1989 PLP (Trib (PTD)

ABRAR HUSSAIN NAQVI (JUDICIAL MEMBER).-- These are two appeals filed by an individual deriving income from business and property and relate to the assessment years 1984-85 and 1985-86. No accounts are maintained by the assessee. The declared and assessed position is as under:

1984-85: Sale declared. Rs.1,50,000 G.P. Rate declared. 15% Expenses claimed Rs.4,000 Sales estimated. Rs.3,00,000 G.P. Rate applied 15% Expenses allowed. Rs.4,000 (confirmed in appeal) 1985-86: Sales declared. Rs.1,55,000 G.P. Rate declared. 15% Expenses claimed. Rs.4,250 Sales estimated Rs.4,00,000 G.P. Rate applied. 15% The learned Commissioner of Income-tax (Appeals) reduced the sales to Rs.3,50,000 and the expenses were increased to Rs.5,000.

2. Apart from this business income, the property income was also assessed. An addition of Rs.12,88,846 was also made by the Income-tax Officer under section 13(1)(c) of the Income-tax Ordinance which was confirmed in appeal by, the learned Commissioner of Income-tax (Appeals). BUSINESS INCOME:

3. The assessee deals in soap. The assessee has only contested the sales estimates which were half-heartedly argued. Keeping in view the assessee's capital and the history of the case, the sales as estimated by the learned Commissioner of Income-tax (Appeals) are reasonable and are, therefore, confirmed. ADDITION U/S 13 (1)(C):

4. Brief facts of the case are that on an information received by the Customs Authorities that the assessee was a dealer in Foreign Currencies, a raid was conducted on the house of the assessee on 31st July, 1984, and the foreign currencies comprising of U.S. Dollars, Saudi Riyals, British Pounds, West German Marks, Indian Rupees, Dubai Dirhams, Kuwaiti Dinars, Afghan Afghanis were recovered from the assessee's house equal to the value in Pakistan Currency at Rs.12,38,

846. In addition, Pakistan Currency of Rs.50,000 was also recovered. The Income-tax Officer after obtaining the explanation of the assessee m regard to the source and nature of acquisition of this money made the addition under section 13(1)(c) of the Ordinance.

5. It may also be stated that the assessee was also prosecuted before the Foreign Exchange Tribunal, Rawalpindi, under the Foreign Exchange Regulation Act, 1947. This Tribunal, however, acquitted the assessee giving him benefit of doubt on the ground that the prosecution had not been able to prove the charge under the Foreign Exchange Regulation Act, 1947. In a separate proceeding, the Collector of Customs vide his order dated 5th January, 1987 held that the assessee was in illegal possession of foreign currencies and failed to account for the same. He further found that foreign currency as well as Travelers cheques seized from the residence of the assessee, were smuggled. He consequently directed to confiscate the entire foreign currencies as well as the Pakistani currency under section 157(1) of the Customs Act, 1959. A penalty of Rs.2,50,000 was also unopposed on the assessee. A revision petition was filed before the Chairman of the Central Board of Revenue, who maintained the order of the Collector in regard to the confiscation of the foreign currency, reduced the penalty to Rs.2,000 and directed to release the Pakistani currency of Rs.50,000.

6. It is in these circumstances that the assessing officer treated the foreign currencies as well as Pakistani currency recovered from the possession of the assessee as income from undisclosed sources.

7. The learned counsel for the assessee raised number of legal objections. It was first contended that in the circumstances of this case no addition could be made under section 13(1)(c) of the Ordinance. He submitted that section 13(1) starts with the words "Where, in the course of any proceedings under the Ordinance" It was contended that before making any addition under any of the clauses of sub-section (1) of section 13, the discovery should be "in the course of any proceedings under this Ordinance". He contended that an information through complaint was received by the assessing officer on 26th November, 1984 when no proceedings for the assessment year 1985-86 were pending. Therefore, the discovery made by the assessing officer was prior to the assessment proceedings for the assessment year 1985-86 and, therefore, it could not be said that this discovery was made "in the course of any proceedings under this Ordinance". The learned counsel for the assessee vehemently contended that no proceedings were pending before the Income-tax Officer when notice was issued to the assessee to file the return. It was submitted that, the discovery of any concealment or escapement was of the nature 'given in clauses (a) to (e) of section 13(1), and should be in the course of any proceedings and the proceedings cannot be started on account of discovery. In order to appreciate the contention of the learned counsel, it has to be first seen as to what are the proceedings and how do they start. The learned counsel appears to be under the impression that proceedings under this Ordinance only mean the assessment proceedings. Though the word `proceedings' has not been defined but at the same time the meaning cannot be confined to the assessment proceedings alone. Under section ` 13 the proceedings should be "under this Ordinance". Now under the Income-tax Ordinance there are many kinds of proceedings. There can be inquiry proceedings such as under section 144, 145 or under section 146 of the Ordinance. Then there can be the recovery proceedings. Therefore, the words proceedings used under section 13(1) does not mean the assessment proceedings alone. These proceedings can include all proceedings, which can or may betaken even before the start of the assessment proceedings. Now a complaint had been received in this case and the inquiry proceedings were started by the Income-tax Officer against the assessee. It may be noted that before issuing any notice to the assessee for filing the return, the Income-tax Officer had conducted an inquiry. Therefore, even if the complaint is to be ignored the discovery could be said to b have been made by the Income-tax Officer in the course of the inquiry proceedings. Therefore, it cannot be said- that the discovery by the assessing officer in regard to the undisclosed income of the assessee was not in the course of any proceedings under this Ordinance. There is another reason also to reject this contention. No doubt the information was received by the assessing officer at the time when no assessment proceedings were pending for the assessment year 1985-86. However, when the assessee subsequently filed the return for the assessment year 1985-86 and the assessment proceedings were pending before the Income-tax Officer, this information was also available at that time. Therefore, the discovery, which was made by the Income-tax Officer before the assessment proceedings for the assessment year 1985-86 did not cease to be the information when the proceedings were started against the assessee for the assessment year 1985-86. Therefore, it could not be said that the Income-tax Officer Aid not discover the acquisition of the foreign currencies and the Pakistani currency during the course of assessment proceedings. Therefore, the controversy as to what is the meaning of proceedings and when the proceedings said to have been started become irrelevant. We, reject the contention of the learned counsel for the assessee on this issue.

