Landmark Cases on Business Income and Deductions

Filing a return of income on or before the due date specified under section 139(1) is a mandatory requirement for claiming deductions under sections 10A and 10B.

Interest paid on funds borrowed for business purposes is deductible. Borrowed funds used for business purposes are not subject to disallowance of interest.

Export incentives are not deductible as expenditure incurred in earning such incentives. The Supreme Court in Hero Exports held that such incentives are to be reduced from the gross expenditure, not deducted as an expense.

Processing of raw materials like shrimps, prawns, and lobsters into edible food stuff, even involving cutting, peeling, deveining, cleaning, and freezing, does not change their original character or identity to make them a commercially new commodity.

Money receivable from a client, in respect of sale/purchase of shares, which has become bad, is to be treated as a bad debt and the deduction is available to the assessee for the total debt amount, including the principal and interest.

An assessee is entitled to claim deductions under Section 80IC (and other similar sections like 80IB) for profits derived from job work charges, as carrying out such work is considered part of the manufacturing process of an industrial undertaking.

An assessee is not statutorily obliged to maintain separate books of accounts for each unit to claim deductions under Sections 80-HH and 80-I of the Income Tax Act, 1961, if the Assessing Officer allows the claim after examining unit-wise profit and loss statements.

A new undertaking is not deprived of its status as a separate and distinct entity merely because it is to a certain extent dependent on an existing unit, if the nature of the technology and mechanism of production warrants it.

A payment received for the cessation of business, even if voluntary, is a capital receipt and not taxable as income. This applies even if the recipient has no legal right to compensation.

Sales tax subsidies given by the state government to encourage industries to set up units in remote or rural areas are considered capital receipts and are not chargeable to tax.

Commission is an allowance for service or labor in discharging certain duties, while rebate is a remission or payment back, distinct from commission.

The Supreme Court may reconsider the issue of eligibility for deduction under Section 80-IA where the assessee has incurred losses in earlier years and claims the deduction in the year it became profitable. The court also deliberated on the allowability of certain expenses claimed by the assessee.

Disallowance under Section 14A of the Income Tax Act, read with Rule 8D, cannot exceed the amount of exempt income earned by the assessee. If there is no exempt income, no disallowance can be made under Section 14A.

Interest on doubtful advances credited to an interest suspense account cannot be assessed as income for the relevant assessment year.

When sales are accepted, the disallowance of corresponding purchases must be limited to the profit element embedded in such purchases, not the entire purchase amount.

Payments made to compensate for environmental damage, even if recovered by a Pollution Control Board on the 'polluter pays' principle, are not allowable as business expenditure if treated as a penalty by the Assessing Officer and the assessee failed to install a pollution control device within the prescribed time.

Expenditure incurred for business purposes is revenue in nature. Cases have followed the view that business expenditure is revenue in nature.

Trademark expenditure incurred to facilitate business operations is considered revenue expenditure, as it does not create an enduring benefit. Product registration expenditure is also revenue in nature as it enables the sale of products.

Where the methodology for calculating a deduction under Section 80HHC has been applied, the deduction cannot be restricted under Section 80AB if the assessee is claiming the deduction on export profits alone.

Interest earned on fixed deposits held as margin money for obtaining a Letter of Credit (LOC) to purchase machinery is taxable as income from other sources.

Expenditure incurred by a holding company in making investments in its subsidiaries can be treated as a business activity and thus, the expenditure is allowable as a business deduction.

An assessee can claim deduction for employee's contribution to PF and ESI even if paid after the due date specified in Section 36(1)(va), provided it is remitted before the due date of filing the return of income under Section 139(1). The Tribunal's consistent view is that such remittances are allowable as deductions.

Bogus purchases can be disallowed entirely when the assessee fails to establish the genuineness of the transactions and provide quantitative details of purchases and manufacturing. The onus is on the assessee to prove the genuineness of purchases, especially when suppliers are unavailable or cannot be produced.

Interest income is considered inextricably related to the carrying on of business of an industrial undertaking and eligible for deduction under Section 80-IA of the Income Tax Act.

