Landmark Cases on Business Income and Deductions

The assessee bears the burden of proving necessary facts to avail deductions under Section 37(1); failure to establish these facts renders the deduction inadmissible.

Payments made as non-compete fees for the purpose of business are on revenue account and are allowable as revenue expenditure.

A non-user of a business unit for six years is not considered a temporary non-user, especially if the unit was closed due to non-viability.

Agricultural income tax cess paid on green tea leaves is a deductible business expenditure when computing composite income.

The interpretation of specific terms within a statute requires considering the context and meaning derived from associated words, rather than isolated definitions.

An assessee following the "exclusive method" of accounting for MODVAT/CENVAT credit is not liable for addition under Section 145A for unutilized balance of such credit. This is because the CENVAT credit on inputs is treated as a separate receivable, not impacting the cost of raw materials.

Reimbursement of actual expenditure to a sister concern cannot be disallowed under section 40A(2) of the Income Tax Act.

Interest income on non-performing assets (NPAs) not recognized as per RBI guidelines cannot be taxed, especially when specific provisions like Section 43D and Rule 6EA are considered.

An assessee engaged in the development of water supply and irrigation projects is considered an infrastructure developer, not merely a contractor, and is therefore eligible for deduction under section 80IA. The distinction between a contractor and a developer is significant for determining eligibility.

Prior period expenses are allowable expenditures if not rebutted by the revenue and confirmed by the CIT(A).

The refund of guarantee commission for the unexpired period of a guarantee contract, where the contract is revoked prematurely, is a valid deduction for the assessee-bank.

The case is cited for the proposition that payments made for the elimination of competition are generally not deductible as business expenditure. This is because such payments are often considered capital in nature, designed to secure or preserve an enduring benefit for the business.

Expenses incurred on issuing Global Depository Receipts (GDRs) are allowable as a deduction under Section 35D of the Income Tax Act, 1961.

An employer's contribution to PF/ESI made after the due date but before the filing of the return of income is an allowable deduction. This was an issue with divergent High Court opinions before the Supreme Court decision in Checkmate Services Pvt. Ltd.

The Gujarat High Court in Voltamp Transformers Pvt. Ltd. held that the perspective of the assessee, a businessman, should be considered when determining commercial expediency, not solely the department's viewpoint. A businessman must act prudently to advance their business interests.

Notional income from interest-free loans or deposits is not taxable under the Income Tax Act in the absence of a specific provision allowing for such taxation.

Deductions for employer and employee contributions to PF and ESI are covered by Section 43B of the Income-tax Act, 1961. Amendments made to Section 36(1)(va) by the Finance Act 2021 are prospective, not retrospective.

The valuation of unsold stock at the close of an accounting period is a necessary part of determining trading results and does not constitute a source of profit. Its purpose is to balance the cost of goods purchased against the closing inventory to reflect actual realized profit or loss from trading.

Expenditure that relates to a continuous flow of expenditure, even if technically treated as prior period expenses, is eligible for deduction if the conditions for deduction are met. Disallowance is not justified if the revenue cannot prove that the right to receive or the obligation to pay arose in a prior year, or that bills were raised in a prior year, and the expenses were incurred for the assessee's business.

Interest subsidy received under the Technology Upgradation Fund (TUF) Scheme is a capital receipt. The Supreme Court's dismissal of a Special Leave Petition affirms the High Court's view on this matter.

The decision in JCIT v. Holland Equipment Co. B.V. is cited for the proposition that it is the duty of the assessee to allocate expenditure to exempt income under Section 14A.

Section 43B of the Income Tax Act, 1961, which requires certain statutory liabilities to be paid by a specific due date for allowability of deduction, does not apply to service tax if the service tax has not become payable due to non-receipt of payments from the service recipient. This is because section 43B refers to a "sum payable by the assessee".

When examining the reasonableness of expenditure under Section 40A(2), tax officers must exercise fair and objective judgment, considering the perspective of a prudent businessman, to prevent tax evasion without causing hardship in genuine cases.

Interest on borrowed funds is not deductible to the extent funds are diverted for non-business purposes, even if the diversion is not illegal but contrary to public policy or government policy. The court considers the reality that borrowings would have been less without such diversions.

Expenditure incurred voluntarily for Corporate Social Responsibility (CSR) purposes is not disallowed if Section 37(1) Explanation 2, which applies to statutory obligations, is not triggered. Additionally, Section 37 is prospective from AY 2015-16, making it inapplicable for AY 2013-14 disallowances.

