Landmark Cases on Business Income and Deductions

The distinction between capital and revenue expenditure is a thin one and must be decided on a case-to-case basis by applying the relevant yardsticks to the facts.

Interest income on Non-Performing Assets (NPA) need not be recognized on an accrual basis and the provisions of Section 145 of the Income Tax Act do not play a role in such income recognition. Furthermore, if interest does not result in any income, there can be no levy of tax.

Grants received from the state government in the form of land allotment, intended for creating employment, are to be regarded as capital receipts and not revenue receipts.

The Punjab & Haryana High Court ruled in favour of the revenue regarding the treatment of External Development Charges (EDC) when similar issues were decided in prior cases. This decision supports the revenue's position on the deductibility or treatment of EDC in the context of property development.

A capital subsidy, the real purpose of which is to incentivize new or expanded units, is to be treated as a capital receipt, not a revenue receipt. The form or mechanism of the subsidy is irrelevant.

Interest paid by an Indian branch of a bank to its overseas head office is not allowable as a deduction. This is because the payment is not considered chargeable to tax in India, and therefore, Section 195 TDS provisions are not attracted.

In identical circumstances, the provision made by an assessee for bad and doubtful debts is accepted if a co-ordinate bench of the Tribunal has accepted a similar provision in the assessee's own case, and this method has been approved by a High Court.

The Punjab & Haryana High Court decision in CIT v. Sunil Kumar Sharma was rendered in the context of computing property income, not business income, and did not arise under Section 36(1)(iii).

Vapour generated from a captive power plant is considered 'power' for the purposes of claiming deduction under Section 80IA(4) of the Income Tax Act.

An addition of 10% of the purchase price was upheld on account of unverifiable or bogus purchases where the assessee claimed Cenvat credit on invoices from non-existent parties without receiving goods.

The delay in filing Form 10DA for claiming deduction under section 80JJAA of the Income Tax Act, 1961, is not a bar to the deduction if the form is filed before the intimation under section 143(1). The rules regarding the form's filing are directory, not mandatory.

Expenditure incurred on overhauling or reconditioning of machinery that does not result in the creation of new capital assets is allowable as a revenue deduction and not treated as capital expenditure.

Expenditure incurred on feasibility reports is revenue in nature and deductible as a business expense, unless it results in the creation of an asset of enduring benefit, in which case it may be capital in nature. The case distinguishes between expenses for exploring business viability and those leading to the creation of a new asset.

Losses incurred on derivative transactions are to be treated as business losses, not speculative losses, and are therefore not subject to the restrictions of Explanation to Section 73 of the Income Tax Act.

Advances given for the acquisition of capital assets, which are subsequently written off, are allowable as a business loss. This also applies to deposits given for lease premises that become irrecoverable.

A transaction is not speculative if the Revenue fails to prove it is speculative. The burden is on the Revenue to establish the speculative nature of a transaction.

Section 80AC of the Income Tax Act, 1961, is a mandatory provision. Failure to comply with its requirements results in the disallowance of the deduction.

The liability to pay service tax arises only upon its receipt by the assessee. Therefore, if the service tax liability did not exist in a particular year, section 43B cannot be invoked to disallow the deduction.

Compensation for the cancellation of an agency agreement is normally considered a capital receipt if it impairs the assessee's trading structure or results in the loss of their source of income.

Royalty payments for technical know-how are revenue expenditure if they do not result in an enduring advantage in the capital field. The assessee is entitled to deduct such royalty payments as a revenue expenditure.

The quantum of deduction under section 80-IA is determined based on the total income computed after all allowable deductions under sections 30 to 43D, irrespective of whether the assessee claimed them. This includes depreciation.

Where the Assessing Officer fails to establish a nexus between borrowed funds and advances made, a presumption arises that the advances were made out of the assessee's own interest-free funds.

Where suppliers are found to be non-existent and do not respond to departmental notices, the ITAT upholds 10% of the purchase price as an inflated amount for bogus purchases.

Disallowance of expenditure under section 14A is not permissible if the assessee has sufficient interest-free own funds exceeding the investment yielding exempt income, and no exempt income is earned in the relevant assessment year.

The decision in Berger Paints India Ltd. v. Commissioner of Income-Tax, Delhi-V is not applicable to cases where the issue is not the interpretation of premium amounts collected on share capital for Section 35D(3)(b) purposes.

