Landmark Cases on Business Income and Deductions

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meaning deductions allowed for amounts transferred to a special reserve prior to the amendment, and subsequently withdrawn, cannot be subjected to tax for assessment years prior to the amendment's effective date.

Expenses incurred by an assessee to bring into existence an asset of a lasting character, such as an electric service line requiring constant inspection, repairs, and replacement, are capital in nature and not revenue expenditure. Amounts contributed by a consumer for a new connection can be considered in direct recoupment of such capital expenditure.

An Assessing Officer who finds a transaction with a subcontractor to be unreal must add the commission earned on such transaction as undisclosed income, rather than treating the entire transaction as undisclosed income.

Section 44BB, which provides for presumptive taxation of profits and gains of business in the case of exploration of mineral oils, does not override the provisions of Sections 5, 9, or 90 of the Income-tax Act, 1961. For business profits to be taxed in India, the existence of a Permanent Establishment (PE) in India must be established by the Revenue.

Payments made by an employer directly to the LIC towards an employees' group gratuity fund are allowable as a deduction under Section 36(1)(v) of the Income Tax Act, 1961, provided the employer has no control over these funds.

Expenditure claimed by an assessee-company is deductible if it is considered in light of commercial expediency, ordinary commercial trading principles, and whether it was part of the profit-making process.

Expenditure incurred in relation to exempt income is not allowable as a deduction. The Assessing Officer must appreciate that no part of interest or administrative expenditure was incurred in relation to exempt income before applying Rule 8D.

A cessation or remission of liability only arises when a creditor's claim ceases to exist in the eyes of the law, not merely because an addition was made by the Assessing Officer while the matter was still pending before an appellate forum.

A single payment made for acquiring the right to benefits granted by a lease, known as 'salami' or premium, is considered a capital receipt. This right is a capital asset, and the payment to acquire it is on capital account.

Interest received by an assessee under Section 28 of the Land Acquisition Act is not taxable.

Section 43B of the Income Tax Act, 1961, which deals with deductions only upon actual payment, does not apply to the employees' contribution to provident fund or other welfare funds, as the same is governed by Section 36(1)(va) of the Act. The deduction for employees' contribution is allowed if paid within the due date specified in the relevant Acts, including the grace period.

The Assessing Officer cannot make an ad-hoc disallowance of expenditure without specific evidence of non-business related expenses. The assessee's appeal is decided in their favour when the disallowance is made on an arbitrary basis.

When assessing expenses under Section 40A(2), tax authorities must consider the entire position judiciously from the viewpoint of a prudent businessman, not arbitrarily or capriciously. The revenue must demonstrate tax evasion and cannot disallow expenses if the recipient is taxed at the same or higher rate.

Expenditure not covered by a specific provision for deduction should be allowed under the residuary clause if it is in the nature of revenue expenditure.

Expenditure must be solely for promoting business to qualify for deduction under Section 37. The assessee bears the burden to prove expenses were incurred wholly and exclusively for business purposes.

Expenditure incurred for the purpose of earning income is deductible under Section 57(iii) even if no income is actually earned. The earning of income is not a pre-condition for allowing the deduction.

An element of refund or repayment is a must in the concept of borrowing, meaning perpetual bonds, unlike equity or share capital, may not be considered borrowings if they lack this repayment element.

Incentives received by an industrial unit are capital in nature if granted to promote industrial development and employment, and are therefore not chargeable to tax. The purpose for which the subsidy is given, not the time or source of its grant, determines its character.

Expenditure incurred to obtain gas supply, where ownership of the pipeline remains with the supplier, is considered revenue expenditure. This is analogous to expenses for service lines where ownership remains with the provider.

An amendment to Section 43B, specifically the insertion of the first proviso, is held to be curative and declaratory, and thus retrospective in operation.

Sales tax for the last quarter of an assessment year, paid before the filing of the return, is deductible under Section 43B. Amendments to Section 43B introducing a proviso are considered clarificatory, curative, and explanatory, making them retrospective.

The purpose of the inclusive definition of 'income' in Section 2(24) of the Income Tax Act is to broaden its scope, meaning that even receipts not explicitly listed may still be considered income if they possess its nature.

Expenses incurred on amalgamation, legal and professional fees, and contributions to a State Housing Board for worker tenements are considered revenue expenditure, not capital expenditure. This is because these expenditures do not result in an enduring benefit and are part of the company's operational costs.

Reassessment proceedings initiated on the ground that excise duty paid in advance was treated as an asset and not routed through the profit and loss account are valid.

