Landmark Cases on Business Income and Deductions

Contributions made by an assessee to an employee's welfare fund or a trust for constructing a school building for employees' children are allowable as business expenditure under Section 37(1) of the Income Tax Act, if related to the business.

Expenditure incurred on interior decoration, false ceiling, and wooden structures on leased premises constitutes capital expenditure, not revenue expenditure.

Interest paid on capital borrowed for business purposes is allowable as a deduction under section 36(1)(iii), irrespective of how the borrowed money was applied. The interest cannot be disallowed even if the borrowed funds were lent out and subsequently written off as irrecoverable.

In cases involving debatable issues, the assessee is entitled to the benefit of favourable judicial decisions.

Fees paid to management consultants for business efficiency improvements are not capital expenditure if the advice is not implemented or for a new business. Obtaining a report and paying for it does not automatically make it capital expenditure.

No addition on account of interest can be made if the assessee has not actually charged interest on funds or loans advanced. The Assessing Officer cannot deem that interest should have been charged on a notional basis.

An assessee engaged in the construction business, following the project completion method of accounting, can continue to do so even if the Assessing Officer believes the percentage completion method should be applied based on the percentage of project costs incurred.

Disallowance under Section 14A requires the Assessing Officer to demonstrate a nexus between the expenditure incurred and the exempt income. A mere failure by the assessee to provide details does not automatically validate a disallowance without such a finding.

Unpaid interest on loans where principal/interest remained unpaid for 90 days, classified as non-accrual loans, when reversed to a Reserve for Doubtful Interest (RFDI) account, and subsequent interest accruals credited to RFDI instead of the profit and loss account, is taxable on a net basis of accruals less recoveries.

The intention of the assessee at the time of purchase of land determines its nature and status, not the period for which it is retained.

The furnishing of an accountant's report along with the return of income under Section 80HHC(4) is a directory, not mandatory, requirement. The report can be filed at any time before the completion of assessment, and the deduction cannot be denied if it is filed during the assessment proceedings.

Section 41(1) of the Income-tax Act cannot be invoked if no deduction was granted in earlier years, as it pertains to the remission of trading liabilities and waiver of loans. Waiver of a loan is considered a cessation of liability other than a trading one.

Expenditure is deductible under Section 37(1) if it is not covered by Sections 30-36, incurred in the accounting year, and for the purpose of carrying on the business or furthering business interests.

For assessees following the mercantile system, provisions created for after-sales services based on warranty, if representing a definite and ascertained liability, are deductible as they are not contingent liabilities.

The deductibility of Non-Performing Assets (NPAs) debited to the profit and loss account for income tax purposes is determined by the Income Tax Act, not RBI guidelines, as RBI directives cannot override statutory provisions.

Current repairs, deductible under Section 10(2)(v), are restricted to petty repairs carried out periodically and do not include expenditure incurred to bring into existence a new asset or an advantage of enduring nature.

Deductions for business expenditure are allowable in the year an ascertained legal liability accrues, even if payment is made later, unless Section 43B applies.

Software expenses are revenue in nature and allowable as business expenses, particularly when following established judicial precedents and principles laid down by Special Benches of the Tribunal.

The Assessing Officer's action, following the Madras High Court's ratio in SCM Creations v. ACIT, regarding the interplay of Section 80HHC(AB) and Section 80IB, cannot be interfered with by the PCIT if it corrects an erroneous view. Divergent views on such issues can lead to a Larger Bench constitution, indicating that multiple interpretations are permissible.

Disallowance under section 14A of the Income Tax Act is justified when the Assessing Officer records dissatisfaction with the assessee's claim that no expenditure was incurred.

Commission received for providing a guarantee is to be taxed over the period for which the guarantee is provided, not in the year of receipt, especially if the guarantee is cancelled before its expiry.

Historical performance of a business is a crucial indicator for estimating income. Courts have emphasized the importance of considering past performance and historical data when making assessments.

Deductions under sections 36(1)(viia)(c) and 36(1)(viii) are to be allowed as per the scheme laid down by the ITAT. The issue of allowing these deductions is highly debatable and beyond the scope of rectification under section 154.

