Landmark Cases on Business Income and Deductions
2,356 decisions, ranked by how many judgments on BharatTax rely on them.
Expenditure incurred for increasing a company's share capital or expanding its capital base, such as expenses related to the issue of shares, constitutes capital expenditure. Such expenses are not deductible as revenue expenditure under Section 37(1) of the Income-tax Act, 1961, even if they incidentally benefit the business.
Income from shares and securities held by banks as stock-in-trade constitutes business income, hence Section 14A disallowance is not attracted. Further, any disallowance under Section 14A cannot exceed the actual amount of exempt income earned by the assessee during the year.
Unclaimed deposits received in the course of trading transactions and sundry credit balances written back are taxable as business income under Section 41(1) of the Income-tax Act, 1961, as they constitute a cessation of trading liability.
Under the mercantile system of accounting, interest income accrues and is taxable in the year it arises, even for "sticky" or doubtful loans, as the right to receive the income is paramount, not its actual receipt, provided there is an agreement for payment.
No substantial question of law arises regarding a subsidy granted for setting up a new industrial unit in a backward area for employment generation, as held by the Bombay High Court. This decision was subsequently set aside by the Supreme Court.
Employees' contribution to provident fund and ESI, if paid by the assessee before the due date for filing the return of income under section 139(1), is an allowable deduction under section 43B. No distinction is drawn between employer's and employee's contributions for the purpose of section 43B.
When making an addition for unaccounted receipts, on-money, or non-genuine purchases/sales, the addition should be restricted to the estimated profit element embedded in such transactions, rather than the entire gross amount, particularly when evidence of corresponding expenditure is incomplete. This estimation often involves applying a net profit rate.
The employees' contribution to provident fund (PF) and Employee State Insurance (ESI), if remitted before the due date for filing the income tax return, is an allowable deduction under section 36(1)(va), especially when considering the prospective amendment introduced by the Finance Act, 2021.
Disallowances made under various sections, such as for PF/ESIC contributions, result in an increase in business profits, and these enhanced profits are eligible for deduction under Sections 10A and 10AA. Similarly, gains from foreign exchange fluctuations directly linked to export sales are also eligible for deduction under Section 10A.
Employees' contribution towards Provident Fund (PF) and Employees' State Insurance Corporation (ESIC) is allowable as a deduction under Section 36(1)(va) read with Section 43B if deposited before the due date of filing the income tax return, even if deposited after the expiry of the statutory time period specified in the applicable fund's statute.
Expenditure is defined as money paid out or away, which is gone irretrievably. To be deductible under Section 37(1), expenditure must be wholly and exclusively for business, not capital or personal, and not fall under specific provisions of Sections 30 to 36, often justifiable on grounds of commercial expediency.
A liability recognized in accordance with the Accounting Standards prescribed by the Institute of Chartered Accountants of India (ICAI) is an allowable expense for income tax purposes.
When purchases are found to be entirely bogus and based on fictitious invoices from non-existent or unconfirmed suppliers, the entire amount of such purchases is liable to be added back as unexplained expenditure, not merely a percentage thereof.
The Assessing Officer has a duty to examine whether an assessee's books of account truly disclose the correct income and is not bound to accept the accounting system regularly employed by the assessee or methods followed in earlier years. Each assessment year is a distinct and self-contained unit for tax purposes.
For the purpose of Section 41(1) of the Income-tax Act, a liability is considered to have ceased only when the creditor actively releases or writes off the amount, or when the liability ceases to exist in the assessee's books; mere expiry of the limitation period for recovery does not constitute cessation of liability.
Subsidies and excise duty refunds that are accounted for in the Profit and Loss account are revenue in nature, form part of business income, and are eligible for deductions under Section 80IB/80IC. Such receipts cannot be reduced from the block of assets for depreciation calculation.
The expression "for the purpose of business" is wider in scope than "for the purpose of earning profits" and encompasses expenditures made for commercial expediency, business preservation, administration, and modernization.
Income accrues and becomes taxable only when there is a reasonable certainty of its realization. A mere possibility or expectation of income, particularly when subject to ongoing disputes, is not enough for it to be considered accrued.
If approval from the Department of Scientific and Industrial Research (DSIR) for an in-house R&D centre is granted during the previous year, the assessee is entitled to claim weighted deduction under section 35(2AB) for the entire expenditure incurred during that year.
Exemption provisions under Chapter III, such as Section 10B(8), must be interpreted strictly, and any claim for such exemptions must be made in the return of income. The principles governing Chapter III (incomes not forming part of total income) differ from those for Chapter VIA (deductions in computing total income).
The Supreme Court approves the mixed fund theory, holding that no interest disallowance is warranted under section 36(1)(iii) if investments or advances are made from the assessee's own non-interest bearing funds, even when mixed funds are available. This presumption applies when non-interest bearing funds are sufficient to meet the investments.
Employee contributions to provident fund and ESI, if deposited before the due date for filing the return of income under section 139(1), are allowable deductions under section 36(1)(va) and cannot be disallowed. Such an adjustment is also not permissible summarily under section 143(1).
