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Losses incidental to Business Allowed to be Debited

There are certain losses, which do occur in the usual or normal working of any business enterprise. To find out the real profits of the business such losses are to be taken into consideration. Only such losses are allowed to be debited which are incidental to the carrying on of the business and which have occurred in the usual course of the conduct of business. The loss must be real one and not expected. Such loss must be of revenue nature. While computing profit under this head capital receipts or capital losses are not taken into consideration. Any loss, which is of accidental or exceptional nature is also not allowed to be debited.

Following losses have been held to be business losses and can be debited to P&L Account

Illustrations Of Losses Which Are Treated As Business Losses :

(i) Loss by theft and embezzlement by employee. [Ram Gopal Ram Swaroop v. C.I. T. 47 ITR 611].

(ii) Loss of cash due to robbery while being carried by cashier for disbursement.

(iii) Loss of cash by dacoity in case of a banking company.

(iv) Brokerage, commission and stamp duty incurred on rent deed for hiring office premises.

(v) Loss due to accidental fire in stock-in-trade.

(vi) Loss caused by white ants.

(vii) Loss caused due to theft of pledged goods.

(viii) Loss on sale of securities held by assessee as a trading asset.

(ix) LOss due to fire of hired machinery.

(x) Loss of stock-in-trade due to enemy action.

(xi) Loss of stock due to natural calamities.

(xii) Loss due to non-realisation of amount given as advance for purchases in the usual course of business.

(xiii) Loss due to fluctuations in the rate of foreign currency.

(xiv) Loss due to breach of contract.

(xv) Loss due to failure or insolvency of assessee’ s bank.

(xvi) Loss due to forfeiture of security deposit.

(xvii) Loss due to non-acceptance of delivery of goods.

Illustrations Of Losses Which Are Not Treated As Business Losses :

(i) Any loss which is not incidental to carrying on the business such as withdrawal of cash from bank by a forged cheque and then if cash is misappropriated by the employee.

(ii) Loss incurred on transfer of business assets.

(iii) Loss incurred due to sale of shares or securities held by the assessee as investments.

(iv) Loss incurred due to closure of business.

(v) Loss suffered due to infringement of any law of the land.

(vi) Any loss which the assessee is likely to suffer in future years.

(vii) Any loss which does not belong to the current previous year i.e., past losses.

Expenditure On Civil Defense Measures To Be Treated As Revenue Expenditure [Circular No. 316 dated Sep. 30, 1981]

Any reasonable expenditure incurred by a business concern on civil defence measures both during emergency and when there is no emergency, would be allowed as revenue expenditure.

As already mentioned, many other expenses may arise at the time of actual running of the enterprise. The assessee should apply the test on the basis of conditions given earlier and if the expenditure satisfies those conditions then it will be legitimate charge on the profit of the business.

The real or actual net profit will be arrived at after deducting all the above-mentioned expenses incurred for the business.


