Landmark Cases on Business Income and Deductions

Amounts credited to the profit and loss account, particularly those arising from trading operations, are taxable as business income. This applies even if the amounts were initially treated differently, such as being considered loans.

Amounts set apart towards a molasses reserve fund are considered a diversion of income by overriding title and are therefore excludible from the assessee's total income.

A debt written off by a taxpayer qualifies for deduction under section 36(1)(vii) of the Income-tax Act, 1961, if it has been written off in the accounts in the year it became irrecoverable, without requiring the assessing officer to determine if the debt was indeed 'bad'.

Expenditure by way of royalty is an allowable revenue deduction if it is for a limited license to use know-how, where the assessee is not vested with proprietary rights. This is especially true if the payment falls within a reasonable range based on comparable transactions.

The Production Sharing Contract (PSC) is a self-contained code. Provisions of the Income-tax Act apply to the computation of income of the assessee under the PSC. Overhead charges incurred by the head office and charged to the assessee's profit and loss account are allowable as a deduction if incurred for the purpose of business.

When an Assessing Officer rejects an assessee's books of accounts, they must estimate sales and Gross Profit (GP) rates, potentially using comparative figures from similar businesses.

Income that is considered business income for tax purposes must be computed on a net basis, accounting for expenses incurred to earn that income, and cannot be taxed in India on a gross basis.

A provision created by an assessee for wage arrears in anticipation of a pay revision cannot be treated as an unascertained liability if there is no dispute regarding the terms of employment and the only dispute is about the quantification of wages.

The provision of Section 43B of the Income Tax Act, 1961, is not applicable to interest payable on loans obtained from the Government of India. Consequently, disallowance under Section 43B for non-payment of such interest is not permissible.

Profits and gains are understood to include losses, meaning profits can be positive or negative income. Both positive and negative profits are of a revenue character and must be included in the computation of taxable income.

Interest earned on share application money deposited with banks, even when received during an initial public issue, is a capital receipt. This capital receipt can be set off against public issue expenses.

Disallowance under Section 40A(3) is not warranted when income is estimated based on a Net Profit Rate or gross profit, as such estimation inherently accounts for business expenditure.

Disallowance under section 14A is not justified when the assessee's interest-free funds exceed the investments made for earning exempt dividend income.

Strategic investments in wholly-owned subsidiaries are to be excluded when calculating the disallowance under Section 14A, which pertains to expenses incurred in relation to exempt income. This exclusion applies even when these investments are made for holding a controlling stake rather than for earning dividends.

The ordinary meaning of the word 'use' as a noun is the act of employing a thing, putting it into action or service, or applying it to a given purpose.

Contractors developing infrastructure facilities can be eligible for deductions under Section 80-IA if they undertake financial and technical risks, are liable for liquidated damages, and employ a qualified team, as established by referencing the CIT v. ABG Heavy Industries Ltd. case.

Payments made for commercial expediency in respect of property purchase are not subject to addition under section 40A(3), particularly when provisions of Rule 66(k) apply.

A rail system that functions solely as a profit siding and not an infrastructure facility of public utility is not eligible for deduction under section 80IA(4) of the Income Tax Act.

Income derived from renting out property by a company whose business, as per its Memorandum of Association, is commercial exploitation of property is to be treated as business income, even if it is in the nature of rent.

Interest paid on professional tax or for late deposit of TDS is compensatory in nature and therefore allowable as a deduction under Section 37(1) of the Income-tax Act, 1961.

The requirement to file an audit report in Form 10CCB before the due date for claiming deductions under Section 80-IB(11A) is directory, not mandatory. Therefore, a claim for deduction cannot be denied solely because the report was not uploaded on or before the due date for furnishing the audit report.

Expenses incurred for maintenance of immature tea bushes in an existing garden are revenue in nature and allowable as deductions. Such expenses do not create an enduring benefit of a capital nature.

Insurance compensation received for damage to stock-in-trade or raw materials is considered profit or loss from an industrial undertaking and is eligible for deduction under sections 80IA and 80IB of the Income Tax Act, 1961.

