Landmark Cases on Business Income and Deductions

A provision for exchange rate differences on forward contracts, based on an MTM certificate, is allowable if the assessee follows the mercantile system of accounting.

The Jammu & Kashmir High Court in CIT v. TRG Industries Pvt. Ltd. (2017) addressed aspects related to tender documents, agreements with AAI, and the assessee's project development with own resources, fund flow statements, and secured advances.

Refund of excise duty is a capital receipt and therefore not taxable. This principle applies irrespective of the form or source of the subsidy.

Under the mercantile system of accounting, income that has accrued is taxable, and cannot be waived or written off to avoid tax. The concept of real income cannot be extended to negate accrual after an amount becomes receivable.

A disallowance of expenditure under section 40A(2)(b) must be based on a finding that the payment was excessive or unreasonable vis-à-vis the fair market value of the services, not merely on the quantum of expenditure.

Assurances in law flowing from statutory provisions cannot be denied to an assessee. Receipts not taxable under one section cannot be taxed under another.

The practicability of making payments in cash, particularly due to business exigencies, must be judged from the perspective of a businessman, not the Revenue.

The increased liability on repayment of a loan borrowed in foreign exchange for business purposes due to exchange rate fluctuation is a capital loss, not a trading loss, especially when there is no outflow of funds during the year.

Losses incurred on advances made to a company that subsequently went into liquidation are considered trading losses and are allowable as a deduction when computing the assessee's total income.

Profits from residential units exceeding 1500 sq ft built-up area are excluded for quantifying deduction under Section 80IB(10). Pro rata deduction is allowed for profits from eligible residential units.

Expenditure that provides an enduring benefit to the assessee is capital expenditure, not revenue expenditure.

Payments made for a non-compete agreement are considered capital in nature. This is because such payments secure an enduring advantage for the business.

While a businessman is the best judge of business expediency, assessing authorities have a duty to verify if expenses were incurred for business purposes and not for extraneous considerations. The terms 'wholly' and 'exclusively' require the expenditure's quantum and motive, respectively, to be solely for business promotion.

Expenses incurred for drawing up and registering a lease deed, including stamp duty and professional fees, are revenue expenditure if they do not involve any premium and would have been the same regardless of the lease period (provided it's more than one year). The period of the lease does not determine if the asset is of an enduring nature.

Disallowance under section 14A cannot be made if the assessee has not earned any exempt income in the relevant assessment year. This applies even if the assessee has made investments in shares or has income from a partnership that is negative.

Investments made by a banking concern are considered part of their banking business, and the income earned from these investments falls under the head 'Profits and Gains of Business'. This includes securities not held to maintain the Statutory Liquidity Ratio, which are treated as stock-in-trade.

License fee receipts are considered capital in nature. Consequently, any interest related to such license fees, even if a provision, is not revenue expenditure.

The insertion of section 2(24)(xviii) by the Finance Act, 2015, which makes subsidies, incentives, and concessions taxable as income, is constitutionally valid and aligns the definition of income with evolving economic landscapes and legislative intent. This amendment recalibrates fiscal advantages rather than removing existing benefits.

The discount on the issue of ESOPs, calculated as the difference between the grant price and the market price of shares on the date of grant, is an allowable deduction under Section 37(1) of the Income Tax Act.

Premium paid for obtaining a lease on land is a capital expenditure, even if paid in annual installments.

Genuine transactions that result in a reduction of tax burden are permissible, even if tax avoidance is a consequence. A transaction cannot be disregarded merely because it reduces tax liability.

Tax is not payable on interest income unless it is real income and not merely accrued income, particularly when the principal amount has been written off as a bad debt.

Unrealized foreign exchange losses incurred by an assessee maintaining accounts on a mercantile system, complying with accounting standards, are allowable as expenditure under Section 37(1) even if the liability has not been discharged in the year of fluctuation.

Where sales in quantity and value have been accepted, the corresponding purchases cannot be disallowed. Transactions with parties cannot be doubted and adjusted to the assessee's income solely because those parties fail to appear or respond to notices from the Assessing Officer.

