Landmark Cases on Business Income and Deductions

Amortization of premium on purchase of government securities is allowable as a deduction if it is in line with RBI's prudential norms and the assessee follows a consistent accounting system.

Royalty payments are considered revenue expenditure when they are directly proportional to the quantity of raw material extracted or produced, and are recurring in nature, reflecting an operational cost rather than the acquisition of a capital asset.

Disallowance under Section 40A(3) can be dispensed with if the assessee proves business expediency for cash payment and verifies the genuineness of the transaction, even if it doesn't fall under Rule 6DD.

Income accrues to an assessee when they acquire a right to receive it, even if it has not yet been actually received or quantified. A debt is created once liability is established, and its future quantification does not make it contingent.

Income realised in excess of the levy price for sugar is not a trading receipt and therefore not taxable, when the assessee's right to realise such excess price is under dispute.

This case is authority for the principle that deductions under section 36(1)(viii) of the Income-tax Act may be granted in respect of certain categories of receipts. The court's decision in this case is relied upon when interpreting the scope of business activities for tax purposes.

Payments for software licenses do not constitute royalty under the provisions of the Income-tax Act, and therefore, disallowance under section 40(a)(ia) is not applicable.

Salary paid to a partner is merely a mode of sharing profits and retains the character of the firm's income. The payment is an adjustment of the amount the partner is entitled to receive based on their contribution of human capital, skill, and toil.

Assessing Officer cannot add profit on the expenditure incurred by the assessee on the premise that the assessee has saved VAT, without establishing that such saving forms part of the income of the assessee.

Where an assessee admits to earning only commission income, the entire bank turnover cannot be considered for additions; only the commission can be charged.

Retention money does not accrue to an assessee until the defect liability period is over and it is certified that no liability is attached to the assessee, at which point the assessee acquires the right to receive such money.

Expenditure incurred on the replacement of parts of machinery, such as moulds, is treated as revenue expenditure if it does not enhance the production capacity or life of the existing machinery and is akin to maintenance.

A subsidy received on account of refund of sales tax is revenue in nature and taxable. The Supreme Court affirmed this view, concurring with prior judgments on the taxability of such grants.

Under the mercantile system of accounting, an assessee is entitled to deduct expenses that are expected to be incurred to fulfill a liability that has already arisen, even if the expenditure has not yet been actually paid. This applies to liabilities such as restoring land disturbed by mining operations.

The rigours of Section 40A(3) should not be invoked without examining the genuineness of the transactions and whether they were free from tax evasion, as the consequences for non-compliance must have a nexus to the object of preventing tax evasion.

Advances made by banks that become bad debts are eligible for deduction under Section 36(1)(vii) if they meet the conditions specified in Section 36(2).

Expenditure incurred by a Government undertaking towards implementation of the 20-point programme, as per specific directions of the Government, is allowable as business expenditure, even if voluntary and not statutorily mandated.

The mere fact that one block in a housing project has units exceeding the built-up area limit does not disqualify the entire project from claiming deduction under section 80IB(10). Assessees are entitled to proportionate deduction for eligible blocks or units.

When funds are mixed, interest expenditure relatable to investments in tax-free income is to be computed under the provisions of Rule 8D(2)(ii), applying the theory of apportionment.

When estimating the income element in unaccounted receipts, tax authorities must adopt a reasonable profit rate, rather than excessively high rates, to determine the real income in the interest of justice.

Assessees cannot claim a deduction for provisions for bad and doubtful debts of non-rural branches under Section 36(1)(viia) of the Income Tax Act.

Transactions involving the purchase and sale of shares constitute trading activity if the interest paid on borrowed funds for such purchases exceeds the return generated from the shares, indicating that the interest payments are commensurate with the share returns.

Expenditure incurred in raising loans through convertible debentures is admissible as revenue expenditure.

Waiver of loan principal or interest by banks/financial institutions is not taxable under Section 41(1) if the loan was not claimed as a deduction in earlier years. Such transactions are loan-based and do not fall under Section 2(24) or Section 28(iv) of the Income Tax Act.