A deduction under Section 80IC cannot be denied solely because the return of income was filed belatedly, provided the conditions for filing a belated return under Section 139 are met.

Blending of tea is a manufacturing activity. The Special Leave Petition filed by the Revenue against the decision was dismissed by the Apex Court.

Interest expenditure is allocable to a unit based on the actual utilization of borrowed funds, not on an ad-hoc basis without establishing a nexus.

A levy is penal in nature if criminal liability or prosecution is provided. Otherwise, the key test is whether the penalty for non-compliance entails compensatory or penal consequences.

An assessee's claim for deduction under sections like 80-I or 80-IA cannot be denied solely for failing to file the audit report (Form 10CCB) along with the return, provided it is filed before the completion of the assessment and any delay is for good and sufficient reasons.

Interest received from bank deposits is taxable under the residuary head when it lacks a direct or proximate connection to the assessee's business operations.

When considering a deduction claim under Section 80HHC, the provisions of Section 80IA(9) must be applied. The formation of the Assessing Officer's belief for issuing a notice is subject to judicial review based on whether there was relevant material for a reasonable person to form that belief.

Disclosure standards applicable for computing taxable income are considered for revenue recognition, and revenue is recognized when there is reasonable uncertainty of its ultimate collection.

Expenses that provide an enduring benefit to the assessee are capital in nature and cannot be claimed as a deduction under section 37(1).

Central excise duty refund, granted based on exemption notifications, is not considered income and is eligible for deduction under Section 80-IC of the Income Tax Act. This is because the refund is a mechanism to operationalize an exemption rather than an increase in profit.

The cost of dyes and moulds used in the manufacturing process is a revenue expenditure when they are for replacement and have a short life, facilitating the main production process without creating a new asset.

Expenditure incurred for expansion of an ongoing business is often treated as revenue expenditure, and the functional test should be applied to determine the nature of expenditure, rather than solely classifying it as capital expenditure.

A scheduled bank can claim a deduction for provisions for bad and doubtful debts made in its books of account, provided it does not exceed specified limits related to total income and rural branch advances, as per section 36(1)(viia).

Disallowance under Section 14A is not warranted merely because an assessee has sufficient interest-free funds to make investments that yield exempt income. No disallowance is called for if no expenditure is found to have been incurred for earning exempt income.

Whether income is to be determined on an estimate basis is a question of fact.

Interest expenditure on borrowed funds used for stock-in-trade is allowable as a deduction in the year the revenue is offered to tax, even when following the percentage completion method for recognizing revenue.

Where purchases are found to be bogus, only the profit element embedded in such purchases is to be added to the assessee's income, not the entire amount. The High Court sustained an addition to the extent of 12.5% of the bogus purchases.

Expenditure incurred for establishing a new unit of an existing business is considered revenue expenditure, not an expansion creating a new business. This allows for depreciation claims on related assets.

Expenditure incurred for the purpose of making or earning income from 'other sources' is deductible if there is a nexus between the expenditure and the income earned. The expenditure must be linked to the income earned, not just the activity that generates the income.

Section 14A of the Income-tax Act is not attracted, and dividend income cannot be disallowed, when shares are held as stock-in-trade by banks, with the primary purpose of trading for profit. This applies even if the shares were acquired through an IPO.

Income accrues to an assessee when they acquire a right to receive it, even if not yet received or ascertained. This means income may accrue without actual receipt.

Expenditure not allowable under Section 36(1)(iv) of the Income Tax Act may still be allowable under Section 37 of the Act, even if the Tribunal followed this decision.

Amounts set apart and meant for utilization only as per the directions of the State Government represent a diversion of income and are not liable to tax in the hands of the assessee.

For taxability under Section 41(1), the assessee must have obtained some benefit, whether in cash or otherwise, in respect of a loss or expenditure previously allowed as a deduction. Later amendments may affect the applicability of this principle.

The nature of expenditure, whether capital or revenue, is determined by its aim, object, and resultant advantage.

Expenditure incurred for the purpose of reclamation of mining land, to fulfill statutory obligations for phased restoration, is allowable as business expenditure.