DR. T.A. QUERESHI vs. COMMISSIONER OF INCOME TAX, BHOPAL

CIVIL APPEAL No. 5635/2006Supreme Court2006 INSC 96706 December 2006Bench: 2 JudgesAuthor: S.B. SINHA, MARKANDEY KATJU DR. T. A. QUERESHI6 pages
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What did the Supreme Court hold?

The Supreme Court held that the Income Tax authorities had recorded a finding that the assessee was engaged in the manufacture and selling of heroin. Once such a finding of fact is established, any loss arising from such a business is a business loss. The Tribunal had also recorded a finding that the seized heroin was the assessee's stock-in-trade. Therefore, the Tribunal rightly allowed the assessee's claim for deduction of the loss of heroin as a business loss. Section 37 of the Income Tax Act, 1961, was held to be inapplicable because it pertains to business expenditure, not business loss. Business losses are allowable on ordinary commercial principles. The Court emphasized that cases must be decided on legal principles, not on moral views, distinguishing law from morality. The High Court's judgment was set aside, and the Tribunal's order was restored. The Court relied on CIT v. Piara Singh and CIT v. S.N.A.S.A. Annamalai Chettiar.

What were the facts?

The assessee, a doctor, was found by CBI sleuths to be transporting and manufacturing heroin. A raid on his premises revealed a clandestine laboratory. Proceedings under the NDPS Act were initiated. For Assessment Year 1986-87, the assessee claimed the seized heroin, valued at Rs. 5,50,000 (later reduced to Rs. 2 lacs by the Tribunal), as a business loss, contending it was stock-in-trade. The Assessing Officer and CIT(A) rejected this. The Income Tax Appellate Tribunal initially refused the deduction but later, on recalling its order, allowed it as a business loss. The Revenue appealed to the High Court, which set aside the Tribunal's order. The assessee is now appealing to the Supreme Court.

What were the issues?

1. Whether possession of heroin in contravention of the NDPS Act, 1985, can be treated as stock-in-trade for a medical practitioner? (Question of law and fact, concerning the nature of the asset). 2. Whether such a medical practitioner can be permitted to deduct Rs. 2 lacs from such stock of heroin as a business loss? (Question of law, concerning the allowability of deduction). 3. Whether the order passed by the Income Tax Appellate Tribunal is perverse and illegal? (Question of law, concerning the validity of the Tribunal's order). Assessee's contentions: Section 37 of the Income Tax Act, 1961, which deals with business expenditure, is not applicable as the issue concerns business loss. Loss of stock-in-trade is a trading loss and should be allowed as a business loss on ordinary commercial principles, citing CIT v. Piara Singh. Revenue's contentions: The High Court argued that possession of heroin is an offence under the NDPS Act, making the rigour of the explanation to Section 37 applicable, and therefore, no deduction should be allowed. The High Court adopted a moral rather than a legal approach.

Which sections of the Income-tax Act were involved?

Section 37

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.... DR. T. A. QUERESHI v. COMMISSIONER OF INCOME TAX, BHOPAL DECEMBER 6, 2006 [S.B. SINHA AND MARKANDEY KA TJU, JJ.] Income Tax Act, 1961-Computation of profits and gains of business/ profession-Assessee engaged in manufacture and selling of heroin-Seizure A B of heroin-Deduction, claim of-Applicability of section 37-Held: Seizure C of heroin formed part of stock in trade of assessee-Thus, entitled to claim deduction as a business loss on account of seizure-Section 37 relates to business expenditure, thus not applicable-Section 37. Jurisprudence-Legal principles vis-a-vis morality-Held: Law is different from morality-Court has to decide cases on legal principles and D not on one's own moral views.

The question which arose for consideration in this appeal was whether the assessee could claim that the heroin seized from him formed part of his stock in trade and hence its loss on account of seizure is an allowable deduction as a business loss while computing his profits and gains of E business/profession.

Allowing the appeal, the Court HELD: 1. 1. The Income Tax authorities recorded a finding that the assessee was engaged in manufacture and selling of heroin. O

The order continues below.

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