Landmark Cases on Business Income and Deductions

Interest paid on borrowings for the purpose of investment by an assessee can be treated as business expenditure.

Expenditure incurred on grounds of commercial expediency, even if not directly and immediately beneficial to the trade, may be considered wholly and exclusively for the purposes of the trade. Such expenditure includes what a prudent man would incur for his business.

Expenditure incurred by an assessee, even if relating to past liabilities, is deductible in the year it is ascertained and paid, provided it was incurred in the interest of and for the business.

The Assessing Officer's disallowance can be restricted to the actual amount of exempted income when investments are brought forward from earlier years. No fresh investment during the year is a relevant consideration.

When purchases are suspected to be bogus, only the profit element embedded in such purchases can be added to the income, not the entire purchase price, especially if adding the full amount results in an improbable gross profit margin.

The Department of Scientific and Industrial Research's (DSIR) role, prior to July 1, 2016, was limited to approving R&D facilities, not the expenditure incurred, even if specific forms were not issued.

Anticipated or contingent profits from foreign exchange forward contracts, to the extent not settled at the close of the accounting year, cannot be brought to tax if not accounted for in the financial statements. However, any losses on such contracts should be provided for by a charge in the profit and loss account on the best estimate basis.

Interest earned on Fixed Deposits (FDRs) kept as security for a Performance Bank Guarantee is considered business income but is not eligible for deduction under Section 80IC or Section 801A of the Income Tax Act.

Expenditure incurred for obtaining a loan, including stamp duty and lawyer fees, is revenue expenditure if it facilitates the business of the company, regardless of the loan's purpose. Consultancy charges paid on grounds of commercial expediency are also revenue expenditure.

Foreign currency, and therefore derivative/forward contracts in respect of foreign currency, cannot be considered a commodity for the purpose of speculative transaction provisions. Such contracts entered into for hedging foreign exchange fluctuations are not speculative.

Payments made as commission to government doctors for prescribing medicines are considered illegal gratification or bribes and are therefore not allowable as business expenditure under Section 37(1).

A net profit rate of 5% is determined as fair and reasonable for subcontracts in civil works.

The case clarified that activities like cutting marble blocks into slabs can constitute 'manufacture' for excise purposes, a principle relevant to understanding 'production' under Section 80-IA of the Income Tax Act, even if the earlier judgment did not explicitly interpret 'production'.

The revenue cannot question the commercial expediency of an expenditure if it is incurred wholly and exclusively for the purpose of business. The assessee's judgment on what constitutes reasonable business expenditure is generally respected.

Expenditure incurred for developing import substitute parts, even if treated as deferred revenue expenditure, is allowable as revenue expenditure if it's not of a capital nature and doesn't grant exclusive or enduring rights.

The Tribunal is wrong in rejecting the Project Completion Method followed consistently by the assessee and applying the work-in-progress method, taxing 80% as net profit.

The specific words 'know-how, patents, copyrights, trade marks, licenses and franchises' constitute a distinct class of positive rights that are capable of being used or put to use, and the expression 'any other business or commercial rights of similar nature' is to be read along with the preceding categories, not as a separate category.

For non-life insurers, the computation of income must strictly follow Section 44 and the First Schedule of the Income Tax Act. Expenses incurred in contravention of law or a regulatory cap are not deductible.

Interest income earned on funds deposited with banks, which were borrowed for the construction of a power project, is inextricably linked to the business of the assessee and should not be treated as income from other sources. Such net interest income shall be capitalized.

Premium paid for a keyman insurance policy is allowable as a business expenditure. The fact that the maturity value of the policy is claimed as exempt by individuals does not affect the allowability of the expenditure for the company.

When an Assessing Officer rejects books of account under Section 145(3), the AO's estimation of income is valid and the Assessing Officer is the best judge to estimate income.

A disallowance under Section 14A of the Income Tax Act cannot be made in the absence of exempt income.

Interest-free advances are presumed to be given out of owned funds, not borrowed funds, if the assessee has sufficient owned funds. The revenue cannot arbitrarily estimate proportionate interest expenditure when the assessee has the right to appropriate funds.

Income is diverted by overriding title before it reaches the assessee if the nature of the obligation means the amount cannot be considered part of the assessee's income.

Disallowance of part of Advertising, Marketing, and Promotion (AMP) expenses is not justified if the entire expenditure was incurred wholly and exclusively for the assessee's business and to promote its brand.

The principal amount written off is allowable as a deduction under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, even if the company is not engaged in the money lending business.

Expenditure is treated as capital in nature when it is connected with the acquisition of land.