Landmark Cases on Business Income and Deductions

Expenditure incurred to eliminate competition is considered capital expenditure. This is particularly true when the expenditure creates an enduring benefit for the assessee.

For claiming deduction under section 80IA(4) after the Finance Act, 2002 amendment, it is only required that the infrastructure facility be developed, and there is no condition that the assessee must also operate it. When an assessee undertakes to develop an infrastructure facility only, the government is responsible for making payment for its development.

When an assessee follows the mercantile system of accounting and treats income as taxable in the year of accrual, the revenue cannot deem it taxable in the year of receipt.

Securities held by banks are considered stock-in-trade, and any loss arising from their valuation is deductible as a business loss. This principle applies even when a bona fide change in the method of valuation is implemented.

Provisions granting deductions or exemptions should be interpreted liberally in favour of the assessee. The decision also distinguishes situations involving commission for storing government stock from profit on trading stock.

A difference between a forward contract rate and the exchange rate on the date of entering into the contract for foreign currency is an ascertained and definite liability and thus eligible for deduction.

Amounts transferred to a separate fund for building storage facilities under a statutory obligation are diverted at source by overriding title and do not form part of the assessee's income.

Amounts appropriated from revenue to a contingency reserve account under the Electricity (Supply) Act, 1948, and its Sixth Schedule, are not deductible in the computation of total income under the Income-tax Act. This is because such amounts are not considered income of the assessee but are diverted at source.

An activity is considered business if it involves a continuous course of activity and is carried on with a profit motive.

Deduction under Section 36(1)(vii) for bad debts is allowed only if the assessee debits the amount in its accounts as irrecoverable. Merely making a provision for Non-Performing Assets (NPA) does not constitute a write-off.

Expenditure incurred on leasehold improvements, including interior decoration and replacement of existing fixtures in rented premises, can be considered revenue expenditure if it maintains the quality of production and protects current assets.

The Karnataka High Court in Spectrum Consultants v. CIT affirmed the view taken in Essae Teraoka (P.) Ltd. regarding the deductibility of employee contributions to PF and ESI.

Expenditure is deductible under Section 57(iii) if it has a proximate and relevant connection to the earning of income, even if the income arises as a by-product of other activities.

Disallowance under Section 40A(2)(b) is not maintainable when both the payer and payee are assessed at the maximum marginal rate, as it results in a revenue-neutral situation.

Casual and contractual workers are included when calculating the number of employees for industrial undertakings, particularly for the purposes of Section 80-IB(2) of the Income Tax Act. This includes workers employed directly or through an agency, regardless of remuneration.

An assessee is entitled to a tax holiday benefit for subsequent assessment years if the conditions for availing such benefit are fulfilled, even if the systematic activity commenced in a later previous year than a trial run.

Deduction under section 80IA(2A) is available for telecommunication services, including other incomes that form part of the profits and gains of the eligible business. The legislative intent in adopting specific wording for subsection (2A) indicates a conscious departure from previous provisions.

The Assessing Officer must record reasons for disagreeing with an assessee's submission that no expenditure was incurred to earn exempt income. The Assessing Officer must also consider whether investments yielding exempt income were made from own funds or borrowed funds when invoking Section 14A.

Interest income earned on fixed deposits placed for business purposes is considered part of the assessee's business income, not income from other sources. This applies when the assessee is compelled to park funds in fixed deposits.

The Punjab & Haryana High Court followed its earlier decisions in CIT vs. Mark Auto Industries Ltd. and CIT vs. Kamal Family Trust, and also CIT vs. Nuchem Limited, in relation to amendments made by the Finance Act, 2021.

Expenditure incurred for the transfer of the use of licenses, without acquiring ownership rights or an enduring benefit, constitutes revenue expenditure. Such payments are allowable as a deduction if they are directly relatable to services in the revenue field.

Interest received on margin money placed for business purposes is eligible for deduction under Section 80-IA as it is incidental to the assessee's business. This applies when the funds are generated for and under a specific agreement, not the assessee's own funds.

Profits from the business of power generation should be calculated based on the price paid for purchased power, even after regulatory orders, as this remains the best basis.

