Landmark Cases on Business Income and Deductions

Expenditure incurred towards the purchase of shares is a capital expenditure and therefore, interest expenditure incurred on such purchases is not eligible for deduction under Section 36(1)(iii) of the Income Tax Act.

The second proviso to section 40(a)(ia) of the Income-tax Act, 1961, introduced by the Finance Act, 2012, applies prospectively and does not have retrospective effect.

Interest expenditure cannot be disallowed under Section 14A read with Rule 8D when the assessee possesses sufficient interest-free funds to cover investments that yield exempt income, even if mixed funds are utilized.

The Assessing Officer must establish a proximate nexus between the expenditure and the investments before invoking Section 14A(2) and Rule 8D for disallowance. Failure to do so renders the invocation illegal and the addition liable for deletion.

The case establishes the scope of 'software development services' for Section 10B exemption, distinguishing validation and testing from core development. It also underscores that the Assessing Officer must provide sufficient opportunity of being heard, which cannot be cured at the appellate stage.

For an activity to constitute 'business', there must be a course of dealings, either actual or contemplated, with a profit motive, not for sport or pleasure.

Transport subsidies received by a business operating in a backward area, being inseparably connected with the ongoing business and incidental to its expenditure, constitute a revenue or trading receipt taxable under the Income Tax Act.

Expenditure incurred for the acquisition, development, or purchase of computer software is classified as capital expenditure, not revenue expenditure.

An expense booked in a later year, even if relating to an earlier period, does not result in revenue loss if tax would have been lower in the earlier year. Expenses relating to prior years can be allowed in the year they crystallize, especially when there is no loss to revenue.

Before disallowing expenditure under Section 14A by applying Rule 8D, the Assessing Officer must first record dissatisfaction with the assessee's claim, provide cogent reasons, and establish a proximate relationship between the expenditure and tax-exempt income, with the onus to demonstrate this link falling on the Revenue.

An integrated business engaged in captive consumption derives profits or value from its internal activities, even when intermediate products are not sold externally. The principle that a person cannot make profits out of himself does not apply to deny profits from such internal operations for tax or cess purposes.

Income from services rendered by an assessee to its tenants, carried on continuously in an organized manner with a view to earn profit, constitutes business income. The rule of res judicata does not apply to taxation proceedings, and the Tribunal is the final fact-finding authority.

Where an assessee files a timely application for a completion certificate for a housing project, any subsequent delay in obtaining the certificate that is not attributable to the assessee should not result in denial of the tax deduction under section 80IB(10). The assessee cannot be penalized for administrative delays beyond their control.

The essential condition for carrying on business, trade, or commerce is the making of a profit. Business is defined as repeated activity in the nature of trade, commerce, or service with a profit motive, distinguishing it from liberal arts, professions, or agriculture.

Corporate club membership fees paid by an assessee-company for a limited period, when intended for running the business and producing benefits for the company, are deductible as a business expense and not considered personal expenses.

For a valid claim of deduction under Section 10B of the Income-tax Act, especially for a 100% Export Oriented Unit under Explanation 2(iv), approval from the Director STPI requires mandatory ratification by the specified "Board". An alternative claim for deduction under Section 10A, even if not initially raised before the Assessing Officer, can be directed for consideration by the Tribunal.

Deduction under Chapter VIA of the Income-tax Act is not barred merely because unexplained money was found, provided the assessee can explain the source of such money.

Interest income from loans does not accrue for tax purposes when neither the principal loan amount nor the interest has been recovered, even if loans were assumed to have been advanced. For income to accrue, there must be a real right to receive it.

Compensation received for the loss of a capital asset or the loss of a source of income is classified as a capital receipt and is not liable to income tax.

Disallowance under Section 40A(3) for cash payments is not warranted if the genuineness of the transaction and the identity of the payee are established, particularly when the payee ultimately deposits the cash into a bank account, as the primary objective of preventing tax evasion is not defeated.

Interest income, such as from bank deposits or letters of credit, qualifies for deduction under sections 10A and 10AA only if it has a direct and immediate nexus with the eligible industrial undertaking's business.

Expenditure incurred on a business project that fails to materialize or is abandoned due to reasons not attributable to the assessee is treated as revenue expenditure and is deductible.

Expenditure on Employees Stock Options Plan (ESOP) compensation is an ascertained liability and is allowable as revenue expenditure.