8. The next contention of the learned counsel for the assessee was that a notice was issued under section 56 of the Ordinance even before the actual date due for filing of the return as provided by section 55 of the Ordinance and as a consequence the assessee filed his return on 30th July, 1985 although under section 55 of the Ordinance the voluntary return due was on or before 1st October, 1985. It was submitted that under section 56 the Income-tax Officer is only empowered to issue notice for filing the return if the assessee does not file the return voluntarily under section 55 of the Ordinance.

9. Without going into this controversy, this objection can be disposed of on the short ground that the department has completely denied issuing any notice under section 56 of the Ordinance to the assessee. It, however, appears that the assessee did file the return on 30th July, 1985, but in a different circle and under a different N.T. Number. Since the assessee was already an existing assessee of Circle-19, he had no business to file the return in Circle-23 at different N.T Number. There is no evidence that the Income-tax Officer which had the jurisdiction, issued any notice under section 56 of the Ordinance to the assessee. The objection is without any basis and is, therefore, rejected.

10. The next contention of the learned counsel for the assessee was that he was not the owner of the money. It was submitted that it was one Mohammad Iqbal who was the owner of this money who had come to Pakistan on 16th July, 1984 and left these foreign currencies as trust money with him. The learned Departmental Representative, on the other hand, contended that the assessee was provided reasonable opportunity to produce Mohammad Iqbal but he failed to do so. The assessee did not even file the affidavit of Mohammad lqbal to the effect that the money belonged to him. The learned counsel for the assessee, however, contended that since Mohammad 1qbal had left for Denmark, therefore, the assessee was not able to produce him. It was submitted that he had produced him before the Foreign Exchange Tribunal and before whom Mohammad lqbal made the statement that the Foreign Currencies belonged to him.

11. Again the contention of the learned counsel for the assessee has no force for the reason that not only the assessee had failed to produce Mohammad Iqbal but he even did not produce his affidavit before the assessing officer. Moreover, the assessing officer had given adequate reasons for disbelieving the assessee's version. Mohammad Iqbal was allegedly living in Denmark but the foreign currencies of different countries were recovered from the assessee. According to the assessing officer the only conclusion was that the foreign currencies belonged to the assessee himself who was dealing in foreign currencies who explains the availability of various foreign currencies in his possession. We are entirely in agreement with the reasoning of the assessing officer and reject the assessee's contention.

12. The next contention of the learned counsel for the assessee was that even if the currencies recovered from the assessee are to be treated as income by fiction of law, this was the position as on 31st July, 1984, when the raid was conducted and the currency was recovered. Since, according to the assessing officer as well as the Customs Authorities the assessee was dealing in foreign currencies this could be the income as on 31st July, 1984, out of the dealing in foreign currencies. However, the total income of a trader has to be determined as on the last day of the income year as it is on that date that the assessee's net income can be worked out after making adjustment of profits and losses. It was further contended that section 13 gives only a presumption on the basis of which in the given circumstances certain income, which is otherwise not an income, is deemed as income by fiction of law. However, this was the position on the day of the discovery or on the date of acquisition but the same position might not continue till the end of the year. The argument of the learned counsel for the assessee in other words was that assuming that the assessee had an income of an amount of Rs.12,88,846 on 31st July, 1984 the position on 30th June, 1985 was not the same as in the meantime all that income which had been earned by the assessee and was treated as income, as on 31st July, 1984, had been confiscated by the Customs Authorities on 5th January, 1985. Therefore, whatever income had been earned by the assessee was lost on 5th January, 1985, and net result on 30th June, 1985, was Zero so far as it related to the foreign currencies trading. It was contended that mere fact that the trading in foreign currency was illegal, does not take-away its character as business of dealing m foreign currencies. It was contended that the assessee suffered a loss in business in that the amount of Rs.12,38,846 was confiscated on account of the assessee's illegal business which has to be set off against income of the assessee in the same business as well as under any other head under section 34 of the Ordinance. Therefore, it was contended, that the income of the assessee from other sources under section 30 of the Ordinance has to be set off against loss of the illegal business of the assessee on account of confiscation. In support of his contention that such a loss is admissible, the learned counsel for the assessee has relied upon three cases of the Supreme Court of India. The first, case relied upon by the learned counsel was Badridas v. Commissioner of Income-tax reported as (1934)-ITR-Page-10. The facts of that case were that the assessee was carrying on business of money lending dealing in shares and bullion and as commission agent at various places. An employee of the assessee made embezzlement and the question was as to whether such a loss was admissible or not. The Supreme Court of India laid a test for admissibility of such losses and held that in the business of money lending continuous operation on the bank by the agent was incidental to the conduct of the business and, therefore, the agent who lead authority to operate -the bank account to withdraw the moneys, his action was referable to his character as agent and any loss resulting from miss-appropriation of funds by him was a loss incidental to the carrying on of the business and, therefore, was to be deducted in computing the profit under section 10(1) of the repealed Income-tax Act.

