Landmark Cases on Business Income and Deductions

An operation constitutes processing if it causes a change in the commodity, even if it involves mechanical force without adding other materials.

Subsidies provided by the government to newly established industries under a scheme for backward area development were considered capital receipts, not taxable revenue receipts, if their object was not to supplement profits but to promote industry establishment.

The market value of power captively consumed should be computed based on the rate at which power is supplied to a consumer in the open market, not the rate at which it could be sold to State Electricity Boards.

For the provisions of Section 43B to apply, not only must a liability to pay tax or duty be incurred in the accounting year, but the amount must also be statutorily "payable" in that year. A deduction is allowable for liabilities that have accrued but not yet become payable under the relevant law.

Contributions made by a co-operative society to an education fund for the benefit of employees' children, under the provisions of a Co-operative Societies Act, are deductible as expenditure.

Developing land into housing plots with the aim of achieving a better price does not automatically convert the transaction into business income; it can be considered the realization of a capital investment or the conversion of one form of asset into another.

A taxpayer's claim for deduction made by way of an application during assessment proceedings, even without filing a revised return, should be allowed if the claim is admissible as per the relevant Form (e.g., Form 10CCB) filed during assessment. Procedural lapses or technicalities should not prevent the allowance of a legitimate claim for tax due.

The decision is cited in relation to the calculation of business loss and the treatment of provisions written back. It suggests that a provision written back can increase the computed loss.

Subscription or admission fees are generally treated as capital receipts and are not subject to income tax. Such amounts are not considered income, especially if treating them as income would violate company law provisions.

Expenses incurred by a company solely to maintain its status as a company are allowable as deductions. However, the core principle is that expenses incurred for earning income are direct expenses and must be allowed in full.

The rejection of account books and subsequent best judgment assessment is justified when an assessee fails to produce relevant records, such as daily manufacturing quantities and raw material consumption, indicating that the accounts do not reflect a true and correct state of affairs.

Payments for the use of technical information, processes, or inventions under an agreement that prohibits disclosure after termination and is terminable before its specified period constitute revenue expenditure, not the acquisition of a capital asset.

Where an Assessing Officer (AO) has not rejected the books of account and has not conducted independent enquiries, additions to income should be made based on the gross profit rate shown by the assessee.

The disallowance of employee share of Provident Fund (PF) contributions is addressed by amendments made to Sections 36(1)(va) and 43B of the Income Tax Act by the Finance Act, 2021, which inserted Explanation 2 to Section 36(1)(va).

A contingent liability, which is not an ascertained liability in praesenti, cannot be allowed as a deduction under the Income-tax Act.

An assessee can change its method of valuing closing stock if the change is bona fide and consistently followed thereafter. A change in valuation method is permissible even if it was not permissible in earlier years.

A taxpayer is entitled to a deduction under section 35(1)(ii) for donations made to an institution if the certificate granted by the prescribed authority was valid at the time of donation, even if that certificate is later retrospectively withdrawn or cancelled.

Payments made under an agreement that are directly related to services in the revenue field are allowable as revenue expenditure, not capital expenditure.

For income to be considered as having ceased to be payable and brought to tax under Section 41(1), it is not sufficient that the claim for repayment has become barred by limitation; there must be a release or write-off of the debt by the creditor in favour of the assessee.

Retention money is considered deferred payment and is not taxable in the year it is retained if it is contingent upon the satisfactory completion of the contract work and the assessee has no vested right to receive it.

The case establishes that when a cash basis of accounting is followed, upfront premiums received in earlier years and accrued as income proportionately in a subsequent assessment year, cannot be subjected to tax in the impugned assessment year. Assessing Officers had accepted amortization of such income in earlier assessment years.

Expenditure incurred for creating new workstations, not detailed or broken down, may be restored to the Assessing Officer for fresh determination as per the principles laid down in Bigjo’s India Ltd. vs. CIT. Expenditure on substantial renovation, such as erecting new counters and building a new lift shaft, constitutes capital expenditure and is not allowable as current repairs.

Property brought into a partnership by a partner becomes the property of the firm, and the partner is entitled to their share of profits from its realization or its value upon dissolution. Once property enters the partnership capital, the partner's right is abridged, not the full original right.

Interest on securities becomes due and receivable only upon maturity and cannot be taxed prior to maturity. The entitlement to interest arises only at that point.

