Landmark Cases on Business Income and Deductions

The transformation of pineapples into pineapple slices, jam, squash, and juice is not considered 'manufacture' for the purpose of tax laws, as the resulting products retain the essential character of the original fruit and are essentially processed goods rather than new articles with a different name, character, and use.

Payments made towards employee's contribution for PF/ESIC before the due date of filing the return of income are allowable as deductions.

A forward contract entered into to protect against foreign currency fluctuations on consideration receivable for exports is not a speculative transaction, and provisions for losses on such derivative contracts are allowable expenditures.

The decision in Godrej & Boyce Manufacturing Company Ltd. [2017] 7 SCC 421 is referred to in the context of the rule of consistency, particularly concerning the application of provisions related to income calculation and disallowances.

Where the Assessing Officer has no option but to resort to the provisions of Rule 8D read with Section 14A, the disallowance can be made under Section 14A.

Where an assessee has sufficient own funds exceeding its investments, a presumption arises that investments were made out of interest-free funds, preventing disallowance of interest expenses.

Payments made to doctors in violation of Indian Medical Council regulations are considered opposed to public policy and are not deductible as business expenditure under section 37(1). Such payments are to be discouraged.

An assessee is entitled to claim the benefit under Section 80IA(4)(i) even in the absence of a specific agreement with the Central/State Government, local authority or statutory body, if the proposal was accepted by the Government on certain conditions which were duly complied with.

Losses on foreign exchange forward contracts are not speculative if they are entered into to cover variations in foreign exchange rates impacting import/export business. Such losses are considered business losses and not notional.

Losses arising from the sale of investments made for business purposes are treated as business losses, not capital losses.

Expenditure directed to be incurred by a company by the Government is allowable as a deduction if the company has no discretion in the matter and is bound to comply with governmental orders.

Waiver of a loan taken for business purposes constitutes a remission or cessation of liability under Section 41(1) of the Income Tax Act, making it taxable as business income under Section 28.

Expenses arising from foreign exchange fluctuations on revenue expenditure and foreign currency loans for day-to-day business operations are notional or anticipated losses and are allowable.

While it has been contended that 'cess' is a tax, the specific issue in Unicorn Industries was not whether cess is deductible under Section 40(a)(ii) of the Income Tax Act. Instead, it concerned whether cess, education cess, higher education cess, and NCCD could be construed as 'duty of excise'.

The sale of certified emission reductions or carbon credits constitutes business income and is treated as trading receipts. This treatment is affirmed by considering the manufacturing process and is supported by a series of tribunal decisions.

Deducting interest expenditure allocated project-wise and added to work-in-progress against income from other completed projects distorts profit calculation according to the project completion method.

Disallowance under section 14A of the Income-tax Act is not permissible if the assessee has not earned any exempt income in the relevant assessment year. This position is affirmed by the dismissal of a Special Leave Petition by the Supreme Court.

Sales tax is considered part of the trading receipt, and its non-payment can attract the provisions of Section 43B. The liability to pay sales tax arises at the moment of sale or purchase.

Profit motive is an essential condition for an activity to be considered as business, trade, or commerce.

Assessee companies are eligible for deduction under section 80IAB, even if settlement fees are considered non-allowable expenses, provided that disallowances result in operating profits for which the deduction can be claimed.

Interest expenditure cannot be disallowed if the assessee has sufficient interest-free funds available. This principle applies even when the assessee has a mix of own and borrowed funds.

Where an assessee-employer deposits the employees' share of contribution towards provident fund and ESI beyond the statutory due dates, disallowance under section 36(1)(va) is justified, and such disallowance is a proper adjustment under section 143(1)(a).

Rent received from leasing a building, even if to a hospital for its employees, is considered business income and not income from house property.

The explanation inserted to Section 14A of the Income Tax Act, 1961, by the Finance Act, 2022, is prospective in nature and not retrospective.

Statutory liabilities, like customs duty, are deductible only in the year they are actually paid, regardless of the assessee's accounting method, as per Section 43B.

Income derived from rent for providing ATM facilities to banks is eligible for deduction under Section 80IB, as it facilitates banking transactions for employees without disturbing business activities.

Cutting and polishing of uncut raw diamonds does not constitute manufacturing or production of a new article or thing, as the raw diamonds remain diamonds after the process.