The Assessing Officer cannot invoke provisions related to profit attribution or adjustment under section 80IA(9) (analogous to 80IA(8) and 80IA(10)) without material evidence to show an arrangement between the assessee and associated enterprises that resulted in profits exceeding what might be ordinarily expected.

Expenses incurred to upgrade or run a system are allowable as revenue expenditure.

If an assessee has not claimed a deduction for a liability in its Profit & Loss Account, no addition under section 43B arises regarding that liability. Amounts not received cannot form part of a person's income.

Deduction for warranty expense is allowed in the current year only when the liability is properly ascertained on a historic basis.

Standard assets cannot be considered for allowance under Section 36(1)(viia) of the Income Tax Act.

The case likely deals with the eligibility of certain deductions or the allowability of expenses under various sections of the Income Tax Act, considering its citation in relation to topics like 'illegal payment', 'section 80hhc(3)', 'explanation to section 37', and 'profits and gains of business or profession'.

Expenditure incurred out of commercial expediency, even if related to a promoter or their family, is an allowable business deduction. This applies to expenses for higher education undertaken by an employee or a director for the benefit of the company's business.

Capacity utilization adjustment should be granted, particularly when supported by industry survey reports. The case is cited as precedent for this principle in subsequent judgments.

Amendments made to Section 80IB(10) are prospective, not retrospective. Conditions for claiming deduction under Section 80IB(10) must be fulfilled for the claim to be allowed.

If an assessee has sufficient capital and reserves, it can be presumed that investments yielding exempt income were made out of non-interest-bearing funds, preventing disallowance under Section 14A read with Rule 8D(2)(ii).

The mere non-maintenance of a stock register does not automatically lead to the conclusion that an assessee's profits cannot be determined based on the books of accounts maintained by them.

The assessee bears the burden of proving that loans on which interest is paid were used for business purposes. If this is not proven, the interest paid on such loans is not deductible under section 36(1)(iii) of the Income-tax Act, 1961.

Demurrage charges paid by an assessee are deductible business expenses, even if paid to a non-resident, and disallowance under Section 40(a)(i) is not warranted.

A provision for expenses can only be recognized for tax purposes when the obligation has already materialized, not based on mere estimation or possibility of future expenses without scientific substantiation.

Stock transfer between different units of a company does not constitute undisclosed sales, and the procedure for such stock transfer involves the movement of goods.

The Special Bench of the ITAT held that membership fees received by the assessee were not entirely taxable in the year of receipt.

Royalty paid for technical know-how is revenue expenditure if the assessee is already in that line of business and the know-how only improves existing capacity; it is capital expenditure if the royalty is paid for proprietary rights that bring the business into existence and its termination would stop that business.

Purchase of shares with the intention of selling them at a profit constitutes an adventure in the nature of trade. Such an adventure, if it results in an advantage of income nature, can be brought to tax under profits and gains from business or profession.

Professional charges incurred for conducting due diligence for the acquisition of another company are allowable as a revenue expenditure.

For computing disallowance under Section 14A, only investments yielding exempt income should be considered for the purpose of Rule 8D(2)(ii).

A fully automatic facility requiring no human intervention is not considered technical service, and therefore, payments for such facilities are not fees for technical services.

Forfeiture of application money is a capital receipt and not liable to income tax.

An ad hoc disallowance of expenses cannot be made without a justifiable basis, especially when the expenses are found to be reasonable and commensurate with the turnover.

An expenditure not allowed as a specific deduction can still be considered an allowable business loss under the general principles of income computation, even if a specific condition for that deduction was not met.

Interest on borrowed capital is allowable only if the capital was borrowed and used exclusively for the purpose of business. If borrowed capital is used for a purpose other than business, the interest to that extent will not be allowed.

A liability, even if there is no outflow of funds during the year, would be treated as a trading loss. The Supreme Court reversed the High Court's decision on this point.

Foreign exchange losses on reinstatement of foreign currency loans are allowable as revenue expenditure, provided they are recognised in accordance with applicable accounting standards. Exchange fluctuation losses attributable to depreciable assets acquired in India may also be allowable expenditure.