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.