Employee's contribution to PF and ESI, if deposited before the due date for filing the return of income under section 139(1), is allowable as a deduction even if paid after the due date stipulated by the respective Acts. Such deposits are not disallowable under section 43B or section 36(1)(va).

Disallowance under Section 14A read with Rule 8D is attracted even when no exempt income is actually earned from investments in the relevant year, as long as the income from such investments does not or shall not form part of the total income.

The Court approved the test for 'current repairs' under section 31(i) of the Income-tax Act, stating that expenditure qualifies as repairs if its object is to preserve and maintain an existing asset. It does not qualify as repairs if its object is to bring a new asset into existence or obtain a new or improved asset.

Expenditure incurred by a holding company for making investments in a subsidiary can be treated as business expenditure and is not disallowable, as such investment activity can itself constitute a business.

Deductions under Section 80IA or 10AA cannot be denied in subsequent years if eligibility was verified in the initial year of claim, provided there are no material changes.

An employer's delayed deposit of employees' contributions to provident fund (PF) or Employees' State Insurance Corporation (ESIC) is deductible if the amounts are deposited before the due date for filing the income tax return.

Compensation received for the cancellation of an agency agreement is a capital receipt if it impairs the assessee's trading structure or results in the loss of a source of income. However, if the contract is terminated in the ordinary course of business, the compensation may be considered a revenue receipt, with classification depending on the specific facts of each case.

An addition to income cannot be made solely on the basis of a transaction, especially when its bona fides are established and the department does not allege the sale to be bogus.

The Assessing Officer cannot question the correctness of the certificate issued by the prescribed authority for claiming weighted deduction under section 35(2AB) for scientific research expenditure. The deduction is limited to the amount approved and certified by the competent authority.

A real estate development business is considered 'set up' when the assessee is in a position to undertake activities for the acquisition, development, and exploitation of real estate. Expenses incurred between the setting up and commencement of such a business are allowable, even if no revenue is generated or land is classified as a non-current investment.

An ad-hoc disallowance of expenses is deleted where the Assessing Officer (AO) has not established or spelt out the specific expenses that were not vouched, especially when the assessee's accounts were duly audited. The reliance on the Friends Clearing Agency case supports this.

Interest earned on surplus funds deposited in short-term deposits is chargeable under section 56 as income from other sources. This interest cannot be treated as business income unless it is inextricably linked with the business operations.

When purchases are not doubted by the Assessing Officer, only the profit element embedded in the purchases, not the entire amount, is taxable if the purchases are found to be bogus.

A change in shareholding or ownership of an undertaking does not affect its eligibility for deduction under Section 80IA if the business itself is not reconstructed. The benefit is tied to the undertaking, not the owner.

No disallowance under Section 14A is warranted if the Assessing Officer fails to record any finding regarding the incurrence of expenditure by the assessee for earning exempt income. The mere presence of sufficient interest-free funds in excess of interest-bearing funds does not automatically lead to a disallowance under Section 14A if no expenditure is linked to earning exempt income.

Where the Assessing Officer (AO) received information of bogus purchases involving accommodation entries, but the AO made additions at a higher rate than the rate applied to the parties providing such entries, the Tribunal was justified in limiting the addition to the assessee at a rate consistent with the additions made to the suppliers.

An indirect connection between expenditure and income can be sufficient to establish the required nexus for deductibility under Section 57(iii). The connection need not be direct.

The definition of 'production' includes mining activity for the purpose of producing mineral ores, as ore is a 'thing' resulting from effort.

Where an assessee claims that investments were made from their own non-interest bearing funds, the onus is on them to establish this, particularly when funds are mixed.

Securities held by a bank are considered stock-in-trade, and any notional loss arising from their valuation at the year-end is allowable as a deduction.

Explanation II to Section 37 is applicable only to business expenditure and not to business losses.

The retrospective insertion of an Explanation to Section 80IB(9) of the Income Tax Act is unconstitutional. Blocks licensed under a single contract cannot be treated as a single undertaking for the purpose of deduction under Section 80IB(9).

Disallowance under Section 14A in relation to tax-free income earned from stock-in-trade is not warranted. The CIT(A) should have allowed the claim without remanding the matter to the AO.

No interest disallowance can be made if interest-free funds available are sufficient for interest-free loans and advances.

Belated payment of employees' contribution to provident fund is deductible if paid before the due date of filing the return of income.

The Income-tax Act does not exhaustively define 'business'. However, it denotes an activity undertaken with the primary objective of earning profit, signifying that profit is derived through a process of production.