13. The next case relied upon by the learned counsel for the assessee was that of Commissioner of Wealth-tax, Gujrat v. S.C.Kothari. The question before the Supreme Court was as to whether loss in illegal transaction could be taken into account in computing profits of the same business and can be set off under section 24 of the repealed Income-tax Act against profits of other speculative transaction. It was held in that case that; "if the business in which the loss was sustained was the same as the business in which the profit was derived, then the loss had to be taken into account while computing the profits of the business under section 10(1)". The Supreme Court referring to certain English decisions observed as under:- "The High Court referred to various English decisions as also to Wheat Crofits Law of Income Tax and Simon's Income Tax for supporting the view that even where a trade is illegal it would still be a trade within the meaning of the income-tax law and if any profits are derived from such trade they would be assessable to tax. The High Court did not accept the contention urged on behalf of the revenue that although profits from an illegal trade or business would be eligible to tax the losses from such business could not be taken into account while computing the profits. This is what the High Court observed: "There is in principle no distinction between profits and losses of a business and if the profits of an illegal business are assessable to tax equally the losses arising from illegal business must be held to be liable to be taken into account in computing the income of the assessee:"

14. The Supreme Court further relied upon a Full Bench decision of the Allahabad High Court in Chandrika Prasad Ram Swarup v. Commissioner of Income-tax reported as (1939)-7-ITR 269, and held as under :-- "Income assessable to tax is the actual income of an individual or a firm irrespective of the manner in which the income was derived. Legality or illegality of the transaction culminating in profits or losses was, therefore, foreign to the scope of an inquiry into the income of an individual or a firm for the purpose of income-tax". The Supreme Court while dealing as to the computation of income under section 10 (1) of the repealed Income-tax Act and which is corresponding to section 22(a) of the Ordinance, further held at page 801 of the report as under:- "Now while section 10(1) of the Act of 1922 imposes a charge on the profits or gains of a business it does not provide how these profits are to be computed. Section 10(2) enumerates various items, which are admissible as deductions. They are, however, not exhaustive of all allowances which can be made in ascertaining the profits of a business taxable under section 10(1). It is undoubtedly true that profits and gains, which are liable to be taxed under section 10(1) are what are understood to be such under ordinary commercial principles. The loss for which the deduction is claimed must be one that springs directly from the carrying on the business and is incidental to it. If this is established the deduction must be allowed". Then at the same page the Supreme Court drew a distinction between the penalty for infraction of law in a legal business and the loss incurred in an illegal business. Consequently, it was observed" . penalty cannot be regarded as an expenditure wholly and exclusively laid for the, purpose of the business. Moreover, disbursement or expenses of a trader is something "which comes out of his pocket. A loss is something different. That is not a thing, which he expends or disburses. That is a thing which comes upon him at extra". (Finlay, J. in Allen v. Farquharson Brothers & Co.) reported as 17-T.C.-59-(K.B.)"

15. It was further observed by the Supreme Court: "If the business is illegal neither the profits earned nor the losses incurred would be enforceable in law. But, that does not take the profits out of the taxing statute. Similarly, the taint of illegality of the business cannot detract from the losses being taken into account for computation of the amount, which can be subjected to tax as "profits" under section 10(1) of the Act of 1922. The tax Collector cannot be heard to say that he will bring the gross receipts to tax. He can only tax profits of a trade or business. That cannot be done without deducting the losses and the legitimate expenses of the business. We concur in the view of the High Court that for the purpose of section 10(1) the losses which have actually been - incurred in carrying on a particular illegal business must be deducted before the true figure relating to profits which have to be brought to tax can be computed or determined".

