taking the currency notes to Pakistan to enable him to purchase gold in that country with a view to smuggling in into India. The Collector of Central Excise and Land Customs ordered the confiscation of the currency notes.

3. The Income Tax Officer now took proceedings under the Indian Income Tax Act, 1922 for assessing the assessees income and determining the tax liability. He came to the finding that out of Rupees 65,500/- an amount of Rs.60,500/- constituted the income of the assessee from undisclosed sources. An appeal by the assessee was dismissed by the Appellate Assistant Commissioner. In 2nd appeal before the Income Tax Appellate Tribunal the assessee represented that if he was regarded as engaged in the business of smuggling gold he was entitled to a deduction under Section 10 (1) of the Income Tax Act of the entire sum of Rs.65,500/- as a loss incurred in the business on the confiscation of the currency notes. The Appellate Tribunal upheld the claim to deduction. It proceeded on the basis that the assessee was carrying on 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. At the instance of the Revenue, a reference was made to the High Court of Punjab and Haryana on the following question :

"Whether on the facts and in the circumstances of the case the loss of Rupees 65,500/- arising from the confiscation of the currency notes was an allowable deduction under Section 10 (1) of the Income-tax Act, 1922?"

The High Court answered the question in the affirmative.

4. And now this appeal by the Revenue.

5. In our judgment, the High Court is right. The Income Tax Authorities found that the assessee was carrying on the business of smuggling. They held that he was, therefore, liable to income-tax on income from that business. On the basis that such income was taxable, the question is whether the confiscation of the currency notes entitles the assessee to the deduction claimed. The currency notes carried by the assessee across the border constituted the means for acquiring gold in Pakistan, which gold he subsequently sold in India at a profit. The currency notes were necessary for acquiring the gold. The carriage of currency notes across the border was an essential part of the smuggling operation. If the activity of smuggling can be regarded as a business, those who are carrying on that business must be deemed to be aware that a necessary incident involved in the business is detection by the Customs authorities and the consequent confiscation of the currency notes. It is an incident as predictable in the course of carrying on the activity as any other feature of it. Having regard to the nature of the activity possible detection by the Customs authorities constitutes a normal feature integrated into all that is implied and involved in it. The confiscation of the currency notes is a loss occasioned in pursuing the business; it is 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 is a loss which springs directly from the carrying on of the business and is incidental to it. Applying the principle laid down by this Court in Badridas Daga v. Commr. of Income-tax 34 ITR 10 : (AIR 1958 SC 783) the deduction must be allowed.

6. In Commr. of Income-tax, Gujarat v. S. C. Kothari 82 ITR 794 this court held that for the purpose of Section 10 (1) of the Income-tax