In an interesting verdict, the Supreme Court has held that for income tax assessment, loss in business has to be considered even if the activity involved illegal manufacturing and selling of contraband drugs forming part of trade stock.

The ruling was delivered while deciding the case of a doctor, who was arrested with a heroin worth Rs 5.5 lakh and had sought deduction of income on the ground that contraband seized from him forms part of his stock in trade and there was a loss on account of confiscation.

"Business losses are allowable on ordinary commercial principles in computing profits. Once it is found that the heroin seized formed part of the stock in trade of the assessee, it follows that the seizure and confiscation of such stock in trade has to be allowed as business loss," a Bench comprising Justice S B Sinha and Justice Markandey Katju said.

While concurring with the findings of Income Tax Appellate Tribunal (ITAT) allowing the deduction as business loss, the Bench in a recent ruling set aside the Madhya Pradesh High Court order denying income tax exemption to the doctor.

The ITAT had rejected the contention of the doctor that he was only earning income from his medical profession and was not doing any illegal activity of manufacturing and selling of heroin. However, it had held that since the heorin seized was his stock in trade it was implicit that the Tribunal reiterated the view that the he was doing the business of manufacturing and sale of heroin.

On appeal by the IT Department, the High Court had reversed the Tribunal's decision. Holding that the High Court's judgement which talked about the ethics of medical profession cannot be sustained, the apex court Bench said "we fully agree that the doctor was committing a highly immoral act in illegally manufacturing and selling heroin. However, cases are to be decided by court on legal principles and not on ones own moral views. Law is different from morality."

It observed that "the High Court has adopted an emotional and moral approach rather than a legal approach," it observed. The court relied on its 1980 judgment in the Piara Singh case in which the deduction was allowed on the loss arising out of confiscation of currency notes from an alleged smuggler.