Landmark Cases on Business Income and Deductions

An assessee cannot claim amounts written off as bad debts if they were not previously treated as income. Section 36(1)(vii) read with Section 36(2) prohibits such claims.

An Assessing Officer cannot question the necessity or benefit of an expenditure if the assessee provides evidence to prove the rendering of services justifying the payment, especially in relation to commission.

Expenditure incurred by a company to maintain its status as a company, rather than for earning specific income like dividends, cannot be allocated for disallowance under Section 14A.

Recurring payments for the use of an asset are revenue expenditure and not the acquisition price of an asset. Such fees paid are allowable as revenue expenditure.

Expenditure on repairs is revenue in nature if it preserves or maintains an existing asset, rather than creating a new asset or advantage. The duration of the benefit from repairs does not determine if the expenditure is capital.

Interest income earned by an assessee on funds parked in FDRs is an integral part of its business income and cannot be distinguished from its core business activities.

Surplus arising on redemption of mutual funds, which are surrendered to the fund and not traded, cannot be considered as business income. The intention of the assessee at the time of purchase of shares or other items, as reflected in the books of account, is a key factor in determining whether transactions are in the nature of trade or investment.

The amendment to Section 36(1)(va) of the Income-tax Act made by the Finance Act, 2021, is prospective in nature, meaning payments made before the amendment are not affected by its retrospective application.

A joint venture or consortium formed solely to obtain government contracts, where the work is executed by the constituent members as per mutually agreed terms, is valid. The ITAT appropriately appreciated evidence in allowing the assessee's claim.

A 100% disallowance for bogus purchases is not justified if the assessee's sales figures are not doubted and the inability to produce suppliers is the sole basis for adverse inference, especially when purchases were made in the grey market.

The transfer of assets from an existing unit to a new unit does not automatically attract Section 15C(2)(ii) if the value of the transferred assets is less than twenty percent of the total value of assets of the new unit. This decision clarifies when a new unit's operations are considered distinct from an old unit's operations.

Where an assessee follows the procedure laid down by the ICAI and the Tax Auditor reports in Clause 12(b) of Form 3CD that no adjustment is required under Section 145A, CENVAT credit need not be added to closing stock.

For an expenditure to be deductible under Section 37(1), the motive behind it must be solely for promoting the business, not merely for personal or other indirect benefits.

Corporate Social Responsibility (CSR) expenditure cannot be claimed as a deduction under Section 80G because it is a statutory mandate and lacks the voluntariness required for donations. This principle applies even when CSR contributions are made to funds like the Prime Minister's National Relief Fund or other eligible charitable institutions.

An assessee is considered to have commenced business in a relevant previous year if it has taken all necessary steps to obtain business, including marketing efforts, even if no revenue has been earned yet. The Assessing Officer cannot disallow a claim of loss on the grounds that business had not commenced if these steps have been taken.

Expenditure on constructing a road on government land, though conferring an enduring advantage to facilitate business operations efficiently and profitably, is not capital in nature if it does not result in acquiring a tangible or intangible asset for the assessee.

Income diverted at source by an overriding title, such as for R&R plans of mining areas, is not taxable as the assessee's income.

Contributions made by an assessee to local festivals and community celebrations are allowable as business expenditure if they are necessary for the smooth running of the business.

Section 28(iv) of the Income-tax Act, 1961, which deals with benefits or perquisites in the course of business, is only applicable when such benefit or perquisite is received in a non-monetary form. Monetary amounts cannot be assessed under this section.

Deduction for contributions made to an approved superannuation fund within the prescribed limits is fully allowed in the assessment year in which the payment is made. The deduction permitted by law cannot be restricted under the pretext of imposing an additional condition.

Expenditure incurred on repairs, modernization, and replacement of existing building components, furniture, and fittings for a hotel business is considered revenue expenditure, not capital expenditure. The construction of a building on leasehold land can also be treated as revenue expenditure.

Expenditure incurred on the replacement of a part of machinery is deductible as revenue expenditure if it does not result in an increase in productivity or capacity.

Receipts from activities undertaken by statutory bodies for public purpose are not per se business or commercial receipts, but the Assessing Officer must scrutinize them to determine if consideration charged is significantly higher than cost, indicating trade or business.