16. The latest case decided by the Supreme Court of India is that of Commissioner of Income-tax v. Piara Singh reported as (1986 P T D 26). In that case the facts were more or less identical to the present case. In that case it was found that the assessee was carrying on the business of smuggling. The assessee in that case was apprehended at the Indo-Pak Border and an amount of Rs.65,500 in currency notes were recovered which were confiscated by the Central Excise & Land Customs. The assessee claimed loss of Rs.65,500 arising from the confiscation of the currency notes as an allowable deduction. The Tribunal allowed the claim of the assessee against which the Commissioner referred the following question to the High Court for its opinion: "Whether on the facts and in the circumstances of the case the loss of Rs.65,500 arising from the confiscation of the currency notes was an allowable deduction under section 10(1) of the Income-Tax Act, 1922?".

17. The High Court answered the question in the affirmative and the Commissioner filed an appeal against that order of the High Court to the Supreme Court. The Supreme Court relying upon the order of the High Court has followed its earlier decision in CIT v. S.C.Kothari reported as (1982)-ITR-792 referred to above. In that case the view of the revenue was that the amount in question was by way of penalty for breach of the law and infraction of the law was not a normal incident of business carried on by the assessee and, therefore, was not allowable deduction. Certain cases were quoted by the revenue to support the view that such penalties were not an allowable loss. The Supreme Court dealt with the contrary decisions of the High Court and drew a distinction between infraction of the law committed in the carrying on of a lawful business and an infraction of the law committed in a business inherently unlawful. Consequently, it was observed: "Apparently, the true significance of the distinction between an infraction of the law committed in the carrying on of a lawful business and an infraction of the law committed in a business inherently unlawful and constituting a normal incident of it was not pointedly placed before the High Court in that case. We hold that the assessee is entitled to deduction of Rs.65,500 and accordingly we affirm the view taken by the High Court on the question of law referred to it".

18. Here we would like to deal with the objection of the learned Legal Adviser that it was nowhere that the income out of the illegal trading of the assessee in foreign currencies was assessed by the Income tax Officer. This contention is devoid of any force as throughout it was the case of the Income-tax Officer as well as that of the Customs Authorities that the assessee was a dealer in foreign currencies. Even otherwise admittedly, the assessee was found to be in possession of the foreign currencies. Now there could be three explanations in regard to the possession of foreign currencies. (a) The assessee had himself brought the currency, into the country from abroad; (b) The foreign currency belonged to some other person who had brought it from abroad legally or illegally; (c) The assessee had purchased the foreign currency.

19. Admittedly, the first possibility is not there as this is the finding of the Court that the assessee himself had not brought the currencies into Pakistan. The second possibility is ruled out because the explanation of the assessee in this regard had been disbelieved. Therefore, the only possibility, which remains in the field would be that the assessee had purchased the foreign currencies. It is, therefore, evident, that the department could not succeed for making an addition under section 13 unless it could be accepted that the assessee had acquired the foreign currencies through purchases. The inescapable conclusion, therefore, would be (and that was the case of the assessing officer throughout as is evident from the notices issued to the assessee by the Income-tax Officer) that the assessee was a dealer in foreign currencies. The Income-tax Officer had himself observed at page 6 of his order while quoting notices issued by him to the' assessee as under:- "It is learnt that you deal in foreign currency. This information stands strengthened from the fact that after 31st July, 1981, F.I.A. conducted another raid at your premises as reported in daily 'Jang' Rawalpindi, dated 31st January, 1986. and recovered foreign currency from you. It means that you have been dealing in foreign currency regularly but you have not declared this business income in your returns ".

20. This fact is also evident from the order of the Chairman of the Central Board of Revenue who at page 2 of his order observed as under:

"F.I.A. on the basis of information that one Mr. Fazal Hussain of Rawalpindi was engaged in the illegal purchase, sale and storage of foreign currency, raided his house after obtaining necessary search warrant from the competent authority under section 162 of the Customs Act, 1969". A similar finding has been given by the Collector of Customs vide his order dated 5th January, .1985. In regard to the Pakistan currency of Rs.50,000 the Collector of Customs observed:- "There remains no doubt that foreign currencies and traveller cheques seized in this case arc smuggled and Pakistani currency of Rs.50,000 is a sale proceeds/income of the foreign currency".

21. From the above facts, it is evident (and there can be no other explanation as stated above) that the assessee was a dealer and engaged in sale of Pakistani and of foreign currencies and the foreign currencies, which had been recovered al the time of raid had been purchased by the assessee and was his stock in trade. In such circumstances, the assessing officer was justified in making the addition under section 13 of the Ordinance inasmuch as the assessee was not able to satisfactorily explain the source with which he had acquired this currency. At the same time, as has been held by the Supreme Court fn various cases cited above, in the illegal business, the confiscation of foreign currency is incidental to such business and, therefore such a confiscation has to be allowed as a loss. The learned counsel for the assessee has also relied upon the Tribunal decisions in I.T.A.No.26 42 to 2644/LB/1985-86 dated 12th May, 1956 in which the same view was taken by the Tribunal relying upon CIT v. Piara Singh (supra). the Tribunal held that confiscation of goods were part and incidental to the business of smuggling carried on by the assessee. In that case the assessee was engaged in the business of smuggling and certain currency notes and other goods were recovered and confiscated. The Tribunal relying upon the following paragraph of Supreme Court's order held that the confiscation of goods were part of and incidental to the business of smuggling carried on by the assessee:

"The currency notes carried by the assessee across the border constituted the means for acquiring gold to 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 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 Custom Authorities and the consequent confiscation of the currency notes. It is an incident as predictable in the Courts 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."

