Landmark Cases on Business Income and Deductions

The Allahabad High Court in CIT v. Jindal Polyester Ltd. held that custom duty paid on de-bonding is either allowable as depreciation or as revenue expenditure.

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.

Interest paid on borrowed funds for capital expenditure incurred after project commissioning is allowable as a deduction, as proportionate interest up to commissioning is already capitalized and subsequent capital expenditure is treated as incurred out of internal accruals or borrowed funds.

The Delhi High Court allowed deduction under Section 80JJAA even if the claim was made during assessment proceedings, provided the claim was otherwise sustainable in law.

Incentives, such as exemption from entertainment tax, granted by a State Government to encourage industries are capital receipts. The form of the mechanism through which the subsidy is given is irrelevant in determining its nature.

A developer is a person who undertakes the responsibility to develop a project, implying managerial and financial responsibility, and their role is larger than that of a mere civil contractor.

Income from a business is taxable only if the business was carried on during the relevant year. If a business is discontinued before the accounting year begins, income received in that year is not taxable as the source of income has ceased to exist.

Income tax law is determined by legal principles, not accounting practices. Accounting treatment cannot override specific provisions of the Income Tax Act.

A business expenditure incurred and crystallized in one accounting year, even if relating to transactions in an earlier year, is deductible in the year it is crystallized, provided it is a revenue expenditure.

When one government department pays another, there's no intent to suppress profits for tax evasion, especially if the transaction is disclosed.

Advances made by a forest lessee to sub-contractors for forest operations, which become irrecoverable due to non-renewal of the lease, are deductible as a business loss under Section 37(1) of the Income Tax Act. These advances are considered part of ordinary business expenditure necessary to carry on the business.

Software expenditure that does not result in the acquisition of a capital asset is revenue in nature and not capital expenditure. Depreciation is allowable on computer software classified as a block of assets.

Two businesses are considered the same if there is inter-connection, interlacing, interdependence, or unity between them, often evidenced by common management, organization, administration, fund, and place of business.

Where a firm claims deduction for partner's remuneration under Section 40(b), income from other sources that is included in the profit and loss account cannot be excluded when calculating 'book profit'.

Expenditure incurred on neon signs and glow signs, used for advertisement and sales promotion, qualifies for deduction as business expenditure under section 37(1) of the Income-tax Act, 1961, as it is revenue in nature and does not create a permanent asset.

Liquidated damages imposed for late completion of contractual terms are considered a business expense deductible under Section 37(1) of the Income Tax Act.

The income earned on the shareholders' account in a life insurance business is to be considered as arising out of the life insurance business and not as income from other sources, especially when it is arrived at by combining surplus from both shareholders' and policyholders' accounts.

Notional foreign exchange loss on unsettled forward contracts is not allowable as a deduction. The loss is allowable only upon settlement of the contract.

Excise duty liability crystallizes on clearance of excisable goods, not manufacture. Therefore, excise liability is not incurred for unsold goods in closing stock and cannot be included in their valuation.

Mark-to-market losses are allowable as deductions. The disallowance of such losses by the Assessing Officer is deleted.

There can be no quarrel with the allocation of direct expenditure which warrants a disallowance under Section 14A.

For assessment years where Accounting Standard 7 was not applicable to real estate developers, the percentage completion method cannot be imposed, and the project completion method of accounting as per Accounting Standard 9 is permissible.

Indirect management and administration expenses qualify for disallowance under Section 14A of the Income Tax Act.

A deduction claimed under Section 80-IA in relation to an SBU II unit cannot be disallowed in subsequent assessment years if it was allowed in the initial year.

If an assessee has sufficient interest-free funds, any investments or advances made are presumed to be out of those funds, preventing disallowance of related interest expenses.

Disallowance under section 14A is not warranted when investment in a partnership firm is made from substantial own funds, demonstrating that the expenditure is not attributable to earning exempt income.

Deduction under Section 80-IA must be computed unit-wise, not for the business as a whole. An assessee can claim deduction for eligible units even if other units incurred losses.

The expression 'manufacture' means the transformation of goods into a new commodity that is commercially distinct, with its own character, use, and name. This transformation can be achieved through one or several processes.

The mixing of different brands of tea without the application of any mechanical or chemical process does not constitute 'manufacture' or 'processing'. This precedent was later distinguished by the Supreme Court in Chowgule & Co. Pvt. Ltd. v. Union of India, which held that blending of ore did amount to processing.

An assessee is entitled to a deduction under Section 36(1)(viii) even if the reserve is created in a subsequent year, provided it is created before the claim is considered and is made from the profits of the concerned year.

A deduction under Section 10AA cannot be withdrawn in a subsequent year if it was accepted in the first year of operations and the second year, by re-examining factors relevant to the initial year.

Where an assessee's income is estimated under Section 145(3), no further additions can be made to the 'income from business' head, though income from other heads may be computed separately.

Remuneration paid for services rendered cannot be disallowed merely because no remuneration for such services was paid in the past.

Expenditure incurred for civil and renovation/interior improvements is revenue in nature if no new fixed assets come into existence and the improvements are made to align business premises with specifications.

Amounts written back and taxed under section 41(1) of the Income Tax Act are treated as business income and are eligible for deduction under section 80HHC.

Interest deduction under section 36(1)(iii) is permissible even when the assessee follows the projection completion method for accounting.

Amounts advanced to a sister concern for commercial expediency are considered business expenditure, and any interest paid on loans taken for such advances is allowable as a deduction.

Non-compete fees paid by a taxpayer can be treated as deferred revenue expenditure, deductible over a period of 10 years.

Payments to retired partners that are quantified and identified in the partnership deed, and treated as a prior charge on the firm's income and assets, are considered an application of income, not a deductible business expense.

The assessee's deposit of employee's contribution to PF and ESI before the due date of filing the return of income under Section 139(1) allows for the deduction, even considering amendments to Sections 36(1)(va) and 43B by the Finance Act, 2021. These amendments are prospective and do not apply retrospectively to such timely deposits.

A subsidy granted under an incentive scheme, which reimburses a percentage of sales tax/VAT paid and is termed 'Industrial Promotion Assistance' to enable setting up a new unit, is a capital receipt, not revenue.

Income from a project is assessed in the year of project completion, not the year of receiving 'on money'. The regular method of accounting dictates the assessment year for regular income.

Fixing a percentage of disallowance for bogus purchases must have a rational and non-arbitrary basis. Selective reliance on parts of a statement made under Section 132(4) while rejecting other parts is impermissible.

Payments made on account of expansion of an existing business into a new geographical area, prior to commercial exploitation, are considered pre-operating expenses. These expenses are deductible for income tax purposes.

The Madras High Court in Chelpark Company Ltd. v. CIT (1991) is cited by the Revenue to support the Assessing Officer's order disallowing non-compete fees claimed as deferred revenue expenditure.