Landmark Cases on Business Income and Deductions

Income derived from a property owned by a company and used in its business, even if occupied by directors for residence, is assessable as 'income from business'.

The Supreme Court admitted a Special Leave Petition (SLP) in a case involving a deduction under section 36(1)(vii) of the Income Tax Act, 1961, where the assessee debited the amount as irrecoverable into its accounts. This admission suggests a potential judicial review of the criteria for such deductions, particularly concerning the debiting of the amount as irrecoverable.

Section 14A disallowance does not apply to insurance businesses. Income of insurance businesses is computed as per Section 44 read with specific provisions of the Income Tax Act.

The Kolkata ITAT in DCIT v. Binani Industries Ltd. ruled that where a liability is extinguished or no longer enforceable, it is taxable under Section 41(1) of the Income Tax Act, 1961, even if it relates to a trade liability.

Each business is considered a distinct source of income. This principle is foundational for classifying different income streams under Section 6 of the Income Tax Act.

No disallowance can be made under section 14A of the Income-tax Act in the absence of any exempt income earned by the assessee during the year. However, this position has changed post the amendment to section 14A by the Finance Act, 2022.

Receipts from the sale of tender forms, supply of water and electricity to contractors during factory construction, and sale of stones, boulders, grass, and trees are capital receipts, not independent income. These are inextricably linked to setting up the business and reduce the capital cost.

Payment to eliminate competition by a rival firm for a certain period, often in the form of consideration for a manufacturing agreement, is considered a revenue expenditure rather than a capital expenditure.

Transactions involving the sale of land converted for non-agricultural use may be treated as an adventure in the nature of trade and taxed as business income, if sufficient inquiries are made by the Assessing Officer.

Interest expenditure incurred in relation to exempt assets does not warrant disallowance under Section 14A read with Rule 8D(2)(ii), especially when the assessee has not maintained separate accounts for investments.

Processing of data, involving active coordination and collation of information to produce balance sheets, stock accounts, and sales analyses as per customer requirements, can be considered as processing of goods, if not manufacture of goods.

Interest on delayed payment of licence fee is allowable as a deduction when the licence fee itself is revenue in nature. A Supreme Court decision on a different issue is not applicable to the nature of interest.

Payments by way of reimbursement of expenses incurred on behalf of the payer are not income chargeable to tax in the hands of the payee.

A grant made by the government to an assessee, which cannot be characterized as a trade receipt, is not considered a revenue receipt and is therefore not subject to tax.

Income diverted at source by an overriding title, such as a legal obligation to pay erstwhile partners for work done, is not taxable in the hands of the firm.

Production of motor spirit by refining naphtha may be eligible for examination under Section 80IB(9) of the Income Tax Act as a "mineral oil".

Interest on deferred payments for the purchase of machinery is deductible as revenue expenditure. Financial charges and upfront fees for loans taken to set up industry are also allowable as revenue expenditure.

Government receipts, including various types of taxes received by an assessee, are consistently held to be taxable receipts.

The pro-rata annual allocation of premium payable on redemption of debentures is allowable as revenue expenditure, and there is no distinction between discount and premium on debentures for this purpose.

A distinction exists between royalty or rent payments, which are revenue expenditure, and lease premium payments made at once or in installments, which constitute capital expenditure.

Expenditure not incurred for rendering technical services outside India should be reduced from total turnover. When tax has been deducted at source on revenue from distribution rights, deduction under section 10A should be recomputed.

Only the real income of an assessee is subject to tax. Tax authorities cannot tax income that has not actually accrued or been earned by the assessee.

The past trading results of an assessee are the best guiding factor for estimating business income, particularly when dealing with unexplained purchases or short stock.

Payments made for the acquisition of leasehold land are considered capital expenditure, not revenue expenditure. This applies even to subsequent lease rent installments when the initial installment was accepted as capital expenditure.

Income from service charges, maintenance revenue, and lease rent can be considered as derived from the main business activity of the assessee, provided there is a direct nexus. Such income may not be treated as income derived from an industrial undertaking for the purpose of Section 80-I.

Income cannot be estimated without rejecting the assessee's books of accounts. Such estimation is permissible only after a clear finding that the books are unreliable.

The claim for leave encashment is not allowable for the year under consideration, following the Supreme Court judgment in Union of India vs. Exide Industries.

Where an assessee earns interest income from investments and cannot specifically identify expenses incurred to earn it, an estimated expenditure as a percentage of income can be allowed as a deduction.

Surcharge is part of rent.

An expenditure incurred during the year, even if it relates to accounting treatment in another year, can be allowed as a deduction in the year it is incurred for income tax purposes.

An activity amounts to manufacture or production of an article or thing if the raw material undergoes a process such that it becomes a new and distinct commodity, fundamentally different from the original raw material.

Expenditures are considered revenue in nature and deserve to be allowed when they meet the criteria for such deductibility.

Deductions under Chapter VI-A of the Income Tax Act, including Section 80-IA, are to be calculated with reference to the 'gross total income' and not merely 'business income'. Section 80AB clarifies that deductions are made with reference to income included in the gross total income.

The principle of consistency dictates that a methodology of valuation regularly followed should be accepted in subsequent assessment years, provided it adheres to accepted accounting principles. This applies even if a change in method was not accepted in the first instance.

Expenditure in relation to exempt income is to be disallowed under Section 14A of the Income-tax Act even when no exempt income is earned during the year, provided the investments have the potential to earn tax-free income.

When a definition section states that a word 'means' something, it provides an exclusive definition. If additional categories are included, only those explicitly added are considered part of the definition.

Expenditure incurred for training personnel of the assessee, which is imperative to run the business and provides technical support, is revenue in nature and cannot be treated as capital expenditure.

Expenditure incurred or losses arising incidentally to the carrying on of a business, rather than for the acquisition of a business or as a temporary investment, are deductible in computing the profits and gains of that business from a broad commercial perspective.

Amounts collected by an assessee, such as security deposits for bottles that are integral to a commercial transaction and are ultimately not refunded, constitute trading receipts and are taxable as income.

The fall in the value of investments made by a banking company to comply with RBI's SLR requirements is allowable as a deduction when computing business income, even if the books of account are treated differently.

The court considers the addition made in the hands of the assessee as business income based on advertisement and subscription revenue.

Business commencement can occur before revenue generation, and expenses incurred before commencement are allowable. The establishment of readiness to undertake business signifies its commencement.

Interest paid on borrowed funds used to acquire shares in another company to maintain control is allowable as a business expenditure under Section 36(1)(iii) of the Income Tax Act.

The applicability of Rule 6DD of the Income Tax Rules for the purchase of paddy, especially when purchases are made from farmers, is upheld. Cash purchases from farmers are not to be disallowed under Section 40A(3) if they meet the conditions of Rule 6DD.

Expenditure incurred for repair/renovation of leased premises is capital in nature, unless it qualifies as a revenue expenditure.

An ascertained liability for gratuity, even if not actually paid during the assessment year but provisioned for based on actuarial valuation, is deductible under Section 37(1) of the Income Tax Act, 1961.

Interest received on enhanced compensation awarded under the Land Acquisition Act is taxable as income under the head 'Income from Other Sources' and the deductions under Section 57(iv) are available.

A disallowance under Section 14A is not permissible where there is no nexus between the expenditure incurred and the income generated, especially when the assessee has sufficient surplus funds.

Disallowance under Section 14A cannot exceed the amount of exempt income earned by the assessee. The Assessing Officer or CIT(A) correctly deletes disallowances exceeding the exempt income.

Vapour generated by a captive power plant is considered a form of power, qualifying for deduction under section 80IA(4).