Business loss from confiscated smuggled goods is deductible where the loss springs directly from the trading activity.

Losses incidental to an illegal trading activity are deductible in computing taxable profits where they arise directly from the business itself. On the facts accepted in reference, the assessee acquired 28 gold bars, could not explain the source of funds, and was found engaged in smuggling; the confiscation of the gold was therefore treated as a business loss integral to that activity. The High Court held that the taint of illegality does not by itself bar deduction of losses necessarily arising from the business, so the disallowance of the value of the confiscated gold was not justified and the answer was against the Revenue.

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Issues: Whether Rs. 40,000, representing the value of gold confiscated by the Customs authorities, was rightly disallowed as business loss in the assessee's trading activity.

Analysis: The finding accepted in the reference was that the assessee had acquired 28 gold bars, had not explained the source of funds, and had been found indulging in smuggling activity. On those facts, the confiscation of the gold was treated as a loss springing directly from the business activity and as an incident integral to that activity. The principle applied was that losses incidental to even an illegal business must be taken into account in computing taxable profits, and the taint of illegality does not exclude deduction of losses necessarily arising from the business.

Conclusion: The disallowance of Rs. 40,000 was not justified, and the answer was against the Revenue and in favour of the assessee.

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