IMPORTANT POINT
Penalty or a confiscation is a proceeding in rem, and loss in pursuance to the same is not available for deduction regardless of nature of business, as a penalty or confiscation cannot be said to be incidental to any business.

JUDGMENT :

M.R. SHAH, J.

1. Feeling aggrieved and dissatisfied with the impugned judgment and order dated 22.11.2016 passed by the High Court of Judicature for Rajasthan at Jaipur passed in DBITA No. 96/2003 and DBITR No. 6/1996 by which the High Court has allowed the said appeals, the Revenue has preferred the present appeals.

2. The facts leading to the present appeals in nutshell are as under:

2.1 A search was conducted by the Directorate of Revenue Intelligence (DRI) officers at the premises situated at A-11, 12, Sector-VII, NOIDA taken on rent by the assessee, Shri Prakash Chand Lunia. The DRI recovered 144 slabs of silver from the premises and two silver ingots from the business premises of the assessee at 1397, Chandni Chowk, Delhi. The assessee was arrested under Section 104 of the Customs Act for committing offence punishable under Section 135 of the Customs Act. The Collector, Customs held that the assessee Shri Prakash Chand Lunia is the owner of silver/bullion and the transaction thereof was not recorded in the books of accounts. The Collector of Customs, New Delhi ordered confiscation of the said 146 slabs of silver weighing 4641.962 Kilograms valued at Rs. 3.06 Crores. The Collector Customs further imposed a personal penalty of Rs. 25 Lakhs on Sh. Prakash Chand Lunia under Section 112 of the Customs Act. The Collector held that the silver under reference was of smuggled nature.

2.2 During the course of the assessment proceedings the Assessing Officer observed that the assessee was not able to explain the nature and source of acquisition of silver of which he is held to be the owner, therefore the deeming provisions of Section 69A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act 1961’) would be applicable. The investment in this regard was not found recorded in the books of accounts of the assessee that were produced before the then Assessing Officer. Accordingly, the Assessing Officer passed an assessment Order and made an addition of Rs. 3,06,36,909/- under Section 69A of the Act, 1961. In appeals preferred by the Assessee against the assessment order, the CIT(A) dismissed the appeal of the assessee. Feeling aggrieved the assessee preferred the appeal before the ITAT. The ITAT, Jaipur also upheld the order of the CIT(A) so far as Section 69A is concerned, however, partly allowed the appeal of the assessee. As regards some other minor additions, the ITAT set aside some minor other additions and remanded the matter to the AO for fresh examination. The AO re-examined the issue and addition was made. The CIT(A) also upheld the order of the AO. The Assessee preferred the appeal against the fresh order passed by the CIT(A) before the ITAT. The ITAT, in the second round as well upheld the order of the authorities below. A reference was made by the ITAT to the High Court with the following questions of law:

“(i) Whether on the facts and in the circumstances of the case, the Tribunal after construing and interpreting the provisions contained in section 69A of the Income Tax Act, 1961 was right in law, in holding that the assessee was the owner of the 144 silver bars found at premises no A 11 and 12, Sector-VII, Noida and two silver bars found at premises of M/s Lunia and Co. Delhi and in sustaining addition of Rs. 3,06,36,909/- being unexplained investment in the hands of the assessee under Section 69A of the Act?

(ii) If the answer to the above question is in affirmative then, whether, on the facts and in the circumstances of the case, the Tribunal was right in law in distinguishing the ratio laid down by their Lordships of the Supreme Court in the case of Piara Singh vs. CIT, 124 ITR 41 and thereby not allowing the loss on account of confiscation of silver bars?”

2.3 While the reference was pending before the High Court, penalty proceedings were initiated against the assessee. An order under Section 271 (i) (c) of the Act came to be confirmed by both the CIT (A) and the ITAT. Accordingly, the assessee filed a