Landmark Cases on Business Income and Deductions

Expenditure incurred for the welfare and recreation of employees is directly related to the business and should be allowed as a deduction.

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.

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.

A High Court judgment cited in subsequent cases discusses aspects related to tender documents and agreements concerning the assessee's project, potentially impacting claims for deductions.

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.

On a mercantile basis, a taxpayer's liability increases due to currency devaluation, and this increase is an accrued liability for the relevant period, not a contingent or anticipated future loss.

Profits from residential units exceeding 1500 sq ft built-up area are excluded when quantifying deduction under section 80IB(10), allowing a pro-rata deduction for eligible units.

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.

Income earned by a banking concern from investments made as part of its banking business is taxable under the head 'Profits and Gains of Business'. Investments not made to maintain the Statutory Liquidity Ratio (SLR) are considered stock-in-trade, not mere investments.

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.

Purchases cannot be disallowed if sales in quantity and value have been accepted. Transactions with parties cannot be doubted and adjusted to the assessee's income solely because the parties failed to appear or respond to notices.

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 provisions under Section 194I.

Income derived from letting out property for business purposes is considered business income. The deduction of tax at source by the payer under Section 194I does not alter the character of the 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.

Expenses are to be allowed proportionately, with the expenditure pertaining to the relevant year allowed in the year under consideration and the balance deferred to subsequent years.

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.

Interest accrued but not due on securities as of the close of the accounting year cannot be taxed in that year. Income is only taxable when it has either accrued and become due or is actually received.

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 the claim of other deductions. The Supreme Court's decision in this case has clarified this position, potentially resolving divergent views.

Only real income, not hypothetical income, can be taxed in the hands of the assessee. Imputed interest on outstanding loans cannot be added to income without establishing the terms and conditions for charging interest.

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 when the assessee possesses sufficient interest-free funds for investments yielding tax-free income.

The assessee has the right to value closing stock at cost or market price, whichever is lower, for income computation purposes. This principle applies even when goods are saleable only in specific foreign markets with no domestic demand.

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.