When an assessee's income is estimated after rejecting their books of account, further additions or disallowances for specific expenses are generally not permissible, as the estimation already accounts for these.
Cash receipts from customers against genuine delivery of goods or services cannot be added as unexplained cash credits under Section 68. The case also provides guidance on non-disallowance under Section 40A(3) for business payments made in specific contexts like agricultural markets.
For a limited company, expenses cannot be disallowed merely on the grounds of presumed personal use of assets by directors or by treating the expenditure as a non-business purpose. Percentage disallowances of expenses in such cases are not sustainable.
A loss incurred by a businessman, such as money lost or advances written off, if it arises in the ordinary course of business, is a deductible trading loss. Such a loss is allowable as it is inherent or incidental to the business operations.
Disallowance under Section 14A of the Income-tax Act applies even if no exempt income is actually earned during the relevant previous year, provided investments capable of yielding exempt income exist.
Employee contributions to provident fund or ESI are deductible if deposited with the authorities before the due date for filing the income tax return under Section 139(1), even if deposited after the due date prescribed by the respective fund's Act.
Employee contributions towards ESI and PF are allowable as a deduction if paid by the due date for filing the income tax return, even if paid after the statutory due dates prescribed under the respective ESI/PF Acts.
If an assessee possesses interest-free funds exceeding investments in tax-free securities, it is presumed that investments are made from these own funds, precluding disallowance of interest expenditure under Section 14A read with Rule 8D(2)(ii). Additionally, weighted deduction under Section 35(2AB) is computed on the gross expenditure incurred, not net expenditure after reducing income earned.
The Supreme Court established the foundational test for distinguishing between capital and revenue expenditure, holding that the aim and object of the expenditure and whether it brings into existence an asset or an advantage of an enduring nature determines its character, irrespective of the payment method. An advantage lasting five years or more can be considered enduring.
When calculating deductions under sections like 10A or 10AA, any expenses or items reduced from 'export turnover' in the numerator must also be reduced from 'total turnover' in the denominator to ensure consistent application of the deduction formula.
Expenditure is capital or revenue in nature based on its aim, object, and resultant advantage to the business.
Prior to the insertion of Explanation 2 to Section 36(1)(va) of the Income-tax Act, there was an ambiguity regarding the due date for payment of employees' contribution to provident fund and ESI. The ambiguity was whether the due date was as per the respective Acts or the due date for filing the assessee's return of income.
Disallowance under Section 14A of the Income-tax Act is made only if exempt income is actually earned, and the disallowance cannot exceed the amount of exempt income earned.
Interest, sales tax, and purchase tax subsidies received by an assessee are generally considered capital receipts, not revenue income, for income tax purposes.
An amendment clarifying the disallowance of employee contributions under sections 36(1)(va) and 43B is prospective. Therefore, before such amendment, employee contributions paid before the due date for filing the income tax return are deductible.
Amounts collected by an assessee as an agent or for a predefined purpose are diverted by an overriding title and do not form part of the assessee's income. Such amounts, even if refundable on contingencies, are not considered uncertain and create a ripening obligation.
If an assessee possesses sufficient interest-free own funds to cover investments yielding exempt income, it is presumed that such investments are made from these own funds, precluding any disallowance of interest expenditure under Section 14A, even when borrowed funds are also available.
A new industrial undertaking is not considered a reconstruction of an existing business for tax deduction purposes if it is a separate, independent production unit manufacturing commercially tangible products that can operate without losing its identity in the old business. The transfer and substantial use of assets and manpower from an old business to a new one may indicate reconstruction.
Interest expenditure incurred for acquiring capital assets, even if capitalized in the books, is deductible if for the purpose of business. Section 36(1)(iii) is a self-contained code regarding such deductions.
Once a claim for deduction under section 80-IA or 80-IB is allowed in the initial assessment year and is not subsequently withdrawn, the revenue is estopped from denying the deduction for subsequent years on the same grounds.
The assessee bears the burden of proving necessary facts to claim deductions. If the assessee fails to establish these facts, the deduction is not admissible.
The word 'production' has a wider connotation than 'manufacture'; every manufacture is production, but not every production amounts to manufacture. 'Production' includes bringing into existence new goods, by-products, or inter-products through a process, which may or may not be manufacture.
The waiver of a loan taken for acquiring capital assets is considered a capital receipt and is not taxable as income under Section 28(iv) of the Income Tax Act. The ruling distinguishes between the waiver of trading liabilities and capital liabilities for tax purposes.
Section 43B of the Income-tax Act applies to both employer and employee contributions to welfare funds, allowing deductions for these contributions only upon actual payment.
Excise duty collected by the assessee as an agent on behalf of the government is not includible in the total turnover for the purpose of computing deduction under section 80HHC.
When the Assessing Officer rejects the books of account and computes income by applying a net profit rate, a separate disallowance under section 40A(3) for cash payments cannot be made.
