Landmark Cases on Business Income and Deductions

Income earned from the sale of scrap generated during the manufacturing process is eligible for deduction under Section 80IB, as it is considered incidental to the manufacturing activity. Similarly, profits from job work are eligible for deduction under Section 80IB as the assessee is permitted to manufacture for itself or others.

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 amounts to 'production' if it results in the creation of something new, even if the process is not fully manufacturing. This classification favors the assessee in tax disputes.

Disallowance under Section 14A read with Rule 8D(2)(ii) is not warranted if the assessee's own funds exceed the investment made, as it indicates the investment was not made from borrowed funds.

Expenditure incurred by a business must be judged from the perspective of a prudent businessman, not the revenue authorities. The revenue cannot substitute its own judgment for that of the businessman regarding the reasonableness of an 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.

Processed or frozen food items are commercially regarded as the same commodity as their raw counterparts, and subjecting them to processing does not change their essential nature.

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 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.

The income-tax appellate tribunal must follow the decision of the Gujarat High Court in CIT v. Amba Impex (2006) 282 ITR 144 regarding the rework of deduction under Section 80HHC in connection with exchange rate fluctuation income and the exclusion of sales tax and excise duty from total turnover for the purpose of calculating the deduction.

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).

Deductions for employee contributions to provident fund and ESI are allowable if paid before the due date of filing the return of income, even if paid late, as long as it is prior to the due date of filing the return.

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.

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.

Amendments to Section 43B and Section 36(1)(va) of the Income Tax Act by the Finance Act 2021 are prospective. A jurisdictional High Court decision in favour of the assessee prevails.

The distinction between voting rights for regular/permanent members and non-voting members is significant in tax proceedings.

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.

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.

The Assessing Officer (AO) is not empowered to reallocate expenses under Section 80IA(8). The eligible unit needs to be assessed independently, and the AO cannot reallocate expenses without a specific provision in the Act.

The characterization of income derived from the exploitation or employment of business assets for profit is a substantial question of fact and law, with the nature of the receipt depending on the specific circumstances.

Expenditure incurred for earning income is deductible even if no such income is actually earned in the year under consideration. Actual earning of income is not a prerequisite for claiming such expenditure.

Reinsurance is an arrangement where an insurer transfers risk to a reinsurer to reduce its liability, without affecting 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', entitling the assessee to a deduction under Section 80IC of the Income Tax Act.

There is no provision in income tax law compelling a taxpayer to sell goods at market value; a taxpayer can sell at a concessional price without violating the law.

A contract for the sale of goods, where the item exists and is the sole property of the seller before delivery, is distinct from a contract for labour or works. When the bulk of materials belong to the manufacturer selling the end product, it strongly indicates a contract for the sale of goods.

Periodic maintenance expenses incurred on a road constructed under a concessionaire agreement are allowable as a deduction under Section 37, even if such repair work is carried out only in the 5th year.

Interest earned on surplus funds deposited in fixed deposits or government securities during the implementation phase of a power project is a capital receipt and not taxable as income from other sources. This is because the deposit of funds is inextricably linked to the setting up of the project and reduces the project cost.

Investment through a Portfolio Management Service (PMS) is a prudent mode of investment for earning higher returns, not a business activity. A PMS agreement is merely an agency agreement and does not infer an intention to make a profit from trading.

Stock transfers between different units of a business are not considered undisclosed sales, provided there is a clear procedure for the movement of goods. Such movements are part of the appellant's operational activities across different states.

Payments made to a State Road Transport Corporation can be considered as payments to a 'State' and therefore are protected from disallowance under section 40A(3) by Rule 6DD(b). This protection applies when the entity partakes in the character of instrumentalities of the Government.

Section 14A applies even where the assessee's motive for acquiring shares is to gain controlling interest in a company, rather than to earn dividends.

The deduction under Section 80-IA for an infrastructure facility is available only if the eligible business begins to operate during the specified period and is not merely a continuation of an existing business. The nature of the business and its commencement are critical for claiming this deduction.