Question

Your client has brought you six (6) notices of assessment for the years’ 2010 to 2010 indicating substantial income tax liabilities including penalties. He explains that he has never filed an income tax return because he had no income. He admits to you, however, that during the years involved he earned his livelihood dealing in a prohibited substance although it is illegal to do so.
Advise him of his position regarding those assessments.

Answer 1

There is nothing like income from illegal activities so far as the Taxman is concerned. Earning livelihood by dealing in a prohibited substance is not a defense against non-filing of returns or non-payment of taxes, even though it is illegal to do so. Income generated by engaging in selling hashish which is otherwise a crime, or income earned by way of selling roses are one and the same in the eyes of tax authorities. Even an offender who is being prosecuted by law enforcing authorities for commission of an offence would be liable for payment of tax as on the income earned by him from the crime. For instance, speculative betting is prohibited by law but if a person is held for speculative betting, he will be liable for both the prosecution by the State as well as paying tax on the income earned from such speculative betting. In such cases, a defendent cannot take the plea that the State has also become a party to an illegal act by demanding and sharing of the proceeds of such crime or offense.

In the case of Commissioner of Income Tax Vs K. Thangamani (Date of Judgement 05/12/2008) the Madras High Court had opined that the primary purpose of the income taxation laws is to bring the income of various kinds into tax net. Tax authorities are not concerned about the manner or means in which the income was acquired. So what if an income was earned from illegal or unlawful means. The illegality attached with the income has no bearing on its taxability. Having acquired income in an unlawful manner or by commiting any act forbidden by law, an assessee is liable for paying income tax on it. As to the cosequences of the illegality of his acts, it is for the law enforcing authorities to take cognizance and it is not for the Taxman to pursue or decide about the same.

Hence, I will advise the client that he was liable for filing tax returns for the years in which he had defaulted in filing. His position regarding those assessment years is quite clear, he must declare his income for these years and pay tax, interest and penalties on the amount in default.