Deduction under section 80-IB(10) is available on a proportionate basis for eligible units, even if some units in a project exceed the prescribed area limits. The entire claim should not be rejected due to partial non-compliance.

Obsolete inventory can be written off at 10% of its cost if supported by a certified auditor's report, even if sold at a lower price in the subsequent year. Interest income earned from customers is considered business profit for Section 80HHC deductions if it's inextricably linked to the business.

Where the exact quantification of a liability is to be determined in the future, but the liability itself is certain, it can be accounted for. This principle is applied when a wage agreement is being finalized.

Income from property is taxable as business income when the company's main object is dealing in properties, and renting is an ancillary activity. If the primary business is letting out property, income is taxed as income from house property.

Profits eligible for deduction under Section 80-IB are calculated after adjusting for disallowances made under Section 40(a)(ia). Any disallowances under Section 40A(3) are added back to the profits for the purpose of determining the deduction under Section 80-IB.

Expenditure on advertisement and sales promotion is generally treated as business expenditure allowable under section 37 of the Income-tax Act. The Assessing Officer cannot treat revenue expenditure as deferred revenue expenditure as the Act does not have such a concept.

Deductions under Section 80IA are to be granted from Gross Total Income, not restricted to 'Profits & Gains of Business or Profession' income.

A sales tax incentive is not taxable if its purpose is to encourage the establishment or expansion of a new industrial unit, irrespective of when it is paid.

Once books of account are rejected, additions should not be made on a line-by-line basis. If the Assessing Officer rejects the books, they must either disallow all sundry creditors or allow only those for which genuineness can be proven.

A partner's income from a firm, including salary, bonus, commission, or remuneration, is considered business income in their hands. Expenses necessary for earning this business income are deductible.

Goodwill is the reputation of a business that attracts customers, is viewed as intangible but materially valued, and can be described metaphorically as a seed growing into an oak, a magnet's attracting force, or the differential return of profit.

The expression 'profits or gains of any business or profession' refers only to profits and gains determined under Section 29 of the Income-tax Act. Taxes levied upon profits calculated in a manner other than that provided by Section 29 cannot be disallowed under Section 40(a)(ii).

The Supreme Court held that unclaimed credit balances that have become time-barred, if written back to the profit and loss account by the assessee, constitute a trading receipt and are thus taxable as business income under Section 28(i).

Where an assessee enters into a development contract where it undertakes all acts from project design to handing over, it is considered to be developing a facility as a whole, not performing a specific work. This implies the ownership of the site is not transferred.

Deduction under Section 80IA must be computed on a standalone basis, meaning the loss from one eligible unit cannot be set off against the profits of another eligible unit.

For expenditure to be deductible, its reasonableness must be judged from the businessman's perspective, not the revenue's, considering commercial expediency.

If an assessee's books of account are rejected and income is assessed on estimation, the rejected books cannot be simultaneously used to add undisclosed income by rejecting specific purchases.

Expenditure incurred to create a new asset or an advantage of enduring nature is not deductible under section 10(2)(v). This expenditure is considered capital in nature.

An assessee can claim an outstanding balance as a business loss under Section 28 if it arises from regular business transactions, even if conditions for bad debt deduction under Section 36(1)(vii) are not met, provided sufficient evidence is produced.

Forward contracts in foreign currency that have not been settled do not represent actual profits or losses for tax purposes; they are considered notional or hypothetical income/loss.

Interest income generated from fixed deposits, if purchased due to business exigencies or for the purpose of carrying on business activities, is to be treated as business income and not income from other sources.

A real estate developer adopting the completed contract method of accounting cannot be forced to follow the percentage completion method under AS-7 if AS-7 has not been specified by the Central Government under section 145(2). The Assessing Officer cannot reject accounts under section 145(3) solely on this ground.

The deduction under Section 36(1)(viia) for provisions for bad and doubtful debts is allowed to the extent of the actual provision made, subject to the prescribed ceiling. If the provision made is less than the prescribed limit, the deduction is limited to the actual provision made.

The connection between an expenditure and the earning of income need not be direct; an indirect connection can establish the nexus between the expenditure incurred and the income earned for the purpose of Section 57(iii).

A mere substantial profit does not inherently indicate an arrangement to earn profits beyond ordinary levels to abuse tax concessions under Section 80-IA(9) or (10). The Assessing Officer must provide specific evidence of such an arrangement.

The initial assessment year for claiming deduction under Section 80-IA is the first year the assessee actually claims the deduction, not necessarily the first year the enterprise is set up. The deduction under Section 80-IA applies only from the assessment year in which the claim is first made.