Landmark Cases on Business Income and Deductions

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.

Disallowance under Section 36(1)(va) is not permissible if employee's contributions to PF/ESI are paid before the due date of filing the return of income under Section 139(1), even if paid after the due date stipulated by the respective Acts.

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.

Payments for obtaining a monopoly or an absolute right are capital expenditures, while recurring consideration paid for the use of something is 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 earned on funds parked in fixed deposits is considered business income if it's intrinsically linked to the assessee's 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 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.

The amplitude of a deduction permitted by a section cannot be cut down by imposing conditions that rewrite the section.

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.

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 to promote business or bring goodwill to the assessee is allowable as a deduction. However, notional losses arising from issuing shares below market price are not deductible.

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.

A taxpayer following the project completion method of accounting for real estate development can continue to do so, even if AS-7 (revised) might suggest otherwise for contractors, provided the method does not distort or underestimate profits and the project is not substantially complete.

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

When unaccounted sales are discovered, income tax is levied only on the profit attributable to those sales, not the entire 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.

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.

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.

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 of much importance, as a bonafide claim can be made at any stage before a higher authority competent to grant relief.

The term 'business' is broadly defined and encompasses any occupation or duty continuously carried on for the purpose of profit, distinguishing it from sport or pleasure.

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.

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.

An assessee-employer is not eligible for deduction under section 36(1)(va) if they fail to pay the employees' contribution towards EPF and ESI by the due date prescribed in the respective Acts.