Business expenditure/loss – Sections 28 and 37(1) – Even if the business is illegal, loss which is incidental to the business has to be allowed u/s. 28 and the Explanation to section 37(1) is not relevant: Disallowance of claim for deduction of loss on account of gold seized by Custom Authorities is not justified:

The assessee, an individual, was dealing in bullion and gold jewellery. Pursuant to search on 12-01-1999, block assessment was made u/s. 158BC. One of the additions was by way of disallowance of the claim for deduction of Rs. 40,34,898/- on account of gold seized by the Custom Authorities. The Tribunal upheld the addition relying on Explanation to section 37(1) of the Act. In the appeal to the High Court, the following question was raised:

“Whether, on the facts and in the circumstances of the case, the Tribunal has substantially erred in disregarding the fact that business is being carried on by the appellant and hence, the loss incidental to business is allowable u/s. 28 and the provision of section 37(1) of the Income-tax Act, 1961 cannot override the provisions of section 28?”

The Gujarat High Court allowed the assessee’s appeal and held as under:

“i) Learned Counsel for the appellant contended that in view of the decision of the Hon’ble Apex Court in the case of Dr. T. A. Quereshi vs. CIT; 287 ITR 547 (SC), the loss which was incurred during the course of business even if the same is illegal is required to be compensated and for the loss suffered by the appellant, the Court is required to answer this Tax Appeal in favour of the assessee.

ii) Having heard learned Advocates appearing for the parties, this Appeal is answered in favour of the assessee and against the revenue.”