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Is this statement holds true ?

Rahul Bansal (Finalist) (35929 Points)

23 August 2012

Loss arising on account of confiscation of heroin ( drugs) is a business loss even it is illegal business. Such loss can be set-off against the profits of legal business.

My question is that whether the above statement holds true or not ? Please Comment.

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6 Replies

Member (Management) (325 Points)
Replied 23 August 2012

I hope you don't have a client who has this problem. Or is it that you want to test our understanding of the law? Be that it may, the SC has held that such loss(?) can be claimed as business loss and Explanation to Sec 37 would not apply (Dr Querishi's case). Once this is a business loss, it can indeed be set off against other income subject to the rules of set off and carry forward of loss.

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Rahul Bansal (Finalist) (35929 Points)
Replied 24 August 2012

I'm not at all interested to test any individual's knowledge..........I usually don't put que. in CCI.

I have this doubt .

Thanks anyway for replying my query.

U S Sharma (glidor@gmail.com) (21063 Points)
Replied 24 August 2012

drug dealers are not under ambit of incometax or any tax net, so all there income is not calculated with tax laws.

laws and rules of india deals with a legal framework only, and anything which is out of its juridiction comes under crime.

CA Sourabh Goenka (Chartered Accountant) (249 Points)
Replied 24 August 2012

illegal business loss only can be set off with illegal business income..

One thing is more that this question is not practical, because no one can ascertain the illegal business loss or income..

This is only a provision that is sought in the act, but not usable in the practical life..

Saurabh Maheshwari (B.com,ACA) (5923 Points)
Replied 24 August 2012

Illesal business income is taxable as any other ioncome but the exps and losses incurreed in relation to carrying such business are not allowed so the question of set-off/ carry fwd doesn't arises at all

Yes, earlier the illegal business exps and losses were allowed in a case on the basis of SC judgement but immediately after that judgement , the I.T. Act specifically disallow illegal business losses and exps.

CA. NARAYAN BHANDARI (Manager-Accounts) (57 Points)
Replied 24 August 2012

Please refer case law of Qureshi regarding the same. Actually Income TAx doesnot differentiate about legal and illegal income. Income Tax allows expenses (under chargeability section 28) of Income Tax Act if all the provisions under section 37(1)( General Deduction). are fulfilled. 1)For the purpose of business. 2) during the previous year etc. So, this expense is allowable as per Quereshi case law. Commissioner of Income-tax vs. Dr. T.A. Qureshi (Madhya Pradesh High Court) Recent UpdatesAdd comments Mar 27 2010 The Explanation to section 37 of the Income-tax Act, 1961, was inserted by the Finance (No. 2) Act, 1998, retrospectively with effect from April 1, 1962. A mere reading of the Explanation would clearly indicate that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and that no deduction or allowance shall be made in respect of such expenditure. The assessee was a doctor. In July, 1985, there was a raid in his residential premises. In this raid a clandestine laboratory to manufacture heroin powder along with several contraband drugs were recovered. All these contraband articles were seized. In his assessment for the assessment year 1986-87 the assessee claimed that since the heroin seized from his possession worked out to Rs. 5,50,000, and since the heroin seized from him formed part of the stock-in-trade its loss on account of seizure was an allowable deduction while computing his profits and gains of business/profession. The Assessing Officer negatived the claim but the Tribunal allowed it. On appeal to the High Court Held_ that the assessee in this case was engaged in the profession of doctor. He had nothing to do with the contraband article heroin for carrying on his profession. It was an admitted fact that the possession of heroin was an offence under the Narcotic Drugs and Psychotropic Substances Act, 1985. The loss was therefore not admissible. Where a stock of heroin was seized from a trader, such loss cannot be allowed as a deduction in view of the restrictive Explanation to section 37. It was so held in CIT v. Dr. T. A. Qureshi [2005] 275 ITR 352 (MP). Heroin is a drug, the possession of which is illegal. All the same, the Tribunal found its way to allow the same, following the decision in CIT v. Piara Singh [1980] 124 ITR 40 (SC), which applied to a case of a professional smuggler, so that his income could only be decided on net basis on considering both illegal receipts and illegal expenses or loss. The High Court pointed out that this decision cannot be applied to a doctor, who was legitimately engaged in medical profession. Holding of contraband goods is not part of such profession. In fact, it is a disgrace to the profession. Though the High Court relied upon the Explanation for the disallowance, it could not have been allowed even in the light of pre-existing law as decided in Haji Aziz and Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350 (SC), which has been followed in a number of cases with Piara Singh’s case distinguishing the same, so that the law at present is that loss from an illegal activity cannot be allowed against a legal business. But if the business or profession itself is illegal, such loss can be allowed against such illegal income. The assessee in the case before the High Court could have succeeded, if his primary business was in narcotics and not the medical profession. That was not apparently the case of the assessee.

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