Landmark Cases on Business Income and Deductions

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

In computing deductions under section 80HHC, the principle of attribution must be balanced with the concept of allocation, where allocation aims to reduce the incentive.

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.

Job work charges are includible in the profit and gains of an industrial undertaking for the purpose of claiming deductions under Section 80IB.

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 claim for deduction under section 80IA of the Income Tax Act is not tenable in law if the assessee failed to establish the eligibility for such deduction.

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.

The Project Completion Method (POCM) of accounting, as per AS-7, is not applicable to a developer who is not a contractor, and additions made by the Assessing Officer based on POCM are unsustainable.

A sales tax subsidy given by a state government to encourage industries to set up units in remote or rural areas is a capital receipt.

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

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.

Expenditure incurred for registration and related expenses for trademarks or patents, and professional fees paid for reviewing brand-related documents, are considered revenue expenditure if akin to business operations.

Deductions under Section 80HHC must be allowed with reference to the gross total income, not merely the business income, when the Assessing Officer restricts the claim to the latter.

Interest earned on Fixed Deposits (FDRs) maintained as margin money for obtaining a Letter of Credit (LOC) to purchase machinery is taxable as income from other sources.

Loss incurred during a year is allowable if the business establishment existed, even if no business dealings were carried out. The existence of a business is determined by whether the entity has wound up entirely, not solely by the number of transactions.

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 are disallowed and upheld when the assessee fails to maintain quantitative details of purchases and manufacturing, and cannot produce suppliers or their owners despite opportunities.

Interest income kept as security does not qualify for deduction under Section 80IA or 80IC of the Income Tax Act, as the connotation of 'derived' in these sections is identical.

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.

Expenditure is not deductible as a business expense if it constitutes an application of income rather than an expense incurred for the purpose of earning income.

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.

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.

The Delhi High Court, in Housing & Urban Development Corporation Ltd. v. Addl.CIT, succinctly captured the legal position regarding certain deductions, although it potentially misdirected itself by equating the assessee's facts with those in Southern Technologies Ltd. v. Asstt. CIT.

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 for freight incurred in foreign currency outside India for the delivery of goods must be reduced from both export turnover and total turnover.

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.

Only commission income can be charged on the turnover reflected in a bank account; the entire bank deposit cannot be treated as income for additions. This principle applies when an assessee's business involves earning commission.

The Assessing Officer cannot disregard the decision of the designated authority (DSIR) regarding scientific research and development (R&D) expenditure. Disallowance of weighted deduction under section 35(2AB) solely because the amount was not approved by DSIR is unsustainable.

Payments classified as wharfage charges are not penal in nature and are allowable as a deduction under Section 37 of the Income Tax Act, 1961. This decision is considered authoritative, even when contrasted with other High Court judgments.