Loss in Illegal Business

[2005] 272 ITR 0626- CIT VS. HIRANAND (RAJ)

If the business is illegal, neither the profits earned nor the losses incurred would be enforceable in law. But, that does not take the profits out of the taxing statute. Similarly, the taint of illegality of the business cannot detract from the losses being taken into account for computation of the amount which can be subjected to tax as “profits”.

Expenditure, which would constitute offence is specifically disallowed under the Explanation to section 37(1). Losses suffered on infringement of any law is being disallowed except in rare cases, where such violation is innocent and the amount payable is compensatory in character. But where the assessee is carrying on illegal business, there is no bar for deduction of loss or expenses as decided in CIT v. S. C. Kothari [1971] 82 ITR 794 (SC) and CIT v. Piara Singh [1980] 124 ITR 40 (SC). Where gold is carried by professional carrier from whom it is confiscated, such loss has been allowed in the latter case. It is this law, which was followed in CIT v. Hiranand [2005] 272 ITR 626 (Raj), where the Tribunal found that the assessee was carrying on illegal business of smuggling, notwithstanding his claim to the contrary, as evident from the previous convictions and incarceration. It was in this context that the loss on account of confiscation of gold was a loss, which had to be allowed. The question of allowing the loss arose because the confiscated gold was treated as an unexplained asset, the source of which was treated unexplained, because the assessee claimed that the confiscated gold did not belong to him. The amount treated as income now stood cancelled by the loss. Such decisions bring out the anomaly of our laws.

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