Landmark Cases on Business Income and Deductions

Income from the sale of immovable property, including any 'on-money' component, is taxable only when the sale is complete, marked by the execution and registration of the sale deed and/or transfer of possession to the buyer.

The assessee is entitled to a deduction of interest under Section 36(1)(iii) on borrowed funds utilized for acquiring shares, provided the shares are held as stock-in-trade as part of a share trading business.

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.

Interest expenditure should not be disallowed under Section 14A when the assessee has sufficient interest-free funds available to make investments yielding exempt income. This principle applies to the computation of disallowance under Rule 8D.

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.

This case establishes principles to determine whether an activity constitutes 'trade, commerce, or business' for tax purposes by considering the intention to make profit, the nature of dealings, and the pursuit of activities with reasonable continuity based on sound business principles.

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.

Income offered for tax in an assessment year, which is subsequently adjusted or reversed due to the final settlement of a claim (e.g., an insurance claim), does not result in a loss to the Revenue if the tax on the correct income is ultimately received in a succeeding year.

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 Supreme Court explains the meaning of the term 'trade' and clarifies that 'business' indicates an activity carried on with a motive to make profits.

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.

Tax is levied only on real income that has actually accrued or been received by the assessee, not on notional income or notional interest. The case also holds that certain expenses are allowable as revenue deductions.

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.

Expenditure on application software or general-purpose software, such as MS Office, is revenue expenditure if it is not custom-built and may require alterations.

Mere timing differences in income recognition across assessment years, where the Revenue does not ultimately lose tax and the income is offered and taxed in a subsequent year, generally do not warrant an adverse inference or addition. This principle applies when an assessee offers extra income, such as from an anticipated insurance claim, which is later reversed upon final settlement without ambiguity.

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.

An assessee's claim for commission, when made through a revised computation filed before the Assessing Officer, can be allowed during the assessment process.

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.

Eligibility for deduction under section 10AA is determined at the time of business formation and cannot be re-evaluated for every subsequent year the deduction is claimed.

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.

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.

The satisfaction of the Assessing Officer regarding the accounts maintained by the appellant must be based on cogent reasons to invoke Rule 8D.

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 activities aimed at producing mineral ores, as ore is a result of human effort or process. This interpretation, originating from the Oxford English Dictionary, establishes that mining falls within the ambit of production.

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.