Landmark Cases on Business Income and Deductions

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.

Multiple business ventures are treated as separate and distinct activities if there is no interlacing, interconnection, or interdependence between them, even if centralized accounts are maintained.

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) cannot be invoked if no deduction was granted to the assessee in earlier years. Section 41(1) applies specifically to remission of trading liabilities, and waiver of a loan is a cessation of liability other than a trading liability.

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.

A provision created for after-sales services based on warranty, under the mercantile system of accounting, is an allowable deduction if it represents a definite and ascertained liability, not a contingent one.

Provisions for non-performing assets (NPAs) debited to the profit and loss account are not allowable as deductions under the Income-tax Act, as Reserve Bank of India directives do not 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.

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.

The Assessing Officer cannot make additions under Section 14A concerning investments in shares if the investment was not made for future benefit and was intended for business purposes.

Historical financial performance is a crucial factor for estimating business income during 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.

A provision for warranty expenses is deductible only if it is ascertained on a historical basis, computed on a scientific method, and represents a probable outflow of resources from a present obligation arising from a past event. Ad-hoc estimations without such scientific basis are not deductible.

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

Commission payments are not to be disallowed if the assessee provides evidence of services rendered, payment through banking channels, and relevant approvals, especially when the Revenue does not contest that services were not rendered at all.

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.

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).

An assessee's books of account cannot be rejected solely because the profits disclosed are low, especially if there is no stock register.

It is for the assessee to prove that each of the loans on which interest was paid was utilized for their business.

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 is only recognizable when the obligation has already fructified. A mere estimation or possibility of expenses without a scientific working or solid material does not qualify for deduction.

No addition can be made to the trading account to enhance the rate of gross profit based on hypothetical calculations of consumption or if the books of accounts were not rejected and no faults were found by the Assessing Officer.

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).

Amounts forfeited on application money for shares are capital receipts, not taxable as income, as they represent the return of capital. This is because the original receipt was for share capital.

An Assessing Officer cannot disallow expenses solely based on the limited presence of the contractor's employees at the premises during an inspection, especially when the genuineness of services is not doubted and the timing of the inspection is explained.

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 that arises in a subsequent year, even if it relates to an earlier year, can be treated as a trading loss in the year it crystallises, provided there is no outflow of funds in that year. The Supreme Court overturned the High Court's decision in Sutlej Cotton Mills Ltd. v. CIT (1971) 81 ITR 641 on this point.