The Kerala High Court's decision in CIT vs. Commonwealth Trust Ltd. (2004) 269 ITR 290, concerning the disallowance of gratuity payments, has been considered "no longer good law" in light of the Supreme Court's judgment in Alom Extrusions Ltd. This implies that the earlier reasoning regarding the allowability of gratuity, particularly in relation to approved or unapproved funds, might not be applicable post the Alom Extrusions decision.

Retention money withheld by a contractee is not taxable in the year it is retained, but only in the year the obligations under the contract are fulfilled and the amount becomes due to the assessee.

Anticipated or foreseeable losses on fixed-price construction contracts are deductible in the year the loss is foreseen, aligning with accounting standards like AS-7. This approach is supported by decisions allowing deduction of foreseeable losses based on technical estimation.

Expenditures are revenue in nature and deserve to be allowed as deductions if they are for commercial expediency.

An employer cannot claim a deduction for employee contributions to provident or welfare funds if they are not deposited by the prescribed due date under section 36(1)(va), even if deposited before the income tax return filing deadline under section 43B. The Supreme Court's decision in Alom Extrusions Ltd. is not applicable to employee contributions.

A credit to a lease equalization account based on a consistent accounting practice is relevant only for accounting purposes, not for determining taxable income.

Expenses are deductible if incurred wholly and exclusively for business purposes, even if voluntarily incurred without legal obligation. Disallowance of CSR expenditure is restricted to expenses under a statutory obligation under Section 135 of the Companies Act, differentiating it from voluntary CSR.

An ordinary case of trade involves buying goods with a view to selling them at a profit. Transactions on a large scale are considered commerce, and continuous repetition of such transactions constitutes business.

An Assessing Officer cannot delete an addition made under Section 69C for bogus purchases and estimate income at a net profit rate if the assessee fails to prove the existence of suppliers.

Expenditure is deductible under section 57(iii) of the Income Tax Act only if it is incurred solely for the purpose of making or earning dividend income.

Expenses incurred for the purpose of business, even if not directly generating immediate profits, are deductible if they serve to carry on the business and protect the assessee's interests. The assessee determines commercial expediency, not the tax authorities.

Foreign exchange gains are includible in profits eligible for deduction under sections 10A/10B of the Income Tax Act, as they represent a form of additional sales price arising from export turnover. The case also supports claims for deduction on export of computer software under section 80HHE.

Expenses disallowed for personal use by directors cannot be sustained by treating the expenditure as for non-business purposes, and such disallowance can be deleted.

The transfer of the right to use goods involves a transfer of possessory rights, including control over the goods, and is not merely about having custody or possession without effective control.

Where purchases of raw material are made outside the books of account and the assessee cannot provide proper accounting or reconciliation, the value of the investment and estimated profits based on the GP rate must be adopted. Statements recorded, if corroborated by other materials, are valid even if they explain seized documents.

The treatment of a transaction in the books of accounts does not govern its tax implications. The law does not permit differentiating tax benefits based on whether internal invoices are raised.

A share loss claimed by an assessee is a genuine loss and eligible for deduction if the view taken by the Tribunal allowing it is not erroneous or perverse.

When dealing with unverifiable purchases, tax authorities can invoke Section 145(3) but cannot make additions solely on that basis without considering the past history and current events of the case. The taxing authorities have the discretion to determine the appropriate GP rate, considering settled practices.

DEPB/Duty Drawback schemes are considered export incentives and are distinct from reimbursements of costs. Entitlement to DEPB arises only after manufacturing and exporting a product, and is not directly related to the business of manufacturing or selling.

Grant-in-aid received for land acquisition and rehabilitation is capital in nature and not taxable as revenue income.

Interest income from non-performing assets should not be recognized for tax purposes if there is uncertainty about its realization, particularly when considering RBI guidelines and Accounting Standard 9.

A business is considered set-up if the assessee can commence business activities, such as participating in a tender to acquire land for development. Expenditures incurred for such initial business activities can be treated as business expenditure.

Damages or penalties that are compensatory in nature are allowable as a deduction under Section 37(1) of the Income Tax Act, while those that are penal and arise from a breach of law are not allowable as business expenditure.