Landmark Cases on Business Income and Deductions

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.

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 operating in various states are not considered undisclosed sales for income tax purposes.

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.

Processing fees paid for obtaining a loan are considered interest under section 2(28A) and are therefore deductible. Payments of interest to a banking company are also exempt from TDS under section 194A(3)(a)(i).

Expenditure is capital if it results in an asset of enduring advantage, which requires looking at the nature of the payment and the asset acquired, as well as the aim and object of the expenditure.

Section 40A(3) disallowance cannot be applied when assessment is based on undisclosed investment, as this section applies only when genuine expenditure is incurred but the mandate of Section 40A(3) is violated.

Disallowance of employee's contribution to PF/ESI due to delay in deposit, even if made in the first month of the financial year, may be treated as an advance payment for the dues of the following month. The Supreme Court in CIT v. NTPC Ltd. referred to this principle.

The discounted premium on Employees Stock Options (ESOPs) is allowable as a deduction under Section 37(1) of the Income Tax Act, as it constitutes a business expenditure and not a notional loss.

Setting up a new industrial unit by a company already running one does not amount to reconstruction of business, and the new unit retains its separate identity. The objective is to incentivize the establishment of new industries to accelerate industrialization.

Expenses incurred by a taxpayer to enhance the effective functioning of their business, such as upgrading computer software for greater efficiency, are characterized as revenue expenditure, not capital expenditure.

The case holds that charges recovered from contractors and reimbursement of expenses are eligible for deduction under section 80IA.

Purchases from farmers, confirmed by officials, are conclusive proof of farmer purchases, making Rule 6DD of the Income Tax Rules applicable to uphold cash purchases.

A liability accrues only when it is determined and crystallized, or when required prior approval for incurring the expenditure has been obtained. Merely relating to an earlier year or a potential future obligation does not make it a liability in that earlier year.

An industrial undertaking carrying on printing activity qualifies as an undertaking that "manufactures or produces any article or thing" for tax purposes.

Interest paid on borrowed funds cannot be considered an expense incurred wholly and exclusively for the purpose of earning income if the borrowed funds are deposited for short periods and earn interest. The interest income from such deposits is incidental and independent of the borrowings.

The Supreme Court, in the context of distinguishing cess from tax, found that the specific issue in India Cements Ltd. v. State of Tamil Nadu (188 ITR 690) was different from whether cess was included in tax provisions like Section 43B(a).

Expenditure on scientific research for weighted deduction must satisfy the conditions in section 35(2AB) and also the provisions of section 35(3)(b) of the Income Tax Act.

Whether transactions constitute 'business' depends on the volume, frequency, continuity, and regularity of purchase and sale, and ordinarily requires a profit motive, though this can be statutorily excluded. Incidental or ancillary sales activities are not business unless there's an independent intention to conduct business in those activities, which the Revenue must establish.

Investments on which no exempt income was received during the year, and investments in subsidiaries considered strategic, are excluded from average investment calculations for determining disallowance of interest expenses.

For the purpose of computing deduction under Section 10AA of the Income-tax Act, 1961, 'export turnover' does not solely include direct exports where the assessee brings foreign convertible exchange into India, and the principles applied to Section 10A may not be directly applicable due to differing definitions of 'export turnover'.

Roasting and grinding chicory roots into chicory powder does not constitute manufacturing activity, as it fails to satisfy the test for production of a new article laid down in Aspinwall & Co. Ltd.'s case.

The Court of Appeal reversed the Assessing Officer's decision, holding that interest income should be classified as business income rather than income from other sources.

Income received in advance for services to be rendered in future, like post-warranty service charges or time-share sales, is taxable in the year(s) services are provided, not in the year of receipt. The amount pertaining to the year under consideration should only be taxed.

Share application money, before allotment, cannot be considered as an investment for computing disallowance under Section 14A read with Rule 8D(2)(iii). Such amounts represent a debt, not an asset eligible for investment-related disallowance.

Security deposits held for extended periods are not subject to income tax.

Interest paid for the belated remittance of service tax is compensatory in nature and therefore deductible as a business expenditure under Section 37(1) of the Income Tax Act.

Expenditure incurred on advertising is necessary for the promotion of business and should be allowed as a business expenditure, not forming part of project cost.

Expenses incurred on lease rent can be deducted when computing business profits if recognized on a straight-lining basis in line with Accounting Standards.

The Assessing Officer must produce concrete material and evidence to justify additions to income, especially when rejecting books of account. A mere observation that profit margins are commensurate with past years is insufficient on its own to disallow expenses or make additions without rejecting the books of account.

Expenditure incurred to discharge a contractual liability to bear the tax liabilities of payees is allowable as a deduction, even if it relates to TDS.

No disallowance can be made under section 14A if the assessee has not earned any exempt income in the relevant assessment year.

Once the conditions for deductibility of business expenditure under Section 37(1) are met, the Assessing Officer cannot question whether the expenditure was legitimate or necessary. Disallowance is permissible only if the claim is found to be bogus, false, or not incurred.

A change in the method of valuing stock, particularly bifurcating stock without justification, can lead to the disallowance of such valuation.

Waiver of a loan liability for the purchase of a capital asset does not fall under Section 28(iv) as the benefit is not received in kind. This section only applies when a benefit or perquisite is received in kind, not in cash.

Expenditure incurred for the maintenance of a Chamber of Commerce, to which the assessee is a member, is admissible as a business expenditure if the Chamber's activities further the business interests of its constituents.

The jurisdictional High Courts have consistently viewed that section 80IA(10) applies when there are common expenses pertaining to normal income and income eligible for deduction under section 80IA.

Construction activity is not considered manufacturing or production for the purpose of claiming deductions under sections 80HH and 80I of the Income Tax Act. This means companies purely engaged in construction are generally ineligible for these deductions.

Commercial expediency encompasses all means that serve to promote commerce and is best understood from the perspective of a businessman, not the revenue authorities.

Expenditure incurred on foreign travel for the wife or sister of a company director is only deductible if the assessee proves it was for business purposes. The assessee must provide evidence to support the business necessity of such expenditure.

The High Court upholds the Tribunal's decision to reduce net profit from 12% to 8% and allows depreciation to be claimed out of net profit.

Expenses are considered revenue expenditure if incurred for business expediency, even if the business has not yet commenced, as the perspective of the businessman determines commercial expediency.

Deduction under Section 36(1)(viia)(c) is to be applied after considering the deduction allowable under Section 36(1)(viii) of the Income Tax Act.

An Assessing Officer's allocation of expenses based solely on capital investment is unjustifiable if it lacks a nexus with the expenses incurred.

Disallowance of expenses under section 14A read with Rule 8D cannot be made in the absence of exempt income earned by the assessee during the year. Even the disallowance under Rule 8D(2)(iii) cannot survive if no exempt income is earned.