22. For the foregoing reasons, while maintaining the addition made by the Income-tax Officer under section 13(1) (c) of the amount of RS.12,88,846 we hold that the confiscation of the amount of Rs.12,38,846, being incidental to the assessee's business of illegal trading of foreign currencies was to be deducted from the income of the assessee and this loss had to be adjusted against the business income of the assessee under section 34 of the Ordinance.

23. As a result of the above discussion, the appeals are partly accepted to the extent indicated above. A.A.ZUBERI (ACCOUNTANT MEMBER).--I had the benefit of perusing the decision proposed to be delivered by my learned brother, the Judicial Member I am in entire argument with the reasoning as also the conclusions on all the issues except the one in respect of two additions made under section 13(1)(c) of the Income Tax Ordinance. With due respect to my learned brother, I set forth-my reasoning and conclusions hereunder. The Appellant all along asserted that he was not the owner of the currency found m his possession and never before took the plea that he was a dealer in foreign exchange, which precisely is the reason why he never made the demand that the amount confiscated be set off against his income from this source. This plea was for the first time taken as an additional ground filed before this Tribunal on 1st March 1988 while the appeal was filed on 7th July, 1987. The additional ground has been filed to contend that the assessing officer held the Appellant to be engaged in the illegal business of smuggling of currency, hence the income should have been determined under section 22 for the computation of which necessary expenses should have been allowed. One of these expenses according to the learned AR was the loss through confiscation of currency by the Collector of Customs which was subsequently confirmed by the Chairman. Central Board of Revenue Reliance. was placed on several cases of Indian jurisdiction, the most important being 1986 53-Tax-70 by the Supreme Court of India, in which it has been held that such penalties or confiscation being a necessary corollary to smuggling should be allowed as a deduction. A similar finding, it was submitted, has been given by this Tribunal in its order dated 12th May, 1986 on ITA No.2642/LB/1985-86. The learned Legal- Advisor, Chaudhry M. Ishaque opposed the admittance of the additional ground because, according to him it did not relate to a pure question of law and in fact called for a fresh investigation into the facts to decide whether the Appellant was indeed carrying the illegal business of currency smuggling. Mr. Ishaque Chaudhry pointed out that the addition by the assessing officer was not by way of computing income under section 22 of the Ordinance, nut it was taxed as "amount deemed to be income" by fiction of law created by Section 13(1) of the Ordinance. The sum, deemed as income, was not necessarily an income coming from a known source moreso when the Appellant all along denied the ownership of the money, attributed it as belonging to some other persons, one of whom resides abroad and was said to have brought the currency with him when vesting Pakistan. After hearing the arguments from both the sides I am of the view that in order to claim that he was engaged in the illegal activity of smuggling, the onus was clearly on the Appellant to establish the existence of a regular business, its carrying on over a period, the mode of its operation (etc). It is, thereafter that expenses admissible under section 23 can be considered for deduction. In the present case, the Appellant totally denied the ownership of the money found in possession and never before, either at the assessment stage or before the first appellate authority nor in other proceedings before the Foreign Exchange Tribunal or the` Collector of Customs or the Member, Judicial Customs, Central Board of Revenue or the Special Judge, Customs and Excise; took the stand that he was carrying on the business of currency smuggling. Therefore, if this stand is taken now, at this belated stage, it would entail an depth investigation as to how much was the investment, what was the extent and volume of business, what were the earnings, and what could be the necessary expenses to earn such income ? All these facts would call for a thorough and fresh probe into the facts to conclusively hold the existence of the so-called illegal business of currency smuggling. I am, therefore, of the opinion that this ground relates to facts though going to the root of the case, yet it would entail fresh investigation and, therefore, cannot be called a pure question of Law. I, therefore, hold the view that this additional ground cannot be entertained for adjudication. Even otherwise a perusal of the record and appraisal of the arguments advanced before us show that the first notice under section 62 of the Ordnance which the assessing officer issued in respect of the foreign currency discovered in the possession of the Appellant was on 16th October, 1986 wherein he made a reference to the returns filed by the Appellant and, inter alia, mentioned: "1t is learnt that you are dealing in foreign currency' but he finally required the Appellant to: ..... furnish detailed reply (in writing on the above points alongwith the relevant document /evidence within one week of the receipt of this notice, In case of failure .... action will be taken accordingly," In reply the Appellant totally denied having dealings in foreign attributed currency in his possession as belonging to some other assessing officer then (on 3rd November, 1986) served another notice under section 62, whereby the Appellant was unequivocally confronted with the conclusions reached by the assessing