Landmark Cases on Business Income and Deductions

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.

Income from trading carbon credits is considered capital in nature and therefore not taxable.

Interest income with a nexus to business is excluded from business profits under Explanation (baa)(1), and the quantum of exclusion must be determined by allowing interest expenditure relatable to the interest receipt.

When an assessee writes off a debt as bad, it is a decision made in the ordinary course of business. The Income Tax Officer cannot question the correctness of this decision unless there is evidence of fraud or mala fide.

A subsidy received by an assessee is to be treated as a capital receipt, not revenue receipt.

There can be no presumption that an assessee must have incurred expenditure to earn tax-free income. Disallowance under section 14A requires actual expenditure, not notional or estimated amounts.

Expenditure incurred for obtaining a loan is deductible as revenue expenditure if it is for commercial expediency, assessed from a businessman's point of view.

Expenditure incurred on improvements like flooring, partition, wiring, and false ceiling in existing premises is treated as revenue expenditure, not capital expenditure, even if it provides some lasting benefit. Such expenses are deductible if made for efficiently carrying on the business.

Expenditure incurred to facilitate the smooth functioning of business and ensure profitable operation is revenue in nature and not capital expenditure.

A business commences with the first purchase of stock-in-trade, and the date of the first sale is immaterial. For manufacturing, business commences with the first activity undertaken to produce finished products.

Expenditure incurred for making advertisement films is revenue expenditure if it relates to an ongoing business. However, if the expenditure is for a brand to be used in a business yet to commence, it is capital expenditure.

Expenditure incurred on an independent research centre and R&D unit is eligible for deduction under Section 35(1)(iv) of the Income Tax Act, and such expenditure need not be reduced from profits.

Income from real estate business can be estimated at a reasonable rate of profit by the CIT(A) based on seized material, and appeals related to assessments made under section 153A may not be pressed if not pursued.

When an existing unit undertakes substantial expansion under Section 80-IC, the previous year in which the expansion occurs becomes the initial assessment year, entitling the unit to 100% deduction for 10 years from that year.

Expenses incurred in connection with a public issue of shares or debentures are allowable as revenue expenditure eligible for deduction under section 35D of the Income-tax Act. This includes expenses related to Qualified Institutional Buyers (QIBs).

When bad debts written off were not allowed as a deduction, any subsequent recovery from such bad debts cannot be brought to tax. This principle is upheld even if a deduction for provisions for bad and doubtful debts was allowed under section 36(1)(viia).

Indirect expenses not directly relatable to an industrial undertaking cannot be considered for computing income eligible for deduction under Section 80-1A. The income and expenditures to be reckoned for this deduction must be directly related to the industrial unit.

Disallowance under section 40A(3) of the Income-tax Act is not to be made in respect of cash payments exceeding the prescribed limit if the assessee proves the genuineness of the payment and the seller insisted on cash, offering incentives/discounts, and issued a supporting certificate.

Extrapolation of a few instances of non-compliance observed during assessment proceedings to justify disallowance under Section 40A(3) for the entire year is arbitrary and unreasonable, especially if the proposed disallowance was not put forth for rebuttal. Loose papers found during a search can have evidentiary value and form the basis for additions, particularly when the assessee admits to receiving on-money receipts.

Lease rent paid by a lessee for assets they do not own and cannot alienate is considered revenue expenditure. The owner (lessor) is entitled to claim depreciation on such leased assets.

A Container Freight Station (CFS) is considered an "Inland Port" and falls within the customs area attached to a port. This classification makes it eligible for deductions under Section 80IA(4)(i) Explanation (d) of the Income Tax Act.

Expenses incurred are not deductible if they are not dictated by commercial expediency but are inspired by profit hunting and tax avoidance motives.

Expenditure incurred on advertisement to promote sales and build a brand is generally considered revenue expenditure and allowable as a business deduction, especially when it does not create an enduring benefit in the nature of a capital asset.

Interest earned on fixed deposits that are pledged as margin money for bank facilities like letters of credit and bank guarantees is considered business profit and eligible for exemption.

