Landmark Cases on Business Income and Deductions

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. Such expenses are incurred periodically to attract customers and are not intended to create an enduring capital asset.

The Supreme Court clarifies the operation of Section 36(1)(vii) and 36(1)(viia) of the Income Tax Act, 1961, particularly concerning their application to Non-Banking Financial Corporations (NBFCs) in contrast to banks. It emphasizes the meaning of a 'write-off' in the context of doubtful debts.

Section 43B is only attracted when an assessee claims a deduction for a sum payable by way of tax or duty. It does not restrict business activities or the system of accounting.

Expenditure incurred for acquiring a commercial advantage, such as for the construction of a jetty used for handling business materials, is considered revenue expenditure even if ownership remains with the state government.

An activity can be considered 'production' for income-tax purposes if it leads to a new, identifiable product, even if the original materials are not entirely consumed. This principle, affirmed by several High Courts including Khalsa Brothers v. CIT, establishes a settled position of law regarding what constitutes 'production'.

Expenditure must be judged from the perspective of a prudent businessman, not the revenue authorities. Revenue cannot substitute its own judgment for that of the businessman regarding the reasonableness of expenditure.

A company in existence, even without current business activity or income, is considered to be carrying on a business and is entitled to deductions for statutory expenses incurred.

The Assessing Officer cannot estimate profit at a higher rate on sales without rejecting the assessee's books of account under Section 145(3) of the Income-tax Act, especially when the books have been audited under Section 44AB.

Deduction under section 36(1)(viii) must be calculated on total income before reducing the amount allowable under that specific section.

The Assessing Officer is bound to allow a deduction under section 35(2AB) for research and development expenditure if it has been approved by the Director-General of Scientific and Industrial Research (DSIR) in Form 3CL.

Expenditure directly relatable to earning exempt income can be considered, but notional expenditure is disallowed. The Assessing Officer must establish a nexus between the expenditure and the exempt income.

Rearing of chicks is not considered an industrial undertaking, and therefore, is not eligible for deductions under income tax law.

Subsidy received for repayment of loan for setting up/expanding a unit or acquiring a capital asset is capital in nature. The purpose for which the subsidy is given determines its character.

Maintaining establishment and staff is an indication of an intention to resume business, even if there is a lull in operations, preventing the business from being considered permanently closed.

A business loss incurred from advances made in the course of business is allowable as a deduction, even if the possibility of recovery is slim and a suit for recovery is not pursued. The assessee can claim a bad debt deduction if they believe the advance is irrecoverable, without necessarily exhausting all legal remedies.

Input tax credit, if available, can be set off against the output tax liability even before the determination of the final amount payable to the sales tax department, and such set-off is permissible even for amounts that could not be set off prior to the due date of filing the return, provided sufficient input tax credit balance exists.

Electricity duty, if unpaid, is an allowable deduction under section 43B of the Income Tax Act, 1961, provided it is paid before the due date of filing the return of income. This principle aligns with the Gujarat High Court's decision in CIT v. Ahmedabad Electricity Company.

The assessee must prove that each loan on which interest is paid was utilized for business purposes to claim the interest expense deduction. Failure to discharge this onus leads to disallowance of the interest expense.

The Assessing Officer can allow deductions suo motu, even if not claimed by the assessee, when all information relating to the transaction is on record and duly evidenced.

Foreign exchange fluctuation gains arising from export business are includible in the total turnover for the purpose of computing deduction under section 80HHC.

Disallowance under Section 14A of the Income Tax Act, read with Rule 8D, cannot exceed the amount of exempt income earned by the assessee. The Punjab & Haryana High Court held that the question of whether such a restriction exists is not a substantial question of law, effectively dismissing the revenue's appeal.

Waiver of a loan taken for trading activity results in income taxable under section 41(1). However, a loan taken for the purchase of a capital asset, which was never allowed as a deduction, does not constitute trading liabilities and its waiver is not taxable under section 41(1).

The value of steam used for captive consumption by an assessee is eligible for deduction under section 80-IA of the Income-tax Act, as steam is considered a source of power with a determinable cost of production.

Investment advisory service providers are functionally comparable to companies providing investment banking services, including equity capital market transaction execution, mergers and acquisition advisory, and capital raising advisory.

Additions to income based solely on conjectures and surmises not backed by material data are not warranted.

Tax authorities must assess business expenditure from the perspective of a prudent businessman, not their own viewpoint, when determining if it was wholly and exclusively for business purposes.

Interest paid on loans is an allowable deduction against interest income earned from fixed deposits when the borrowed funds were used to generate that income.

Each clause under Section 36(1) of the Income Tax Act operates independently and does not rely on other clauses for the benefit to be extended. This principle is illustrated by a housing board liable to pay interest on delayed possession under a self-financing scheme.

The Bombay High Court holds that when an SEZ unit is not formed by splitting up or reconstruction of an existing unit, it is eligible for deductions under Section 10AA. This is because the SEZ Act overrides the Income-tax Act in such cases.

Subsidies received after commencement of production are of a revenue character and are taxable accordingly, particularly when the purpose of the subsidy is to assist in carrying out business operations rather than setting up the business.

Employee contributions to Provident Fund (PF) and Employees' State Insurance (ESI) are allowable as deductions if paid before the due date for filing the income tax return.

Income from a project is taxable in the year of completion, and completion is determined by factors like the Municipal Corporation's grant of completion and the actual handover of possession to owners.

The case distinguishes between voting rights of regular/permanent members and non-voting members, drawing a parallel to the treatment of different membership categories.

Payments made to non-resident reinsurers without deducting tax at source may be disallowed under Section 40(a)(i) if they are considered in violation of the Insurance Act, 1938.

Deductions for provisions made for expenses such as 'IBNR & IBNER' are allowable business expenses, even if not an ascertained liability at the time of provision, particularly when following IRDA regulations.

Interest income earned on delayed or overdue payments from customers is assessable as profits and gains from business for the purpose of computing deductions under Chapter VI-A of the Income-tax Act.

Income Tax authorities cannot disallow a portion of interest paid on borrowed capital if the borrowing transactions are not illusory or colourable and the capital is borrowed for business purposes. The determination of a reasonable interest rate lies with the assessee.

Foreseeable losses, when determined on an estimated basis as per Accounting Standard 7 (AS-7) and duly debited in audited accounts, are allowable as expenditure under section 37(1) of the Income Tax Act, irrespective of the accounting method used.

Reimbursements received by a business are not part of its gross receipts or turnover if they represent mere recovery of expenses, and thus, profit cannot be charged on such reimbursements.

The Assessing Officer (AO) is not empowered to reallocate expenses under Section 80IA(8) of the Income-tax Act when assessing eligible units. The AO's addition of GP without proper application of mind and comparison with excise law is questioned.

The nature of a receipt, whether derived from exploiting a business asset or otherwise employing it for profit, is a substantial question of fact and law.

Reinsurance is an arrangement where an insurer transfers risk to a reinsurer to reduce its liability. This arrangement does not affect the relationship between the original insured and the direct insurer.

Expenditure incurred for upgrading an existing product is revenue expenditure, not capital expenditure, as it keeps the product competitive and responsive to market changes. Such expenditures do not create an enduring benefit.

Assembling air purifiers using simple tools and testing equipment constitutes 'manufacture' for the purpose of claiming deductions under Section 80IC of the Income-tax Act, 1961, as the final product is entirely different from its constituent parts.