Unpaid liabilities cannot be added to income under Section 41(1) solely because they remain unpaid for a long time; the revenue must prove the cessation or remission of the liability.

Section 41(1) of the Income Tax Act can only be invoked if there is a remission or cessation of a trading liability coupled with the assessee obtaining a benefit from such cessation. The absence of confirmation letters from creditors does not automatically imply cessation of liability.

Advances given for business purposes, even if not returned, are allowable as expenditure under Section 37 of the Income Tax Act.

Expenditure incurred on the issuance of convertible debentures is not allowable as revenue expenditure. Such expenditure may be treated as capital expenditure if it results in the creation of a capital asset.

Expenditure incurred for advertising products manufactured or marketed in an ongoing business is revenue in nature, even if the Assessing Officer (AO) relies on CIT v. Patel International Film Ltd. for a contrary view. Later judgments distinguish Patel International Film Ltd. where the expenditure is for ongoing business and does not create an enduring benefit.

Income generated from systematic investment of funds by eligible undertakings in fixed deposits, mutual funds, or inter-corporate deposits qualifies as business income and is assessable under the head 'profits and gains of business'.

Incidental income derived from a long-term finance business, such as processing fees and upfront charges, is eligible for deduction under Section 36(1)(viii) of the Income Tax Act.

Expenditure incurred by a company to keep itself operational and ensure its continued existence is deductible as a business expense, even if the company has not completely abandoned its business activities. Such expenses are allowed as long as they are incurred for the purpose of business.

Whether expenditure is capital or revenue in nature depends on the specific terms of the agreement, and royalty payments for the use of trademarks and know-how are not necessarily capital expenditure if they are not of an enduring nature.

For computing the profits and gains of an insurance company, the Assessing Officer must resort to Section 44 and prescribed rules, and cannot apply Sections 28 to 43B, which are excluded from Section 44's purview. This exclusion applies to Section 14A.

Steam is considered power, and its production qualifies for deductions under section 80-IA(4) even when used for captive consumption. The generation of steam is synonymous with the production of steam.

The Bombay High Court held that technical know-how granted under an agreement is not equivalent to the protected rights of a patent holder, and the limited right to use such know-how does not confer the same standing. The duration of the agreement and whether the assessee could use the know-how thereafter is immaterial.

Legal and professional expenses incurred for the purpose of business are allowable as a deduction while computing taxable income.

Investments made by a company are presumed to be from its capital and reserves, and not from borrowed funds, where the company's capital and reserves exceed the investment amount, unless the Assessing Officer records specific satisfaction to the contrary.

The assessee bears the burden of proving that expenses were incurred wholly and exclusively for the purpose of business.

Interest paid or incurred on the late deposit of Tax Deducted at Source (TDS) is not an allowable expenditure.

Maintenance charges received for the promotion and upkeep of a mall are business receipts assessable under the head 'Income from business'. This applies even if part of the premises is sold on an outright sale basis.

Deduction under section 80IA for telecommunication services is allowable in respect of profits of eligible business, not restricted to profits derived from the eligible business. Subsection (2A) of section 80IA is wider in scope than subsection (1).

Expenditure incurred in replacing old machinery with new machinery is capital in nature if each machine functions independently, even if it is part of a larger integrated process.

Tax planning is legitimate if within the law, but colorable devices and dubious methods to avoid tax are unacceptable and dishonest.

Amounts deducted by a cooperative society from payments to its members for goods supplied are revenue receipts includible in taxable income if they are part of trading operations, regardless of how they are accounted for.

A transaction is not taxable if it is a normal business activity and lacks any element of tax evasion or artificiality, even if it reduces tax liability. The commercial expediency of a decision should be assessed from the businessman's perspective, not based on suspicion by the tax department.

Interest received as part of an arbitration award can be treated as business income if the assessee files its return under Section 44AD.

The expression 'current repairs' under Section 10(2)(v) of the Income Tax Act, 1961 (formerly Section 10(2)(v) of the Indian Income Tax Act, 1922) is not restricted to only petty repairs carried out periodically, but encompasses all repairs that are revenue in nature, distinguishing them from capital expenditure.

Advertisement expenses incurred to increase sales are generally treated as revenue expenditure, not capital expenditure creating an intangible asset, due to their periodic nature and short-lived impact on customer memory.