Landmark Cases on Business Income and Deductions

Spectrum Usage Charges (SUC) and Wireless Planning Commission charges are allowable as revenue expenditure for the business. These payments are necessary for running the business and do not create an enduring benefit.

Section 40A(3) of the Income Tax Act aims to prevent tax evasion and unaccounted money, not to penalize genuine cash payments. When the genuineness of a transaction and the payee's identity are established, a liberal view may be taken for compelling circumstances.

Profits and losses arising from foreign exchange fluctuations are part of export turnover and are includible in profits eligible for deduction under Section 10A/10B of the Income Tax Act. Service charges may not be considered operational income if they don't accrue out of the main business activity.

Expenditure is admissible as revenue if activities are closely linked with the welfare of a specific industry, despite conferring an enduring benefit.

Interest income received from customers on delayed payments for credit sales forms part of the profits and gains of a business and is eligible for deduction under Section 80IA.

Prior to the amendment effective April 1, 2021, no disallowance can be made for employee's contribution to PF and ESI paid by the assessee before the due date of filing the return of income under section 139(1).

Interest earned on fixed deposits placed with a bank for obtaining a bank guarantee necessary for the business, or for business exigencies, is to be treated as business income and not income from other sources.

Payments made by a business to labour unions or workers to ensure timely and emergency cargo handling are not prohibited by law and are thus deductible business expenses, even if receipts are not obtained from individual workers or payments are not made by cheque.

An assessee is eligible for proportionate deduction under Section 80IB(10) on a pro-rata basis in respect of residential units fulfilling the prescribed conditions, even if other units do not.

An activity may be considered a 'vocation' for income tax purposes if it is organized and undertaken with the motive of making a profit.

The marketability of a product is an essential criterion for determining its chargeability to excise duty. A product must be saleable in the condition it emerges from the manufacturing process to be considered marketable.

Expenditure is capital in nature if it is incurred for acquiring an asset or advantage of enduring benefit, or if it forms part of the profit-earning structure of the business.

Section 43B of the Income Tax Act cannot be invoked if the issue is concluded against the revenue by a prior High Court decision. Such prior decision may preclude further substantial questions of law.

Section 35E allows deduction for capital expenditure that is otherwise not deductible. However, if expenditure is admissible under Section 37(1), Section 35E should not be invoked to force amortization over 10 years instead of allowing it in the year of incurrence.

Allowances are computed correctly, and grounds for correct computation of disallowance under Section 14A can be raised. The appellate authorities have the power to allow deductions or exemptions.

The taxability of a receipt is determined by its character at the moment it is received, and subsequent treatment by the recipient does not alter this character.

Interconnection, interlacing, and unity of control and management, along with common decision-making mechanisms and use of common funds, establish that different business activities are part of the same business. This interdependence means they cannot be treated as separate businesses, even if one can be stopped without affecting the other.

For availing deduction under section 80-IA, the 'infrastructure facility' does not necessarily need to be owned by the assessee. The assessee was held to be a developer, eligible for deduction under section 80-IA(4).

An assessee cannot claim a deduction for an expenditure in a subsequent assessment year if it was a known expenditure in an earlier year and the assessee failed to provide for it or claim it in that earlier year.

Section 41(1) of the Income Tax Act, 1961, which deals with the remission or cessation of trading liabilities, is not applicable if the liability continues to subsist and has not been waived off by the creditors. Similarly, provisions for gratuity made on actuarial valuation constitute an ascertained liability and are not to be added to net profits.

When circumstantial evidence combined with the assessee's conduct leads to the conclusion that accommodation entries were taken and purchases were not genuine, a disallowance of 25% of the impugned purchases may be considered sufficient.

A joint venture agreement does not necessarily create a partnership if parties bear their own expenses and receive consideration for their specific work, indicating no intention to share risks and rewards.

When an assessee discharges the present value of a future obligation, it does not constitute a 'benefit' accruing to the assessee, thus Section 41(1) of the Income Tax Act is not applicable.

Expenditure incurred on Corporate Social Responsibility (CSR) cannot be allowed as a deduction under Section 37(1) of the Income-tax Act, 1961, following Explanation 2 to Section 37(1) introduced by Finance Act No. 2 of 2014.

Interest income derived from funds temporarily not required for immediate business activity is assessable as business income, not income from other sources.

Expenditure is capital in nature if it acquires an asset or right with a lasting or enduring benefit, distinguishing it from revenue expenditure which is operational and intended for furtherance of the enterprise.

