Landmark Cases on Business Income and Deductions

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.

A bona fide change in the method of accounting, which is a permanent arrangement to be followed consistently, must be accepted even if it causes a temporary detriment to the revenue in the initial year of change.

The netting or difference between two prices constitutes receipt on a commercial basis or net profit.

A difference between a forward contract rate and the exchange rate on the date of entering the contract, when recognized as a deduction, is an ascertained and definite liability eligible for deduction, not a contingent liability.

Interest income earned by an assessee carrying on business from temporary investments of surplus cash with a bank is taxable as business income under section 28, not as income from other sources, if the investments are made from commercial assets or business funds.

The Supreme Court held that amounts credited to a contingencies reserve created under the Electricity (Supply) Act, 1948, and its Sixth Schedule are related to the provisions of that Act.

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 engaged in an industrial undertaking.

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.

No disallowance under Section 14A can be made if the assessee has not incurred any expenditure in relation to earning exempt income, and the revenue fails to pinpoint any such expenditure.

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.

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, calculated based on the purchase price of power, remain the best basis for calculation even after an order from the MERC.

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 incurred by pharmaceutical companies in distributing free samples to doctors is considered publicity and sales promotion, and therefore, it is not disallowable under Section 37(1) of the Income-tax Act.

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 for business purposes, if not in doubt, must be allowed as a deduction. Ad hoc additions by the Assessing Officer are impermissible when the expense is established and for business purposes.

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 issue of Employee Stock Options (ESOPs) is an ascertained liability and an expenditure deductible under Section 37(1) of the Income Tax Act.

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.

A contingent or conditional liability cannot be recognized for tax purposes under the mercantile system of accounting. Such liabilities arise only when they are ascertained, unlike statutory liabilities where quantification does not postpone accrual.

The classification of bitumen/asphalt is considered in the context of US patent classification definitions.

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.

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.

When an Assessing Officer (AO) is not satisfied with the assessee's explanation or working regarding expenditure, disallowance under Section 14A must be made on a reasonable basis. The AO's dissatisfaction must stem from an objective analysis and cogent reasons.

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.

Government securities held by a bank must be treated as stock-in-trade, not as investments, especially when the bank maintains accounts on a regular basis. This principle applies even if the loss is not allowable as a capital loss but can be claimed as a business loss.

The 'wholesale cash price' for levying excise duty must be based on transactions at arm's length. Prices charged to special or favoured buyers due to extra-commercial considerations do not qualify as the wholesale cash price.

Expenditure is allowable as revenue expenditure if it is incurred for the purposes of business.

Subsidies or exemptions granted by a state government to an assessee, such as entertainment tax exemption for multiplexes, are treated as capital receipts and are not liable to income tax.

Section 14A of the Income-tax Act is not applicable to insurance businesses governed by specific provisions of Section 44 and Schedule 1. Profit on sale of investments by insurance companies is not taxable, especially after the deletion of sub-rule (b) of Rule 5 of the First Schedule.

License fees are required to be amortized as per Section 35ABB of the Income Tax Act, 1961. However, this ruling does not apply to Spectrum Usage Charges (SUC).