Interest income earned on fixed deposits kept as security or margin money for business purposes is taxable as income from other sources, not business income. The Supreme Court upheld that such interest has no direct connection to carrying on the business.

Provisions made by a company for liabilities such as warranty, if based on scientific actuarial valuation, may be allowed as a deduction, even if not an actual payment. This case is cited as an example of judicial decisions on such provisions.

A transaction cannot be split between the mercantile and cash methods of accounting.

The Assessing Officer is directed to adopt the average net profit rate of preceding 3 years from contract receipts as total income for the year.

When calculating disallowances under the third limb of Rule 8D(2), only investments that have actually yielded exempt income in the current year should be considered. If the calculated disallowance is lower than the suo motu disallowance, the suo motu disallowance should be adopted.

For entitlement to deduction under Section 10A/10AA, an industrial undertaking must be newly established, and the articles produced need not be different from those produced in the assessee's existing undertakings, as long as a new, independent unit is brought into existence with fresh capital.

Expenditure incurred by a company on computer software is revenue in nature and allowable as a deduction, even if it results in an enduring advantage, provided it is not capital in nature.

A deduction for employee stock option scheme (ESOS) discount is allowable only when the discount offered is taxable as a perquisite in the hands of employees and is subjected to TDS.

Each branch of a business can be considered a distinct source of income. A source of income is defined as the origin from which a clearly defined channel of income flows, capable of being treated in isolation.

An Assessing Officer cannot reject accounts under section 145(3) merely because the assessee, a builder and developer, followed the completed contract method for real estate projects instead of the percentage completion method mandated by Accounting Standard AS-7.

Sales promotion expenditure incurred by a pharmaceutical manufacturer cannot be disallowed by expanding the scope of a CBDT circular issued under different regulations. The circular applies prospectively from its date of issue.

Disallowance under section 14A cannot exceed the amount of exempt income earned by the assessee during the financial year.

The Commissioner (Appeals) cannot assume the role of the assessee and decide what should have been the appropriate expenditure towards discount, etc. Expenses incurred to grow a business in a competitive world cannot be disallowed.

The Assessing Officer must record specific findings on whether an expenditure is excessive or unreasonable, based on objective criteria such as fair market price, legitimate business need, and benefit derived by the assessee.

Commercial expediency is not relevant to the allowability of interest-free advances when the advances are not made out of interest-bearing funds. The utilization of funds for capital investment in building constitutes commercial expediency.

A provision made by a public sector unit for the revision of employee pay, based on a government-appointed committee's recommendations, is an allowable business expenditure.

Expenditure incurred for the use of a trademark is considered revenue expenditure if it does not confer any permanent right. This expenditure falls within the ambit of Section 37(1) of the Income Tax Act.

An Assessing Officer cannot arbitrarily adjust the profit margin of a specific unit by comparing it to the overall profit margin of the assessee, especially when the units have different business natures and separate books of accounts are maintained.

Expenditure of freight incurred in foreign currency outside India for delivery of goods must be reduced from both export turnover and total turnover, i.e., numerator and denominator.

Interest on arrears of sales tax paid by the assessee is not deductible as a business expenditure under Section 37(1) of the Income Tax Act, as it is considered penal rather than compensatory.

Demurrage paid by a trader is by way of compensation for the use of port facilities beyond the allowed period, not a penalty for violating a law, and is therefore deductible as a business expense.

Amendments to Section 80JJAA of the Income Tax Act, 1961, are clarificatory in nature and apply retrospectively. Section 40(a)(ia) disallowance does not apply to lease rentals for motor vehicles where tax is not required to be deducted under sections 194I or 194C.

Only trading debts that were allowed as deductions in earlier years can be treated as a trading liability. A trading transaction alone gives rise to a trading liability.

An assessee is considered a manufacturer or processor, not merely a trader, when third parties undertake manufacturing or processing activities under the assessee's control and supervision.

Profits and gains derived from an illegal business are taxable under the Income-tax Act. Once the Act applies, its provisions must be followed for determining taxable income.