Deductibility of confiscation loss: imported goods lost under valid licences were treated as an allowable business loss, not a penal outgo.

Loss from confiscation of imported goods was treated as a deductible revenue loss where the imports were made under valid licences in the ordinary course of business and the confiscation arose from a description dispute, not from any intentional unlawful conduct by the assessee. Because the loss arose during the relevant previous year and the assessee followed the mercantile system, it had to be recognised in the accounts. The outgo was not penal in character and was therefore allowable in computing business income; the disallowance was unsustainable.

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Issues: Whether the loss arising from confiscation of imported woollen rags by the customs authorities was an admissible business loss or revenue expenditure deductible in computing the assessee's income.

Analysis: The import was made through valid licences and the assessee acted in the ordinary course of its manufacturing business. The goods were confiscated because of a difference as to their description and not because the assessee had intentionally undertaken an unlawful business. Since the confiscation occurred during the relevant previous year and the assessee followed the mercantile system of accounting, the loss had to be reflected in the accounts. The loss was treated as arising in the ordinary course of business and not as a penal outgo for an infringement attributable to the assessee.

Conclusion: The loss was allowable as a revenue loss and was deductible; the disallowance was not sustainable.

Ratio Decidendi: A loss incurred in the ordinary course of a lawful business, though arising from confiscation of goods imported under genuine licences, is deductible where it is not a penal consequence of the assessee's own infringement and is properly accrued under the mercantile system.

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