Landmark Cases on Business Income and Deductions

Additions to income cannot be made on the entire bank deposit where only commission income is earned. The Assessing Officer should consider only the commission income on the turnover generated in the bank account.

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.

An operation constitutes 'processing' if, as a result of the operation, the commodity experiences some change. This can occur through mechanical force or pressure without the addition of other materials.

The interpretation of 'source' of income is not limited to the head of income under the Income Tax Act but refers to the specific origin from which income or expenditure arises.

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 for the education of employees' children 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 provision for gratuity written back is includable in business income when the corresponding expenditure was allowed as a deduction.

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.

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.

Disallowance of expenditure under Section 14A requires a proximate cause establishing the relationship between the expenditure and the exempt income. The expenditure must have a real, dominant, and immediate relationship with income not forming part of the total income.

Payments made for the limited right to use technical information or know-how, where there is no sale of such information, are allowable as revenue deductions.

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.

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.

The rule of consistency dictates that a position adopted by the revenue in a prior year should not be allowed to be changed in a subsequent year, especially when it relates to the allowability of expenses or other tax treatment.

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.

Cooperative banks are eligible to claim deduction under both limbs of Section 36(1)(viia) for all types of loans and advances extended by their rural branches.

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.

Receipts for bringing into existence capital of lasting value, such as service connection charges for installing capital equipment, are considered capital receipts, not incidental to business operations.

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 if the trust deed clearly benefits employees and the contribution is for employee welfare and required by an industrial agreement, aligning with the legislature's intent for Section 40A(9).

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.

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

A payment of salami or premium is not a revenue receipt but a capital receipt, and departmental authorities and courts err in treating it as an advance rent.

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) held that a developer was eligible for deduction under Section 80-IA(4). However, this ruling was later overruled by the Mumbai Tribunal.

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 a business liability that has definitely arisen in the accounting year, even if discharged later, is allowable as a deduction if it can be reasonably estimated. This applies to ascertained liabilities crystallized with reasonable certainty, such as interest obligations arising from a contract.

The exception under Rule 6DD(j) to the disallowance under Section 40A(3) for payments exceeding Rs. 20,000 cannot be invoked if the genuineness of the expenses is doubtful, especially when 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.