For disallowance of expenditure under Section 14A, it is a pre-condition that the income earned must not be includible in the total income of the assessee. The Assessing Officer must record satisfaction if the assessee's apportionment of expenses is not accepted.

Disallowance under Section 14A cannot be made in the absence of any exempt income earned by the assessee. The High Court upheld the ITAT order, and the Supreme Court rejected the departmental SLP.

Payments made to ward off competition, even to a rival dealer, are considered capital expenditure. It is not necessary for such fees to create a monopoly to be classified as capital in nature.

Employee contributions to PF and ESI funds are allowable as deductions under Section 43B if paid within the due date for filing the return of income under Section 139(1).

The case establishes that for an activity to constitute 'trade, commerce or business' for taxation purposes, it must be conducted with a profit motive. Activities carried out on a 'no loss no profit' basis can still be liable for taxes if they involve economic activity.

The expression 'used' in relation to assets for tax purposes generally means actual user, although a broader interpretation might be considered to avoid making provisions superfluous.

A deduction under Section 80HH of the Act in respect of transport subsidy is not allowable if the subsidy is not found to be inseparably connected with the profitable conduct of business.

Profits are not wholly made by the act of sale and do not necessarily accrue at the place of sale; profits attributable to manufacturing operations accrue where the business operations are carried on.

Sales tax exemptions and incentives received by an assessee are considered revenue receipts and are therefore taxable.

The term 'every month' in the Provident Fund Scheme refers to the month in which wages were actually earned and salary became payable, not the month in which the salary was paid. An employer's responsibility to deposit contributions is independent of the timing of salary payments.

No separate disallowance under Section 40A(3) is required when income is estimated by adopting a Net Profit Rate.

Allocation of R&D expenditure to eligible units is not clearly warranted when R&D units are maintained within manufacturing units and not as independent entities. This is particularly relevant when the Assessing Officer allocates R&D expenses to Export Oriented Units (EOUs) in the ratio of turnover, and the Commissioner (Appeals) has deleted such additions.

An assessee cannot benefit from a mistake made by the assessing officer, especially when the assessee intentionally attempts to mislead the officer into making such an error.

Expenses incurred prior to business commencement but after business setup are deductible as revenue expenses, as the setting up and commencement dates of a business are not necessarily the same.

Payment received for refraining from carrying on a competitive business is treated as a capital receipt. High Courts may misinterpret prior Supreme Court judgments like Gillanders Arbuthnot & Co. Ltd. in their decisions.

The Supreme Court confirmed the Gujarat High Court's view in Avani Exports, regarding the exclusion of the profit element within DEPB income when calculating deductions under Section 80HHC of the Income Tax Act.

Fluctuations in foreign exchange currency, accounted for at the end of the accounting year using a consistent accounting system, are not notional losses and are therefore deductible. The loss accrues at the time of valuation, not solely upon remittance or repayment.

Income from assets held by a Hindu Undivided Family (HUF) cannot be treated as business income if the primary purpose is investment, not business operations.

A coordinate bench of the Tribunal follows a previous decision in Ultratech Cement Ltd. v. ACIT (2017) 88 taxmann.com 907 (Mumbai), allowing a claim for deduction under Section 80IA for profits earned from operating rail systems inherited along with cement plants.

All expenses connected with exempt income must be disallowed, irrespective of their nature (direct, indirect, fixed, variable, managerial, or financial).

A deduction under Section 43B for service tax is allowable only upon receipt of the consideration from the customer, not merely upon rendering the service, if the tax liability arises from such receipt.

Section 14A disallowance is applicable even in a year where exempt income was claimed, distinguishing it from cases where no exempt income was claimed.

Payment made for acquiring the right to use technical know-how is allowable as revenue expenditure, especially when ownership and intellectual property rights remain with the foreign licensor.

Disallowance of interest on borrowed funds is not justified if the assessee has sufficient interest-free funds available to cover the interest-free advances made, especially when a clear nexus between borrowed funds and non-business advances cannot be established.

Amendments to Section 36(1)(viii) are prospective, meaning deductions allowed for amounts transferred to a special reserve prior to the amendment, and subsequently withdrawn, cannot be subjected to tax for assessment years prior to the amendment's effective date.