Landmark Cases on Business Income and Deductions

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.

Amounts collected towards entertainment tax, granted as exemption under a State Government scheme, are entitled to be treated as capital receipts.

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.

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.

Foreign exchange loss incurred on loans used for acquiring indigenous fixed assets is allowable as revenue expenditure. The revenue cannot draw an adverse inference on the same facts if no adverse inference was drawn in an earlier assessment year.

Amounts taxed under section 41(1) are eligible for deduction under section 80HHC.

For claiming tax holiday benefits under Section 80IA, it is not necessary for the eligible unit to maintain separate books of account. The audited Balance Sheet and Profit & Loss account of the eligible business, along with the duly audited Form 10CCB, are sufficient.

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

Deduction under section 80HHC is to be computed with reference to the profit as per books of accounts, not as per Section 115JB. Advertisement expenditure incurred to create brand image is allowable as revenue expenditure in the year it is incurred.

Advances made to subsidiaries for business purposes are not subject to disallowance. The Supreme Court's dismissal of the SLP indicates approval of this principle.

Revenue earned from software and consultancy services can be recognized on delivery of goods/services, even if invoices are raised on payment milestones, provided the method is in accordance with AS-9 and regularly followed. An addition as 'unearned income' may be wrongly made by the Assessing Officer in such cases.

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.

A disallowance under section 40(a)(ia) for failure to deduct TDS cannot be sustained if the assessee subsequently deducts the tax in a later year and remits it within the due date, provided the payees are not identified. The principle of 'Palam Gas Service' case does not apply when payees are unidentified.

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.

Corporate Social Responsibility (CSR) expenditure, when described in sections 30 to 36 of the Income-tax Act, 1961, is allowable as business expenditure, as indicated by the explanatory memorandum to Finance Act No. 2, 2014.

A debt that cannot be written off as a bad debt may be allowed as a trading loss under Section 28, provided the loss is incurred wholly and exclusively for the purpose of the assessee's business.

The essence of an agreement must be considered to determine whether it constitutes a lease or the provision of services, distinguishing between handing over possession and using equipment to provide services.

Deductions under Chapter VI-A, such as Section 80-I and Section 80HH, are allowable only on the net income computed under the Act, not on gross income. These deductions apply to gross profits and gains before the computation of income under Sections 30 to 43D.

Expenses incurred for business borrowings are allowable deductions under Section 36(1)(iii) irrespective of their capitalization, and different business units of an assessee can be treated as distinct if there is no interlacing or interdependence.