officer after an evaluation of Appellant's reply and connected material. He gave a clear indication: ...I am gong to hold that the total foreign currency recovered from you by FIA belonged to you and intend to add total value of the said foreign currencies in your income for assessment year 1985-86 as from unexplained source. In case you have any objection to this proposed action, you may furnish the same in writing alongwith the appropriate and concrete evidence.. A reply to this was filed on 28th December, 1986 which did not satisfy the assessing officer who then computed the assessment as respects foreign currency with the following observation: " ....It stands established that the said foreign currency and traveller's cheques were owned by the assessee and the total value of the same, is therefore, added into assessee's income for the assessment year 1985-86 under section 13(1)(c) of the Income Tax Ordinance with prior approval of the IAC, Range III, Rawalpindi, contained in his letter...". It thus emerges that though initially the assessing officer had the impression that the Appellant was carrying on dealings in foreign exchange, he finally made the addition for the Appellant being the "owner of any money or valuable article" which was not recorded in the books of accounts nor shown in the wealth statement. I am, therefore, of the view that the conclusion drawn by my learned brother, the Judicial Member, that the: addition was in respect of a business of smuggling of foreign currency, is in conflict with the finding in the assessment. I am quite certain that what the assessing officer taxed was not the profit out of the business of smuggling but the money and valuable articles found in possession of the Appellant for which he could not furnish explanation to the satisfaction of the assessing officer. It was nowhere held by 'the assessing officer that a regular business, or an adventure in the nature of trade, was carried on by the Appellant of which even a solitary transaction could render the profit as a revenue receipt. In fact the assessing officer accepted the plea of the Appellant that he did not carry on any dealings in foreign exchange but was compelled to treat the money found in possession of the Appellant as income by fiction of law created by section 13 or the Income Tax Ordinance. If at all the currency represented stock-in-trade, as is the finding of the learned JM, even then it still remains to be seen whether the capital investment came out of taxed income or else the same would be taxed by resort to section 13 of the Ordinance. I am firmly of the view that attention is to be particularly focused on the subtle distinction because unless it is established, beyond any shadow of doubt, that a regular business existed, as is the finding of my learned brother, the confiscate the amount of Rs.12,38,846 cannot be treated as incidental to business notwithstanding its illegal character. My conclusion, therefore, is that had the assessing officer intended to make the addition for profits, arising out of dealing in foreign exchange, he would surely have made the computation of income under section 22 read with section 23 and 24 of the Income Tax Ordinance. The record is clearly indicative that the addition was made for fictional income under section 13 (1)(c) which is to be treated as income, from other sources Section 30 of the Ordinance). It is pertinent that for determination of income under section 30, deductions are permissible as listed under section 31 of the Ordinance. These at clause (b) of sub-section (1) of section 31, must represent" expenditure laid out or expanded wholly exclusively for the purpose of earning such income." It is not the case o the appellant that confiscation of the currencies was an expenditure wholly and exclusively for the purpose of earning income from smuggling. On the other hand it is an admitted position that currency was confiscated after earning of the income, and Therefore, it could not qualify for adjustment against, income falling under section 30 read with section 13(1)(c). However, this view represents an additional reason for rejecting the claim of the Appellant while the primary view remains that the amount having been earned (at some point of time) and found in possession of Appellant could be validly brought to charge to tax under section 30 read with section 13 (1)(c) of the Ordinance and the fact that having once been earned it was lost (in this case through confiscation, as punitive measure) would not detract from the fact that the capital (or stock-in-trade) was acquired out of undisclosed and untaxed income. On this view I would uphold that addition as made by the assessing officer and confirmed by the Commissioner. MIAN ABDUL KHALIQ (JUDICIAL MEMBER).--24. This further appeal relating to assessment year 1985-86 has been laid before me to resolve the difference of opinion amongst the learned Members of a Division Bench on the following two points:-- (i) Whether the additional grounds now sought to be raised for the first time at the second appeal stage is such as may not require appraisal of fresh facts going to the roots of this case and be allowed to be urged' ? (ii) Whether on the facts and circumstances obtaining it would be correct to presume that what the assessing officer subjected to tax by resort to section 13 represented the "profits of the illegal business of smuggling of foreign currency" against which the confiscated amount needs set off; or that the assessing officer taxed the sum representing amounts earned at some earlier point of time which remained undisclosed and untaxed income and now surfaced as capital (or stock-in-trade) for investment in foreign currency thus not entitled to set off of the confiscated amount?

