The income earned from any business—whether legal or illegal—is taxable. Income-tax law does not make any distinction between a legal and illegal business. Thus income earned from smuggling business was held to be taxable income [C.I. T. v. Piara Singh (1972) 83 I. T.R. 678 (Punjab)].
Expenses incurred to earn illegal income [Explanation u/s 37(1)]
“For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose, which is an offence, or which is prohibited by law shall notbe deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.”
It means that any expenditure incurred to earn an income from a source which is an offence or is prohibited by law shall not be allowed to be deducted from any income.