Landmark Cases on Business Income and Deductions

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.

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

The reasonableness of a business expenditure must be judged from the perspective of a businessman, not the tax department, and actual incurring of expenditure cannot be disallowed merely on suspicion without contrary evidence.

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).

Net profit rate of 5% to 7% is considered fair and reasonable for sub-contractors in civil works. The High Court has also quashed revision proceedings where the AO estimated income from sub-contract 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.

Expenses disallowed and added back to total income are eligible for deduction under Section 10B.

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.

An Assessing Officer's disallowance of advertising, marketing, and promotion (AMP) expenses is invalid if those expenses were 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 in lieu of compensation for employment is treated as compensation in lieu of employment.

The prescribed authority's failure to send intimation in Form 3CL does not disentitle an assessee from claiming deduction under section 35(2AB) of the Act. Amendments to Rule 6(7A) apply prospectively from July 1, 2016, meaning prior to this date, Form 3CL approval was not essential for the quantification of weighted deduction under section 35(2AB).

Interest paid on delayed payment of service tax or sales tax is compensatory in nature and therefore, it is an allowable business expense. The same principle applies to interest levied for delayed payment of TDS.

A liability does not cease and become taxable under section 41(1) merely because the debt has become time-barred. The creditor's right to recover the debt does not extinguish solely due to the passage of time.

A loss must be allowed if it has actually arisen and is not merely anticipated, even if it is not immediately profitable.

Income from investments must be considered for disallowance under Section 14A, but only if actual income has been earned. The assessment must involve an exercise to determine if income has been earned, if the investee company can declare dividends, and if dividends will be declared in the future.

Payments exceeding Rs. 20,000 that violate Section 40A(3) are not covered by the exception in Rule 6DD(j) if the genuineness of such expenses is doubtful, especially when they are unrecorded in the books.

An undertaking developing and building housing projects is eligible for deduction under section 80IB(10) if the housing project receives approval, and a separate approval for each distinct housing project within a larger development is not necessarily required.

The word 'derived' in a tax context requires an inquiry into the immediate and effective source of income, not its ultimate origin.

Commercial transactions, such as intercorporate deposits that charge interest, are outside the ambit of Section 2(22)(e) of the Income Tax Act.

Interest income earned as margin money for export sales is business profit, and subsequent favourable decisions override earlier opposing ones.

When royalty expenses have been crystallized in an assessment year and their genuineness is not questioned by revenue authorities, disallowance of such expenses by the Assessing Officer is incorrect.

Interest on staff loans earned by an electricity company is business income, not income from other sources.

A loss incurred on the write-off of a deposit given for taking premises on lease, where the landlord becomes insolvent and the lease was taken for business purposes, is allowable as a business loss.

Expenditure incurred in connection with the extension of an undertaking or setting up a new unit by an Indian company is eligible for deduction under section 35D of the Income-tax Act.

Expenses incurred for pooja are allowable as a business expenditure if treated as a welfare measure for employees. Pooja expenses are deductible from business profits.

If the assessee's books of account have not been rejected, a mere fall in the gross profit rate does not justify an inference of inflated expenditure. Such an inference is only possible if the books are rejected.

The fall in the value of investments treated as stock-in-trade is to be allowed as a revenue loss.

Interest paid on borrowed funds used to acquire equity in a subsidiary is deductible under Section 36(1)(iii) if the holding company has a deep interest in the subsidiary's business and the investment is for commercial expediency. The Supreme Court noted that the S.A. Builders Ltd. case may need reconsideration in this context.

An amount paid by an assessee to its employees' approved gratuity fund is not deductible if it is not paid wholly and exclusively for the purposes of the business. A payment made by way of contribution to a gratuity fund, while it may be for the benefit of the employees, must also be demonstrably for the purpose of the business itself to qualify for deduction.

Expenses excluded from export turnover must also be excluded from total turnover when computing deductions under Chapter VI-A.

Interest income earned on surplus funds prior to the commencement of business is taxable under Section 56 of the Income Tax Act, unless specific expenses are incurred to earn that income.