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In the well known case of piara singh the asessee was found to be in the business of smuggling of currency notes so that it was held that confiscation of currency notes was a loss occasioned in pursuing his business, i. e., a loss which sprung directly from carrying on of his business and was incidental to it claimable u/s 10(1)/28.

The Supreme Court in ( 2023] 454 ITR 61 (SC) beautifully tackled a case of a silver trader who did not claim the value of the confiscated silver bars during DRI search as business expenses but as business loss to avoid explanation 1 effect in section 37(1) relying on piara singh case.

Explanation 1 to section 37 in the present day seeks to prohibit deduction of any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law.

In their answer to the subject the Apex Court held that though the provision speaks of expenditure while not making a specific reference to loss, one has to press into service the accepted commercial practice and trading principles. If one is to treat the expenditure as a genus, a loss would become a specie. All losses would become expenditures but not vice versa. The word “any expenditure” mentioned in section 37 of the Act takes in its sweep loss occasioned in the course of business, being incidental to it.

Furthermore after visiting the current scheme of provisions of sections 37(1) , 68-69 series and 115BBE the Apex Court held that there cannot be a situation where an assessee carrying on an illegal business can claim deduction of expenses or losses incurred in the course of that business, while another assessee carrying on a legitimate one cannot seek deduction of loss incurred on account of either a confiscation or penalty. Such an expenditure or loss incurred for any purpose which is an offence shall not be deemed to have been incurred for the purpose of business or profession or incidental to it, and hence, no deduction can be made. The Court thus held that the decisions of this court PIARA SINGH [1980] 124 ITR 40 (SC) and DR. T. A. QUERESHI (2006] 287 ITR 547 (SC) do not lay down the correct law in light of the decision of the court in HAJI AZIZ AND ABDUL SHAKOOR BROS ( 1961] 41 ITR 350 (SC) and the insertion of Explanation 1 to section 37.

Whether this decision would warrant change in accounting of loss incurred in business to be reckoned as part of natural head of related expenditure is a food for thought.


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