More Topics .... " Business or Profession"
Definition of the Head ' Business or Profession'-[Sec.-28]
Compensation Received as Business Income(Section-28(ii))]
Income of a Trade or Professional Association [Section 28(iii)]
Income from Export Incentives is chargeable to Income Tax
Any Amount Received Under certain Agreement for not to Carry on Business [Section 28(va)]
Speculation Business [Explanation to Section 28]
Profit Earned from an Illegal Business
Transfer of certain Assets Specified u/s 35AD in certain circumstances [Section 28(vii)]
Certain Incomes relating to business but not taxable under the head ‘Profits Gains of Business or Profession .
Computation of Income of Business or Profession - General Important Points
General Principles - for Deductions Allowed from Gross Income of Business and Professions
Deductions from Gross Income of Business or Profession [ Section 30 to 44DB]
Expressly Admissible Deductions from Gross Income from Business or Profession [Section 30-36]
Expenditure Incurred in the Field of Scientific Research [Section 35]
Expenses on Research Activities carried on by the assessee himself
Contribution to Approved Institutions to carry on Research is Allowed as Weighted Deductions for Calculating Profits and Gains of Business or Professions.
Expenditure incurred on the acquisition of Patents Rights or Copy Rights [Section 35A] [Applicable for expenditure incurred before 1-4-1998]
Expenditure on know-how [Section 35 AB] [Applicable for expenditure incurred before 1-4-1998]
Expenditure for obtaining License to operate Telecommunication Services [Section 35 ABB]
Expenditure on eligible projects or schemes [Section 35 AC]
Deduction in respect of expenditure incurred on setting up of a Specified Business [Sec. 35AD]
Any amount given to an institution or association [Section-35CCA]
Expenditure on Notified Agricultural Extension Project [Section-35 CCC] [w.e.f. A.Y. 2013-14]
Expenditure on Notified Skill development project [Section-35 CCD] [w.e.f. A.Y. 2013-14]
Amortisation of Certain Preliminary Expenses [Section 35D]
Expenditure on demerger or amalgamation [Section 35DD]
Amortisation of Expenditure Incurred Under Voluntary Retirement Scheme [Section 35DDA]
Expenditure on Prospecting etc., for certain Minerals [Section 35E]
Other Deductions Allowed to Compute Income from Business or Profession   [Section-36]
Interest on Borrowed Capital [Sec. 36(1)(iii)].
Deduction of discount on Zero Coupon Bond [Section 36(iiia)]
Contribution to Provident and Superannuation Fund [Sec. 36(1)(iv)].
Employee’s contribution towards staff welfare schemes [Sec. 36(1)(va)]
Bad debts [Sec. 36(1)(vii)]
Bad debts of Banks, financial institution and industrial investment corporation etc. [Section 36(1)(viia)]
Special Reserve Created and Maintained by Financial Corporation [Section 36(1)(viii)].
Expenditure on Family Planning [Section-36(1)(ix)].
General Or Allowable Deductions [Section 37]
Commission earned by the agents of Life Insurance Corporation, Unit Trust of India, Post Office or Mutual Funds
Legal Expenses in the Interest of Business are Allowable Expenses
Losses incidental to Business Allowed to be Debited.
Expenses Expressly Disallowed In the Case of any ‘Assessee’ [ Section-40a]
Expenses Expressly Disallowed In the Case of any Firm [Section 40(b)]
Expenses Expressly Disallowed In General Cases [Section 40(b)]
Disallowing of certain Expenses under certain circumstances like ‘Payments to Relatives’
Payments exceeding ` 20,000 by cash/bearer cheque [Section 40A (3)].
Provision for the Payment of Gratuity – [Section-40A(7)]
DEEMED PROFITS Under Profits and Gains of Business or Professions [Section 41]
VALUATION OF STOCK for Profit and Gains of Business or Professions
Deduction Of Certain Payments Only If Actually Paid [Section 43B]
Maintenance Of Accounts By Certain Persons Carrying On Profession Or Business. [Sec. 44AA]
Compulsory Audit For The Non-Corporate Assessees [Section-44 AB]
Computation of Income on Estimated Basis [Section 44AD]
Profit from the business of carriage of goods for truck owners [Section 44 AE]
Special provision for computation of income from royalties in case of nonresidents [Section 44DA]
Partly Agricultural and Partly Business Income
Adjustment In The Profit And Loss A/C Prepared By The Assessee
Computation of Profits and Gains of a Non-Resident from Shipping Business— [Section 44B]
Computation of Profits and Gains of business of Oil Exploration [Section 44BB]
Computation of Profits and Gains of the Business of operation of Aircrafts by Non-Resident [Section 44 BBA]
Computation of Profits of Foreign Enterprises [Section 44BBB]
Ceiling Limits in respect of Head Office Expenses [Section 440]
Special Provisions in case of Income of Public Financial Institutions etc. [Section 43D]
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