An ancillary transaction does not amount to business if the main activity of a person is not business, unless an intention to the contrary is established. The determination of whether an activity constitutes 'business' is based on the facts and circumstances of each case, irrespective of profit motive.

The Supreme Court's decision in CIT v. Travancore Sugars & Chemicals Ltd. is cited for the principle of diversion of income by overriding title, distinguishing it from issues related to the deductibility of certain taxes like education cess.

Purchases made through banking channels are not necessarily bogus if the assessee has a high gross profit ratio, even if suppliers are listed as hawala dealers or cannot be produced.

For weighted deduction under section 35(2AB), the condition precedent is a certificate from the DSIR, but the date of the certificate is not important if the objective is to encourage research and development.

A debt written off in the assessee's books as irrecoverable, which was advanced in the ordinary course of business, is allowable as a deduction. The court noted that the Tribunal may have made a mistake in reproducing the Commissioner's findings, but this did not raise a substantial question of law regarding the allowability of bad debts.

A provision for doubtful debts made in the profit and loss account and reduced from loans and advances in the balance sheet may qualify for deduction as bad debts under section 36(1)(vii) of the Income-tax Act.

Banks can claim tax deductions for broken period interest on Held to Maturity (HTM) government securities if classified as stock-in-trade, treating it as revenue expenditure, not capital expenditure.

Assembling activities can be considered manufacturing for tax purposes. However, this classification requires specific evidence of such activities being undertaken by the assessee.

Transactions settled otherwise than by actual delivery of the commodity are speculative transactions and do not fall within the purview of business or trade.

Disallowance under section 14A cannot be made if the Assessing Officer (AO) does not record satisfaction that the assessee's claim of expenses is incorrect, particularly when investments yielding exempt income are presumed to be made from interest-free funds.

Payments made for purchasing stock-in-trade or raw materials are considered expenditure for the purposes of Section 40A(3) of the Income Tax Act. The Supreme Court has upheld the constitutional validity of Section 40A(3), stating its purpose is to curb black money, not restrict business freedom.

A High Court may find a decision factually inapplicable if the payments were made in cash to truck drivers, rather than directly deposited into the payee's bank account and acknowledged by them.

Purchases from certain parties are considered genuine if the corresponding sales are also found to be genuine, and the Assessing Officer must present material evidence to justify any estimations made regarding such purchases.

A member of a chit fund is not entitled to claim a loss incurred in chit fund transactions as a deduction under section 37 of the Income-tax Act, 1961.

The withdrawal of approval for a deduction, such as under Section 35CCA, cannot be given retrospective effect, and any reassessment notice based on such a retrospective cancellation is invalid. An assessee should not suffer due to the department's mistakes, and withdrawal of approval can only be prospective.

Losses arising from forward contracts, when used to hedge underlying business liabilities or risks, are treated as business losses and not speculative losses. This applies even if the transaction settles without actual delivery.

Monetary benefits received by an assessee are not covered under Section 28(iv) of the Income Tax Act, which applies only to benefits received in kind.

Current repairs, for the purpose of deductions under Section 31 of the Income Tax Act, refer to expenses incurred for preservation, maintenance, or proper utilization of an asset, restoring it to its original condition, and do not include capital improvements or expenditures that create a new advantage.

Disallowance under section 40A(2) of excessive or unreasonable payments to related parties is not justified if the revenue cannot demonstrate tax evasion, especially when the related party also pays taxes at a similar or higher rate.

Contributions made by an assessee, such as a cooperative society, under specific state cooperative societies acts for the purpose of an education fund for employees' children are deductible as expenditure.

Contributions made by a company to employees are allowable deductions if they are out of business expediency and wholly and exclusively for business purposes. Disallowance is not called for in such cases.

An ad hoc disallowance of expenditure is not permissible without pointing out specific defects or the absence of vouchers, especially when the assessee has furnished complete details. The Assessing Officer cannot estimate income or disallow expenses without rejecting the books of accounts or establishing specific deficiencies.

Expenses incurred on the maintenance of nurseries for raising tea bushes to be used for replanting dead or useless bushes within an existing cultivation area are considered revenue expenditure, not capital expenditure.

A loss arising from embezzlement by an employee is considered a trading loss deductible under the Income Tax Act, irrespective of its nomenclature as a bad debt or trading loss, provided it is written off in the books of account in the relevant year.