Cash payments made to farmers are exempt from Section 40A(3) disallowance if the payment is routed through the payee's bank account and is traceable, ensuring the payee receives the funds.

Amendments to Section 40(a)(ia) by the Finance Act, 2010 are considered clarificatory and thus retrospective in nature. Disallowance under this section cannot be sustained if TDS was deposited before the due date of filing the return.

Profits of an eligible undertaking cannot be adjusted against losses from other undertakings when calculating deductions under sections like 80-IA, 80IB, or 80IC. The overriding provisions of these sections require that deductions are calculated based on the profits of the eligible unit itself, without set-off.

Disallowance of expenditure under Section 14A cannot exceed the income from the relevant exempt investments.

Expenditure approved by the DSIR in Form 3CL alone qualifies for weighted deduction under Section 35(2AB). The DSIR's decision on the correctness of expenditure under this section is final.

A housing project developer is eligible for a proportionate deduction under Section 80IB(10) if the residential units meet the criteria, even if some units are below the specified built-up area, provided the project otherwise complies with the conditions.

Expenses incurred by a company cannot be considered personal, as a company is an artificial legal entity incapable of incurring personal expenses. Therefore, disallowances on this basis are not sustainable.

No disallowance can be made if payments were made by account payee cheques and sales/closing stock are accepted.

For a bad debt to be allowable as a deduction, it must be a debt that, if good, would have increased the taxable profits. An expenditure for running a school for employees' children in a remote area can be considered an allowable expenditure for the welfare of employees.

A tribunal's decision against an assessee is upheld when following the Supreme Court's decision in Indian Hotels Co. Ltd. v. ITO, which dealt with the issue of 'manufacture or production' in relation to excise duty payment.

A person cannot enter into a contract with themselves, meaning no profit or loss can arise from self-dealing. This principle applies to the computation of profits under domestic income tax law but does not necessarily extend to profit attribution under tax treaties for permanent establishments.

Laws relating to economic activities are viewed with greater latitude than laws touching civil rights, allowing the legislature "some play in the joints" to deal with complex problems without rigid formulas.

Advances made to subsidiaries, even if irrecoverable, can be considered as business expenditure if they are part of the assessee's sustained business activity of financing and guiding subsidiaries. Not charging interest on such advances does not negate the allowability of the claim.

The discount on the issue of Employees Stock Options (ESOPs) is an ascertained liability, not a contingent one, and is an expenditure deductible under Section 37(1) for the purpose of earning profits through employee services.

Expenditure incurred for repairs and renovation of hotel premises, which improves existing business without creating a new asset or advantage of an enduring nature, is treated as revenue expenditure.

Hedging contracts related to raw materials for manufacturers are excluded from speculative transactions under Section 43(5) of the Income Tax Act, even if they involve both sales and purchases and are entered into at different times from the delivery of goods.

Interest on borrowed capital is not deductible if the capital is not utilized for the purposes of the assessee's business. This includes funds advanced to partners for personal use.

Ethyl alcohol can be considered a mineral oil if it is a product derived from liquid petroleum and is a mixture of hydrocarbons.

A rate imposed upon a business owner or occupier, where the quantum is fixed after considering the owner's circumstances including business income, is not assessed on the basis of profits and is therefore allowable as a business expense.

Provisions granting deduction, exemption, or relief to an assessee are to be interpreted liberally and in favour of the assessee.

The first proviso to Section 43B is retrospective. Sales tax for the last quarter paid before the filing of the return for the assessment year is deductible.

Statutory provisions, especially those that disallow deductions, must be interpreted strictly and literally. Courts cannot read words or concepts into a provision that are not expressly stated, even if the intent seems logical.

Expenditure for staff welfare activities, including contributions to staff sports and welfare expenses, is not hit by the provisions of Section 40A(9) of the Income Tax Act, 1961.

Valuation of closing stock for the purpose of determining business income is to be in accordance with Section 145A of the Income Tax Act, 1961. Where the assessee consistently valued closing stock on an actual cost basis, this method is to be continued unless a change is mandated.