Income received by a sub-licensee is not taxable in the hands of the assessee if the assessee does not receive any amounts as income for the premises.

Rental income received for fulfilling a business purpose is assessable as business income, irrespective of TDS deductions made under Section 194I by the payer.

Rental income received by a taxpayer for fulfilling its business purpose, such as renting out a hospital building used for its business, is considered business income. The deduction of TDS under Section 194I by the payer does not alter the head of income in the hands of the recipient.

The distinction between a capital receipt and a revenue receipt in the context of contract termination is a difficult question, dependent on whether the termination affects the trading structure or the source of income.

When undisclosed sales are discovered, only the profits attributable to those sales can be brought to tax, not the entire sales amount.

Contributions made by an assessee to upgrade an elementary school, if it results in preference for admission of employees' children, are an allowable deduction as business expenditure under section 37(1) of the Income Tax Act.

Redemption premium on redeemable debentures is deductible on a pro-rata basis over the life of the debentures.

When applying Section 40A(2) of the Income Tax Act, the reasonableness of expenditure concerning related parties must be assessed from the perspective of a prudent businessman, considering legitimate business needs and benefits, not solely from the revenue's viewpoint.

Expenditure incurred for painting, re-laying of damaged floors, partitions, and other improvements on leased premises is revenue expenditure deductible under Section 37(1) of the Income Tax Act.

Interest-free advances made by an assessee are not subject to disallowance of interest expenses if the assessee has sufficient own funds and has not diverted borrowed funds for non-commercial purposes.

Each industrial undertaking must be considered independently when calculating deductions under Section 80-I of the Income-tax Act, 1961, even if the assessee has multiple units and incurs losses in one unit while making profits in another.

Ninety percent of gross receipts by way of interest is excluded when determining profits under Explanation (baa) to Section 80HHC, not ninety percent of net receipts.

A contractor executing irrigation projects on an EPC turnkey basis is not eligible for deduction under section 80IA(4), as they are not considered a developer of an infrastructure facility.

Foreign exchange gains arising from fluctuations in foreign exchange rates are intrinsically linked to export business and cannot be separated from it, making them eligible for deductions.

The running of a visitors' hostel by an educational institute, providing lodging and boarding integral to its academic activities, is not considered business and is not liable to tax. Such activities are subservient to the institute's educational objects.

Deductions under Section 80IA of the Income Tax Act are to be allowed on net profits remaining after all other eligible deductions, and a Larger Bench reference to the Supreme Court on this issue was dismissed.

Income that is hypothetical or not actually earned cannot be taxed in the hands of the assessee. Real income, not notional income, is the basis for taxation.

Where cash deposits pertain to a retail business but the details and nature of the business are not clear from the records, the net income is to be determined under section 44AF of the Income-tax Act, considering the total turnover. Alternatively, a reasonable estimation of income from such deposits can be made.

Compensation is deductible as a revenue expenditure, and such discount cannot be described as either a short capital receipt or a capital expenditure.

A claim for deduction under sections like 80IC or 80IB can be allowed even if not made in the original return, provided the return was filed within the stipulated time. Such claims can be made subsequently, even before the appellate authority or during assessment proceedings.

Disallowance under Section 14A is not justified if the Assessing Officer has sufficient interest-free funds for investing in investments yielding tax-free income.

Closing stock that has lost its marketability or is no longer a marketable commodity should be valued at NIL. This principle is affirmed even if the assessee had the option to write off the stock.

Compensation received for surrendering the right to sue, which leads to the withdrawal of litigation, is a capital receipt and not taxable as income. This is because the dominant consideration for the payment is the relinquishment of the right to sue, rather than being in lieu of a non-competition agreement or agency.

Manufacturing has a wider meaning of making or fabricating an article, and a narrower meaning of transforming raw materials into a distinct commercial commodity.

The issue of whether the employer's contribution to employee welfare funds can be claimed as a deduction is a recurring point of contention, with various benches referencing Kamal Textiles v. ITO in the context of amendments to Section 43B and Section 36(1)(va) by the Finance Act, 2021.