Commission paid to agents for services rendered is not deductible if the assessee fails to provide evidence that the agents actually procured sale orders or rendered services justifying the commission.

Allowing deduction of interest paid by the assessee as business expenditure u/s.37(1) of the Act is not permissible when netting off interest received against interest paid.

Section 28(iv) of the Income Tax Act does not apply to benefits received in cash or money, but only to transactions arising from business. However, this view has been distinguished or found to have errors in subsequent judgments.

Banks are eligible to claim deduction under both limbs of Section 36(1)(viia) of the Income Tax Act, 1961, allowing deductions on all types of loans and advances extended by the bank.

The requirement to furnish an audit report along with the return of income under Section 80IA(7) of the Income Tax Act, 1961, is directory and not mandatory, and will be satisfied if the report is filed during the assessment proceedings.

Advances given in the normal course of business that become irrecoverable and are written off can be allowed as a business loss. A debt must arise out of and as an incident to the trade to be allowable as a deduction.

Charges for establishing or extending electricity distribution systems are restricted to the purposes outlined in regulations.

The Assessing Officer has the onus to prove that payments made to related parties under section 40A(2)(b) are excessive, by providing comparable market prices and demonstrating the unreasonableness of the payment.

Disallowance of expenditure under Section 14A, read with Rule 8D, must be computed based on expenditure directly relatable to earning exempted income. The assessing authority must record satisfaction for such disallowance.

Contributions to a trust are deductible under Section 40A(9) if the trust deed clearly shows that the beneficiaries are the assessee's employees, as the legislative intent behind the section is to discourage contributions to trusts that do not benefit employees.

The ITAT Mumbai, in the case of West Coast Paper Mills (P.) Ltd. v. CIT, concurred with the findings of the CIT(A) concerning deductions under Section 80IA.

Interest on borrowed funds used to acquire a capital asset is deductible as revenue expenditure if the acquisition is an integral part of the business. Expenditure closely related to business can be viewed as an integral part of its conduct and thus deductible as revenue expenditure.

Expenditure incurred on the construction or acquisition of a new facility that is subsequently abandoned while still in the work-in-progress stage is allowable as a deduction in the year of write-off, provided it was incurred wholly and exclusively for the purpose of the assessee's business.

When undisclosed income from 'on money' in property transactions is assessed under Section 158BC, the addition should be a reasonable profit earned on the unaccounted turnover, with an 8% profit rate considered reasonable by the ITAT.

Upfront premium received for a concession or lease, which is non-refundable even upon premature termination, is considered a revenue receipt for tax purposes.

No disallowance can be made if interest-free funds available with the assessee exceed the interest-free advances given.

The decision in Patil Engineering Ltd. v. DCIT (84 TTJ 666) which allowed deduction under section 80-IA(4) has been overruled by the Mumbai Tribunal in the case of B.T. Patil & Sons Belgaum Construction (P) Ltd. v. ACIT (TM) (126 TTJ 577), following the insertion of an Explanation to section 80-IA(13).

Where a provision made for a Non-Performing Asset (NPA) is no longer required, its reversal is to be charged under Section 41(1) of the Income-tax Act as a remission or cessation of liability. This principle applies when an NPA begins performing again.

A provision for interest that is an ascertained liability, quantified with reasonable certainty, is an allowable deduction under section 37(1) of the Income-tax Act.

For the exception under Rule 6DD(j) to apply to payments exceeding Rs. 20,000 made in contravention of Section 40A(3), there must be cogent material establishing exceptional circumstances beyond the payer's control. The genuineness of such expenses must also not be in doubt, especially if they are unrecorded in the books.

Valuing slow-moving and obsolescent stock at a price below cost is a recognized accounting method that can be followed in India.

Interest paid on delayed payment of TDS is an allowable deduction under section 37(1) of the Income Tax Act, as it is compensatory in nature.

Disallowance under section 40A(2)(b) for remuneration paid to a director is unsustainable if the revenue fails to provide cogent reasons or market comparisons to prove it's not commensurate with services rendered, especially if accepted in subsequent years.

Periodic grants to the management of a temple constructed for employees are allowable as business expenditure.

Filing of income tax return within the time prescribed under section 139(1) is mandatory to claim deductions under sections like 10A and 80IB(10).

The principle of mutuality is satisfied when there is a complete identity between the contributors to a common fund and the participators in the surplus. No one can make a profit out of himself, and income from investments of member contributions is exempt on this ground.