Confiscation of contraband goods is not a deductible business loss when it operates as a statutory penalty for breach of law.

Contraband gold confiscated under customs law was held not to give rise to a deductible business loss. A loss is allowable only if it springs directly from the carrying on of the business or is incidental to it; confiscation for breach of law is a proceeding in rem against the offending property and operates as a statutory penalty, not an ordinary trading loss. The fact that income from illegal activity may be taxable does not make every connected loss commercial. The claimed deduction was therefore disallowed, and the reference was answered in favour of the Revenue.

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Issues: Whether the value of contraband gold confiscated under the customs law could be treated as a business loss deductible in computing the assessee's income.

Analysis: A loss is deductible only if it springs directly from the carrying on of the business or is incidental to it. The fact that income from an illegal business may be taxable does not mean that every loss arising in connection with such activity is a commercial loss. Confiscation of contraband goods is a proceeding in rem directed against the offending property itself and operates as a statutory penalty for breach of law. Such confiscation does not arise in the ordinary course of trade and is not a loss incidental to business. The authorities distinguishing commercial losses from penalties for infraction of law therefore control the present claim.

Conclusion: The claimed amount was not an allowable business loss and the answer to the referred question was in favour of the Revenue.

Final Conclusion: The reference was answered against the assessee, and the disallowance of the claimed deduction was upheld.

Ratio Decidendi: A loss caused by confiscation of contraband goods for breach of law is not a commercial loss arising from, or incidental to, the carrying on of business and is therefore not deductible in computing taxable business profits.

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