The case before the High Court pertained to Income Tax assessment of Mahendra Jain, a Mumbai-based goldsmith, who possessed a license under Gold Control Act. Under the license, Jain was not allowed to sell or buy gold, but only to make ornaments from gold given by clients.

In April 1991, Directorate of Revenue Intelligence raided Jain's shop, and seized bars of gold with foreign marks, worth about Rs three lakh.

Jain pleaded that gold bars were given to him by one Raju from Bangalore to make ornaments. But Additional Commissioner of Customs did not accept this claim, and confiscated the gold as contraband.

When the IT officer assessed Jain's income for the financial year 1992-1993, the value of gold bars was added as 'income from undisclosed sources'.

Jain appealed against this addition. Before the Income Tax Appellate Tribunal, he also pleaded that if the value of gold bars was to be added as income, then the same must also be deducted as business loss, because the gold was confiscated and never returned to him.

Appeallate Tribunal rejected this argument. Jain filed an appeal in the High Court. In the decision given last week, the division bench of Justices S Radhakrishnan and S J Kathawalla held that confiscation of gold could not be dubbed as a business loss, because Jain never admitted that he dealt in gold, smuggled or otherwise.

"Loss caused by confiscation of smuggled gold is not trade/commercial loss connected with or incidental to assessee's business" (which was making oranments), judges said.

Loss of gold occurred not in the course of Jain's business, but because he broke the law and possessed smuggled gold, High Court said.

Jain's lawyer relied on Supreme Court's judgement in one Piara Singh's case. In this case, Singh, who smuggled currency across Indo-Pak border, was caught and the currency he was carrying was confiscated.

Supreme Court allowed him to show confiscation of currency as business loss in his Income Tax return.

But the High Court said that Jain's case was different. Piara Singh's principal business was smuggling, therefore confiscation of currency "sprang" from carrying on of this business, court said.