Trading loss from enforced sale and confiscation is deductible only for the business-linked balance, not the confiscated portion.

The Madras HC held that loss arising from enforced sale of cloth was deductible only to the extent it represented a real commercial loss connected with business. The portion attributable to confiscated goods and related sale expenses was not allowable, because that part did not constitute a deductible trading loss. However, the balance loss on goods not ordered to be confiscated remained business-connected and was admissible in computing income. The ruling also distinguished authority on penalties for breach of law, because the amount in dispute was not the penalty itself but the loss caused by the manner of confiscation. Deduction was allowed only to the extent of Rs. 8,844.

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Issues: Whether the loss arising from the enforced sale and partial confiscation of the assessee's cloth was an admissible deduction in computing business income for the assessment year.

Analysis: The assessee had credited the sale proceeds received from the Government in respect of the goods retained after confiscation and claimed the difference as a trading loss. The loss attributable to the confiscated portion and the sale expenses could not be allowed, but the balance loss arising from the sale of the goods not ordered to be confiscated was connected with the business and was a real commercial loss. The earlier authority disallowing deduction of penalties for breach of law did not govern the present case because the disputed amount did not represent the penalty itself but the loss occasioned by the manner in which the confiscation was enforced.

Conclusion: The loss was deductible only to the extent of Rs. 8,844, and the claim was otherwise disallowed.

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