A subsequent approval of Form 3CL does not invalidate a claim for deduction under Section 35(2AB) if the expenditure was otherwise approved. The deduction is available for expenditure incurred, even if the approval format was obtained later.

Revenue authorities are not justified in assessing business income in the hands of an entity engaged in construction and development of residential and commercial structures entirely on behalf of the State, as such income constitutes income of the State and is not exigible to income tax. This principle was affirmed by the jurisdictional High Court, affirming the Tribunal's decision.

Expenditure incurred for business expediency is deductible under section 37(1) even if it is at a higher rate, provided it is not demonstrably for non-business purposes.

For the purpose of disallowing expenses under Section 14A, only investments that have yielded exempt income should be considered when calculating the average value of investments.

Expenditure incurred under a guarantee for the purpose of business is considered a business expenditure, and its write-off is treated as a business loss deductible from income. The expense incurred to recoup business losses in a subsidiary company is also allowable as a deduction.

Income derived from letting out property for marriages and other functions, where the property is made available for limited periods and ancillary services are provided for a charge, can be considered business income rather than income from house property.

Deductions under Chapter VI-A of the Income Tax Act, such as Section 80-IA, are to be calculated and allowed with reference to the assessee's gross total income, not just business income.

Bonus or commission paid to directors for services rendered as part of their terms of employment is allowable as a deduction, and Section 36(1)(ii) of the Income Tax Act does not apply in such cases.

Royalty payments for acquiring the right to use technical know-how are allowable revenue expenditure when ownership and intellectual property rights remain with the foreign company.

For the purpose of computing the deduction allowable under Section 80IA, the market price of electricity supplied by a captive power plant (CPP) is to be determined by adopting the rate at which the manufacturing unit has been purchasing electricity from the open market.

Section 40A(3) and Rule 6DD are intended to regulate business transactions, prevent the use of unaccounted money, and reduce the chances of using black money. Payments made by crossed cheque or draft facilitate verification of genuineness and source of funds.

Consideration received for the sale or transfer of an entitlement or accretion of capital, such as surplus loom hours, is a capital receipt and not taxable income.

Deductions or amortization of expenses allowed in initial years and accepted by the Revenue cannot be denied in subsequent years, especially when the method of accounting is consistent. Claims for deductions under Section 80IA, once allowed in an assessment framed under Section 143(3), cannot be subject to rectification under Section 154.

Interest paid on capital borrowed for business purposes, including the acquisition of shares to gain controlling interest in another company, is allowable as a deduction under Section 36(1)(iii) of the Income-tax Act, 1961.

ESOP cross-charge expenses are allowable as a deduction under Section 37 of the Income Tax Act. The difference between the fair market value of shares and the price at which they are issued to employees of an Indian associated enterprise constitutes an ascertained liability that is revenue in character.

A transaction involving the sale and lease-back of assets is not considered a colourable device if the assessee derives substantial benefit and manages its tax affairs to attract a lesser tax as permitted by law.

Accounting Standard 7 is not applicable to real estate developers, and therefore, the percentage of completion method cannot be imposed on them. Assessees are justified in following the project completion method as per Accounting Standard 9.

The measure used for assessing a tax need not be the same as the nature of the tax itself. A broader standard of reference can be adopted to determine the measure of a levy, as long as it maintains a nexus with the essential characteristics of the levy.

Amortisation of premium paid for leasehold land is a capital expenditure and not deductible.

A provision for doubtful debt cannot be considered part of operating cost when calculating operating profit, as it is a non-operating expense.

A subsidy granted by the government for industrial development in backward areas is not part of the actual cost of plant or machinery and therefore cannot be deducted towards the cost of acquisition of capital assets.

Expenditure incurred to remove a restriction, obstruction, or disability preventing the carrying on of an existing business is revenue expenditure, provided no capital asset is acquired. The nature of the lease, purpose of expenditure, and its relation to profitable business operations are key considerations in mining cases.

Administrative and interest expenses incurred for earning exempt dividend income are to be disallowed. This disallowance is permitted under Section 14A of the Income Tax Act.