The law considers income earned legally as well as tainted income alike. The burglar and the swindler are as much liable to tax as an honest businessman.
A person lives by regularly receiving and reselling stolen goods for a profit. Is the profit made by him taxable as income? Another person takes to burglary on a large scale. Will his gains be taxed? What is his trade or business? Is a dacoit or a burglar carrying on a trade even if it be his regular profession?
An age-old issue
This age-old issue has been agitating the courts for nearly a century. As early as in 1927, Lord Haldane observed in the leading case of Minister of Finance vs Smith (1927 AC 193 PC) that the Income-Tax Act is not necessarily restricted in its application to lawful business only.
The Revenue merely looks at an accomplished fact. It brings the profit to tax but it does not condone or take part in the illegal enterprise. Prosecutions for the offence will not disentitle the I-T department from taxing the profits arising out of the commission of the offence.
That was the law laid down by Justice Rawlatt in Mann vs Nash (16 TC 523). Profits arising from a trade which necessarily involves fraud upon the customs authorities or from illicit trafficking in drugs/liquor or keeping automatic gaming machines for public use, illegal bets taken by book makers on race courses, street betting or betting through the post or wagering agreements are all chargeable to tax, according to the law laid down by English courts. They are taxable as profits of business even if the business involves the perpetration of crimes. If it is not business or profession, decoity may still amount to a vocation, according to learned commentator N. A. Palkhiwala.
The Thangamani case
The Madras High Court has just delivered a path-breaking judgment in CIT vs K. Thangamani (309 ITR 15) on the subject. Thangamani of Erode was engaged in tax consultancy and audit work in March 1989. A search of his residential and office premises led to the seizure of documents which revealed that Thangamani was claiming and receiving income-tax refunds by filing bogus TDS certificates along with returns of income prepared by him in the names of fictitious persons.
A sum of Rs 7,29,424 represented the figures of the fraudulent encashment of refunds through bogus TDS certificates. This was assessed as professional income for 1987-88. In the next assessment, on the basis of deposits made by him, Rs 60,09,366 was brought to tax as income from undisclosed sources.
Thangamani had admitted before the CBI and the I-T authorities that he had claimed the refund by fraud in respect of taxes never deducted at source. This was professional misconduct on the part of the income-tax practitioner.
The Income-Tax Appellate Tribunal (ITAT) condemned Thangamani and also the departmental officials for collusion. The Tribunal however took the view that the money with Thangamani was money stolen from the I-T department. The department can recover it as stolen property. The Tribunal set aside the assessment on Thangamani. It ruled that the department cannot ask for a share of the booty in the form of taxes to the Government.
The Revenue went in appeal before the Madras High Court. The High Court allowed the appeals. It pointed out that the expression “income” in Section 2(24) of the I-T Act, 1961 is wide and has to be given an extended meaning. Tax is attracted at the point of earning income.
Tax law is not concerned with the ultimate event as to how the income is expended. The law considers income earned legally as well as tainted income alike. The burglar and the swindler are as much liable to tax as an honest businessman.
State no partner in crime
The state does not become a partner in crime. It is only rhetoric to say that the state is sharing in illegal profits. Tax authorities are not concerned about the manner or about the means of acquiring income. The assessee having acquired income by unethical manner or by resorting to acts forbidden by law, cannot say that the state cannot be a party to such sharing of ill-gotten wealth. Tax authorities cannot act like the police to prevent the commission of unlawful acts. Strict rules of evidence are not applicable to the I-T authorities.
This ruling opens up a debate. Should the offender be taxed at 33 per cent and allowed to enjoy the balance 66 per cent of the income? Penalty is not always sustained. A better avenue will be to confiscate the whole profits and leave nothing for the offender to enjoy. This is what the customs authorities do. There is no provision in the I-T Act for confiscation. An amendment is long overdue. The judgment will send shivers down the spines of erring politicians in power.