A liability cannot be presumed to have ceased to exist merely because it has been outstanding for several years. Without a bilateral act between the assessee and the creditor indicating cessation, additions under section 41(1) are not permissible.

Securitisation income derived from the business of long-term housing finance is eligible for deduction under section 36(1)(viii) of the Income Tax Act, 1961, even if the assessee continues to bear the risk of default.

Expenditure incurred on the first registration of trademark-related expenses is revenue in nature and deductible as a business expense.

An assessee is eligible for deduction under section 80IA if it constructs an infrastructure facility for government projects, as this constitutes a transfer of property in chattel rather than a contract of service.

Interest income earned by an assessee on fixed deposits and other interest income is eligible for deduction under Section 80-IA of the Income-tax Act, 1961.

A lump sum payment made by a prospective tenant to a landlord for the settlement of agricultural land and the parting of certain rights, paid before the landlord-tenant relationship is established, is a capital payment and not rent.

Section 14A disallowance is computed by considering the income that has actually been subjected to tax. If certain income is exempt, no expenditure is deemed to have been incurred for earning that exempt income.

Where an assessee discharges a future liability at its present value, it does not result in a "benefit" accruing to the assessee, and therefore, Section 41(1) of the Income Tax Act, 1961, is not applicable.

Addition to the profit of an assessee cannot be made solely on the ground of low profits without a specific finding that the assessee's accounts are incorrect or incomplete. The Assessing Officer cannot dispute the assessee's method of accounting or claim a change in method without justification.

Subsidy in the form of a refund of sales tax received after the commencement of production cannot be treated as a capital receipt and is taxable as revenue.

Waiver of a loan taken for trading purposes is taxable under section 41(1) of the Income Tax Act, 1961, as it amounts to a remission or cessation of a trading liability.

Conference registration charges are deductible as business expenditure under Section 37(1) of the Income Tax Act, as they are not covered by MCI guidelines and therefore not prohibited by law.

Whether a commercial commodity has been transformed into a different commercial commodity with a distinct character, use, and name is a factual determination that depends on the specific circumstances of the case.

Expenditure that merely facilitates trading operations or improves business efficiency without creating an enduring capital asset is revenue in nature. The commercial sense and the enduring benefit test determine whether expenditure is capital or revenue.

Profits of a captive power plant eligible for deduction under Section 80-IA are to be computed based on the average annual landed cost of electricity purchased by the assessee from the State Electricity Board, which is considered the market value.

When computing eligible profits for deduction under section 80-IA, earlier losses that were set off against other income must be notionally considered and set off against the profits of the eligible business.

Expenditure or payments to related persons cannot be disallowed under Section 40A(2)(b) unless the Assessing Officer first establishes that the expenditure is excessive or unreasonable. The onus is on the revenue to prove such unreasonableness.

Debt forgiveness constituting a monetary benefit does not attract Section 28(iv) of the Income Tax Act. Such a benefit is not income arising from business or profession.

Penalty charges recovered from suppliers of capital goods are to be treated as capital receipts. Compensation related to delay in the procurement of capital assets, or for the sterilization of a profit-earning source, is a capital receipt.

Starting a new line of manufacture using existing funds is considered an extension of the existing business, not the commencement of a new business.

Expenditure incurred to acquire controlling interest in a company, rather than to earn dividend income, is not allowable as a deduction under section 57(iii) as it is in the nature of capital expenditure.

Expenses incurred during the pre-commencement period of a business are not deductible as business expenses or losses, although such expenses may be eligible for depreciation if they can be capitalized to assets. The interpretation of 'used for the purposes of the business' regarding machinery, plant, or buildings, and whether it includes passive as well as active user, was left open.

Foreign exchange gains earned on forward contracts are eligible for deduction under Section 10A as they form part of the appellant's export business income. Expenses such as premium, bank charges, and interest paid are considered an inextricable part of the assessee's business.

A Supreme Court decision in P.R. Prabhakar v. CIT approves the principle laid down in a Special Bench decision regarding the determination of eligible deductions, specifically approving a 'straight jacket formula' under subsection (3) for computing eligible business profits.