Which of the following losses are not deductible from business income?
1. Loss sustained before the business is commenced.
2. Losses incurred in the closing down of the business.
3. Loss incurred due to damage, destruction, etc., of capital assets.
4. Loss of raw material and finished goods in transit.
5. Loss of stock-in-trade due to enemy action.
Choose the correct answer from the options given below:

Correct option is A

Losses deductible from business income are those that arise during the normal course of business operations and are directly linked to generating business income. 

1. Loss sustained before the business is commenced:

   • Not deductible: Losses incurred before the commencement of business are considered pre-incorporation or pre-commencement expenses, which cannot be deducted as they are not incurred in the ordinary course of business.

2. Losses incurred in the closing down of the business:

   • Not deductible: These losses are considered as cessation expenses and are not related to the normal operations of the business.

3. Loss incurred due to damage, destruction, etc., of capital assets:

   • Not deductible: Losses on capital assets (e.g., machinery, buildings) are not deductible as they are not stock-in-trade. However, these losses may be considered under capital gains provisions if applicable.

4. Loss of raw material and finished goods in transit:

   • Deductible: Such losses are directly related to business operations and are treated as deductible revenue expenses.

5. Loss of stock-in-trade due to enemy action:

   • Deductible: Losses on stock-in-trade (inventory) caused by events like enemy action are revenue in nature and can be deducted from business income.

Thus, statements 1, 2, and 3 are not deductible, making Option (a) the correct answer.

Information Booster:

Losses Deductible from Business Income:

• Losses incurred during regular business operations (e.g., stock-in-trade, raw materials).
• Losses due to events like theft, transit damages, or natural disasters if they pertain to stock-in-trade or inventory.
• Bad debts, provided they were included in income in previous years.

Losses Not Deductible from Business Income:

• Losses incurred before starting business operations.
• Losses on capital assets (covered under capital gains).
• Losses due to personal expenses or unrelated business activities.
• Expenses related to the cessation of business operations.

Additional Knowledge:

1. Loss of raw material and finished goods in transit:

   • Deductible: These are operational losses, directly connected to the business’s income generation, and hence allowed as a business expense.

2. Loss of stock-in-trade due to enemy action:

   • Deductible: Since stock-in-trade is part of the inventory used in business, losses incurred due to enemy action, theft, or similar reasons are revenue expenses deductible under business income.