It sounds strange but it’s true. A person engaged in manufacture and sale of heroin and other such drugs is entitled to income tax deductions for the “business loss” arising out of seizure of the contraband by law enforcement agencies.
The Supreme Court has held that even if a person carried out an illegal business, the loss arising out of confiscation of goods must be treated as a “business loss” for the purpose of computing his income under the Income Tax Act. Observing that “law is different from morality,” a Bench of Justices SB Sinha and Markandey Katju set aside an order of the Madhya Pradesh High Court in this regard.
The HC had reversed the Income Tax Appellate Tribunal’s decision allowing tax deduction for the value of five kilograms heroin seized from one Dr TA Quereshi.
“In our opinion, the High Court adopted an emotional and moral approach rather than a legal approach. We fully agree with the High Court that the assessee (Quereshi) was committing a highly immoral act in illegally manufacturing and selling heroin. However, cases are to be decided by the Court on legal principles and not on one’s own moral views,” the Bench observed.
Writing the judgment, Justice Katju clarified that Section 37 of the Act which prohibited tax deductions for expenditure incurred for an illegal purpose, dealt with deductions with regard to “business expenditure” but the deduction claimed in this case was for “business loss”.
“Business losses are allowable on ordinary commercial principles in computing profits. Once it is found that the heroin seized formed part of stock in trade of the assessee, it follows that the seizure and confiscation of such stock in trade has to be allowed as a business loss,” it held.
The Bhopal Income Tax authorities had added Rs 5.5 lakh, the value of 5 kg of heroin seized from Quereshi’s possession, to his total income under the head “income from undisclosed source” for the assessment year 1986-87.
Quereshi, who illegally manufactured heroin, claimed the contraband seized formed part of his stock in trade and, therefore, the loss arising out of the police action was an allowable deduction in computing his gains from business under the Act.
His plea was allowed by the Tribunal, which ordered a deduction of Rs two lakh out of his gross total income as he claimed deduction on account of “business loss”. The Tribunal calculated the value of the seized heroin at Rs two lakh only.
However, the High Court reversed the Tribunal’s order on the grounds that he was a doctor and had nothing to do with the heroin in carrying on his business/profession.