25. The facts in brief are that a raid at the assessee's premises was conducted on 31st July, 1984 and as a consequence thereof FIR was lodged by Assistant Director FIA, State Bank Circle. Islamabad stating that on receipt of information through an informer that the assessee was doing illegal business of dealings in foreign currency, currencies of various denominations of different countries were recovered on the spot. The assessee was tried by the Foreign Exchange Tribunal, Rawalpindi under sections 4/9/23 of Foreign Exchange Regulation Act, 1947. Vide order dated 7th September, 1985 the aforesaid Tribunal acquitted the assessee holding that the prosecution had miserably failed to bring home the guilt to the assessee. Before that Tribunal assessee had pleaded that foreign currency recovered from his premises belonged to one Mohammad Iqbal who had since gone abroad and as such was not available for evidence. The aforesaid Tribunal did not accept the assessee's plea the same being not substantiated by any evidence. The Collector of Customs, vide order dated 5th January, 1987 held that the assessee was in illegal possession of foreign currencies and travellers cheques which were seized from his residence on 31st July, 1984. The seized currency was directed to be confiscated. The Chairman, Central Board of Revenue, Islamabad while exercising revisional jurisdiction maintained the order of the Collector of Customs regarding confiscation of the foreign currency.

26. These facts and circumstances led the assessing officer to treat the foreign currencies recovered from the assessee's possession as deemed fictional income. While processing assessment for the year under review on 7th April, 1987, an addition of Rs.12,38,846 was made under section 13(1)(c) of the Income Tax Ordinance, 1979 (hereinafter called . the Ordinance) by converting the valuation of the seized foreign currencies into Pakistani currency. A sum of Rs.50,000 recovered from the assessee's premises in Pakistani currency was also added under section 13 (1)(c) of the Ordinance. The learned CIT(A) upheld both these additions.

27. The assessee filed further appeal on 7th July, 1987. During the pendency of that appeal on 1st March, 1988 the assessee besides others filed the following additional grounds as well:- (i) That the order of the ITO was illegal and unjustified as he did not allow the business expenditure of confiscation of money under section 23 of the Income Tax Ordinance. (ii) That the order of the ITO was illegal and unjustified as he did not allow the set off of loss of confiscation of money under section 34 of the Income Tax Ordinance.

28. After a good deal of discussion of case law the learned Judicial Member allowed the confiscated amount as a deduction under section 34 of the Ordinance whereas the learned Accountant Member confirmed the ITO's observations that it was not an allowable deduction under section 23 or section 31 of the Ordinance. Both the learned Members differed on the points as stated in the earlier part of this order.

29. The representatives of the parties have been heard at considerable length. I have gone through the order of the learned Member with great admiration. After perusal of evidence as available on record and in the light of various decided cases reference to which will be made in the subsequent part of this order, the learned Judicial Member held: "Now there could be three explanations in regard to the possession of the foreign currencies:- (a) The assessee had himself brought the currency into the country from abroad. (b) The foreign currency belonged to some other person who had brought it from abroad legally or illegally; (c) The assessee had purchased the foreign currency." The First two possibilities were ruled out in the light of notice issued by the ITO under section 62 of the Ordinance and contents of decision of Chairman of the Central Board of Revenue; the learned J.M. concluded that the assessee was a dealer in foreign currencies. The ITO' action of making addition under section 13 of the Ordinance was maintained holding that dealings in foreign currencies was illegal business of the assessee and confiscation of foreign currency being incidental to such business activities, the confiscation has to be allowed as a loss. It was finally concluded "while maintaining the addition made by the 1T0 under section 13(1)(c) of the Ordinance of the amount of Rs.12,88,846 we hold that the confiscation of the amount of Rs.12,38.840 being incidental to the assessee's business of illegal trading of foreign currencies was to be deducted from the income of the assessee and this loss had to be adjusted against the business income of the assessee under section 34 of ,, the Ordinance." For arriving at this conclusion, the learned Judicial Member made elaborate discussion of the decisions of Supreme Court, High Court and the Tribunal in these cases: (i) Badridas vs. Commissioner of Income Tax (1934) I T R.10; (ii) Commissioner of Wealth-tax, Gujrat v. S.C. Kothari (19$2) I T R 792; (iii) Chandrika Prasad Ram Swarup v. C.1.T. (1939) 7 I.T.R 269; (iv) Commissioner of Income-Tax v. Piara Singh 198(P T D 26; (v) Order of the Chairman, Central Board of Revenue dated 11th October, 1985; (vi) Order of Foreign Exchange Tribunal, dated 7th September, 1985. The learned Accountant Member was of the view:- (a) That the additional ground taken up by the assessee on 1st March. 1988 did not relate to a pure question of law and as such cannot be (b) That the additional ground entails in depth investigation as to how much investment was made by the assessee in illegal activity of smuggling and what was the extent of volume of his business. These facts require thorough and fresh probe and investigation and as such the additional ground cannot be entertained for adjudication. (c) That the assessee had failed to establish existence of a regular business of smuggling of foreign currency. (d) Conclusion of the learned Judicial Member in respect of the 'assessee's business of smuggling of foreign currencies was in conflict with the findings arrived at the assessment stage. (e) The confiscated currency having been termed as fiction income, it did ' not qualify for allowance of expenditure or set off under section 31.

31. Before discussion of the issue involved I would like to deal with entertaining of the additional ground. It is law that legal ground can be taken al any stage provided it does not require any investigation of facts. The additional ground taken op by the assessee was purely legal requiring no adjudication of facts. As per F.I.R. lodged against the assessee, decisions of the Foreign Exchange Tribunal and Chairman, Central Board of Revenue, it stands established that the assessee was doing illegal business of dealing in foreign currencies. The additional ground raised by the assessee being a pure question of law merited allowance in the light of various judicial pronouncements. In 1976 P T D 56 (H.C. Lahore) it was held that legal issue can be raised even after conclusion of hearing but before announcement of order. The other authorities on this issue are (1987) P T D 369; 1978 P T D (Trib,) 1; 1983 P T D 438; 1982 P T D

282. Besides that various authorities from Indian jurisdiction are as 154 I.T.R. 277; 127 I.T.R 822; 99 I.T.R. 482; 83 I.T.R. 223; and 69 I.T.R.