The Income Tax Department can make a prima facie adjustment to taxable income under Section 143(1)(a) when an amount is inadmissible due to Section 43B overriding Section 36(1). This adjustment is permissible as Section 43B takes precedence over Section 36(1).

The closing stock of an earlier accounting year must form the opening stock of the subsequent accounting year. This principle is applied when assessing total income, particularly concerning the valuation of stock.

Expenditure incurred for bringing goodwill to the assessee or for promoting the business is allowable as a deduction.

Subsidies received by an assessee from the government, intended to reimburse costs incurred in manufacturing and selling products, are considered profits and gains derived from the business for the purpose of deductions under sections 80-IB and 80-IC.

Section 40(a)(ia) is not applicable where tax has been deducted at source, even if at a lower rate than required, due to a difference in opinion regarding the nature of the payment.

The percentage of completion method for recognizing income is a relevant method in tax assessments. Courts and tribunals have considered its applicability, particularly in construction and real estate contexts.

Penalties paid for violation of law are not allowable as a deduction. Such penalties are opposed to public policy.

When additions are made to income based on unaccounted sales, only the profit attributable to such sales can be taxed, not the entire sale proceeds. The Assessing Officer may be directed to estimate income based on a specific percentage of cash sale proceeds.

Expenditure incurred on the higher education or training of a director's son or daughter abroad is not allowable as a business deduction if it does not pertain to the assessee's business and lacks a direct business connection.

Subsidies received for the purpose of accelerating industrial development and creating employment are considered capital receipts. This is determined by applying the purposive test to ascertain the object for which the subsidy was granted.

Interest paid on delayed remittances of service tax is compensatory in nature and not a penalty hit by the Explanation to Section 37(1) of the Income Tax Act, 1961, making it a allowable business expenditure.

The employer's responsibility for timely payment of employees' contribution to provident fund remains even if wages are paid in the succeeding month. Belated remittance of employees' contribution to the provident fund is not eligible for deduction under Section 36(1)(va) of the Income Tax Act.

Income from services rendered in connection with the extraction and production of mineral oils is taxable under section 44BB, as it is a specific provision that overrides general provisions.

If there are two reasonable interpretations of a taxing statute, the interpretation that favors the assessee must be adopted.

Ad hoc disallowances made without material to justify them or pointing out deficiencies in the assessee's claim are not justified. This applies to expenses like car and telephone expenses which cannot be disallowed merely on an estimate basis.

A trading liability that becomes time-barred, such as unpaid employee dues outstanding for many years, is considered a cessation of liability under Section 41(1) and must be added to the assessee's income.

An Assessing Officer cannot arbitrarily change an assessee's consistently followed completed contract method of accounting, which has been accepted by revenue authorities in the past, and determine income on an estimate basis.

Income from letting out a property along with its amenities is assessable as business income, not income from house property, when the agreements for letting and services are entered into contemporaneously with the intention to enjoy the entire property as a whole for business purposes.

Where the Assessing Officer rejects the books of accounts and estimates the income, no further addition can be made for irregularities, as this would amount to double taxation.

Amounts paid towards an unapproved gratuity fund are deductible as business expenditure under Section 37(1) of the Income Tax Act, 1961, even though they may not be allowable under Section 36(1)(v).

Deduction for employee's contribution to PF/ESI under section 36(1)(va) is allowable if paid after the due date under the respective act but before the due date of filing the income tax return.

A DG Unit generating power for captive consumption is eligible for deduction under section 80-IA.

A deduction not claimed before the Income-tax Officer is not necessarily fatal, as a claim can be made in a bona fide manner at any stage before a competent higher authority if the liability arises.

The term 'business' encompasses any occupation or duty requiring attention, continuously carried on for the purpose of profit, and is a broader concept than 'trade'.

Donations made for corporate social responsibility (CSR) expenses, if disallowed under Section 37(1), are eligible for deduction under Section 80G of the Income Tax Act.

An assessee is not eligible for a deduction under Section 80IB(10) if such deduction was not claimed in the original return of income, even if a claim was sought to be admitted based on a Supreme Court decision.

The assessee is entitled to claim a deduction under section 80M of the Act for dividend income received from shares, where such income was chargeable to tax in their hands.