117. In the light of these decisions I hold that the additional ground taken up by the assessee during the pendency of second appeal did not require any investigation of (acts and being a pure proposition of law merited allowance.

32. With great admiration I endorse the reasons advanced by the learned Judicial Member of the conclusion arrived at. I agree with the finding in the light of reasons advanced therein and on the basis of the discussed case law. With utmost respect I do not feel myself inclined with the reasons advanced by the learned Accountant Member On issue No.2 I respectfully disagree with the reasons and findings arrived at by the learned Accountant Member on the following basis: (i) It has been held that previously the assessee has been refusing the ownership of the seized foreign currency and as such new stand taken up in additional ground cannot be accepted. This reason runs counter to the conclusions arrived at by the Foreign Exchange Tribunal and Chairman, Central Board -of Revenue. Therein the- assessee's plea of denial of ownership of seized foreign currency was not accepted. Even in the F.I.R. it was stated that the assessee was involved in illegal business of dealings in foreign currencies. In the decisions of the Collector, Customs and Chairman Central Board of Revenue it was held that the assessee was engaged in the business of foreign currencies. The learned Judicial Tribunal member has reproduced a part of that judgment on gape 13 bit the Tribunal's order. The departmental officers relied on the decisions of the Collector Customs, Foreign Exchange Tribunal and Chairman, CBR to the extent of ownership and seizure of foreign currency from the assessee's premises but did not accept the assessee's engagement in illegal business. This conclusion runs counter to the wholesome doctrine of law that a party cannot be allowed to pay fast and loose, blow hot and cold, approbate and reprobate in the same breath to the detriment of its opponent. When the departmental officers had accepted one part of recovering of foreign currency from the assessee, no room was left for holding that the assessee was not involved in illegal and unlawful trade of smuggling and dealings in foreign currency. The assessee could not afford to retain these currencies for his own' s sake only. Respectfully disagreeing with the conclusion of the learned Accountant Member, I endorse the "view of the learned Judicial Member that the assessee engaged in illegal trading of the foreign currencies, (ii) The learned Accountant Member has held that no deduction is allowable under section'23 of the Ordinance as the income has not been assessed under Section 22 of the Ordinance. This conclusion runs counter to the assessee's claim. In fact the assessee's plea was that income under various heads i.e. property, business income and deemed income had to be computed under section 15 of the Ordinance and as such income (loss) under section. 15 (d) was adjustable against income under section 15 (f) of the Ordinance. The assessee's case was that the income (loss) had to be adjusted under section 23 (1) (xviii) or 34 of the Ordinance. (iii) The learned Accountant Member has raised.2nd question whether the addition under section 13 was on account of profit of illegal business against which confiscated amount needed set off. To my mind there are two possibilities in this situation, firstly it could be a profit of illegal business and secondly it is not a profit of illegal business. If it is from a profit of illegal business theft the confiscated amount is adjustable as deduction in the light of decisions reported as 1986 P T 'D 26 SC; (1985) 34 I.T.R. 10: (1971) 82-I.T.R. 794; (1981) 124 I.T.R. 40; 83 I.T.R. 678; 155 I.T.R. 34; and 159 I.T.R.

689. If in the alternative the confiscated amount is not from illegal business, then the fact of confiscation in itself is sufficient, to establish carrying on of illegal business of dealings in foreign currencies by the assessee. In that situation while following, the Tribunal's decision in I.T.A No. 2642 through 2644/LB/1985-86 dated.12th May, 1986 confiscation by the Customs Authorities will be a allowable deduction in smuggling business. (iv) The learned Accountant Member has observed that the I.T.O taxed the amount earned earlier which remained untaxed and now surfaced as capital (stock-in-trade) and as such was not admissible for set off. This finding runs counter to the fact that the confiscated amount was earned by the assessee upto 31st July, 1984 and as such was assessable in the year under review. As the confiscation was done during the business operation in the same year there can be no distinction between profit and loss ac "income" because if the profit is taxable then the loss is also assessable. The distinction drawn between penalty in legal business and loss in illegal business has no bearing as gross receipts cannot be taxed and only profit can be taxed after deducting expenses and loss. MAJORITY DECISION For the foregoing reasons my conclusion is that the additional ground urged by- the assessee before hearing of further appeal is allowable under law. Mere possession of foreign currencies is not illegal unless it is smuggled or utilized in an illegal business activity. Confiscation of sum of Rs. 12,38,846 in the form of foreign currencies being incidental to the assessee's illegal business of dealings in foreign currencies had to be deducted from the assessee's income and this loss merited adjustment against the business income of the assessee under section 34 of the Ordinance. Agreeing with the learned J.M. the assessee's appeal succeeds to the extent as indicated above. M.A.K./640/T Order accordingly.