Landmark Cases on Business Income and Deductions

Disallowance under Section 14A of the Income Tax Act is restricted to the extent of exempt income earned during the year, even when the Assessing Officer claims a higher amount.

Brokerage expenses are revenue in nature and should be debited to the profit and loss account, not capitalized.

An assessee is entitled to claim deduction under section 80-IB even if the certificate in Form 10CCB was not filed along with the return of income, provided it is filed before the final order of assessment is made.

Mining and transportation activities in specific areas of the Bellary district were suspended by the Supreme Court.

Disallowance under Section 14A is subject to judicial review and can be remitted back to the Tribunal for further consideration.

No disallowance under section 14A of the Income-tax Act can be made in the case of a company engaged in the insurance business.

The entire amount collected by an assessee cannot be treated as income; only the estimated income can be adopted if the assessee does not perform all the agreed obligations.

An Assessing Officer must consider factors like quality, size, employee cost, administrative cost, interest cost, working capital cost, debt recovery cost, and quality factors when determining sale price. Failure to give due weightage to these can invalidate additions made on account of lower sale price.

Interest paid on an overdraft used for investment in shares of a subsidiary company, where bifurcation is not possible, is deductible under Section 36(1)(iii). This is because the investment was made to maintain control over the subsidiary, which benefits the assessee's business.

Surcharge or cess forms part of 'tax' and cannot be allowed as a deduction when computing business profits. This is clarified by Explanation 3 to Section 40(a)(ii) of the Income-tax Act, effective from 1 April 2005.

An Assessing Officer must verify facts and decide the quantum of disallowance under section 36(1)(va) when the matter is remanded by the CIT(A). The issue of employee contributions to EPF/ESI remitted after the due date for filing the return under section 139(1) but before the due date for filing the return under the respective Acts, is settled by the Supreme Court in Checkmate Services (P) Ltd.

Disallowance of administrative expenditure cannot be made if it is not incurred to earn exempt income. Expenses pertaining to the main business activity are unrelated to earning dividend income, especially when dividend income is a small fraction of total revenue.

Where the mercantile system of accounting is followed, foreign exchange fluctuation losses on circulating capital or revenue accounts are treated as revenue expenditure in the year of devaluation.

An assessee cannot be penalized with an addition for delayed deposit of employee contributions to PF/ESIC when the deposit was made before the due date but credited late due to technical glitches or reversal by the bank. The addition is disallowed if the assessee initially deposited dues before the prescribed dates but glitches caused delays.

Payments made for purchasing stock-in-trade or raw materials are considered expenditure for the purpose of Section 40A(3). An assessee's ignorance of a newly inserted prohibition on cash payments can lead to deletion of disallowances.

Expenditure incurred for obtaining a license for technical know-how for a limited period is a revenue expenditure as it does not create an asset of enduring nature.

Remission of a liability in a subsequent assessment year, for which a deduction was obtained in an earlier year, cannot be taxed as income if the assessee maintains accounts on the mercantile system.

Interest expenses should be allowed as a deduction under the head 'income from other sources' if interest income is taxed under the same head. This principle applies even when the interest pertains to a tonnage scheme.

Interest paid on borrowed moneys for the payment of income tax is not a permissible deduction. Expenditure incurred to meet personal liability, rather than for earning income, is not deductible.

Where an amount is diverted by an obligation before it reaches the assessee, it does not form part of the assessee's income. This principle applies to income that is diverted at source.

Section 14A applies even if no dividend income is earned by the assessee from share investments. The intention of the legislature is to disallow all expenditures incurred in relation to income that does not form part of the total income.

Under the mercantile system of accounting, income that has accrued cannot be waived on the ground of diminished hope of recovery.

Expenses are deductible under Section 57 only if they are incurred wholly and exclusively for the purpose of earning income. There must be a direct nexus between the expenditure and the earning of income.

Only real income, not hypothetical income, is chargeable to tax, even under the mercantile system of accounting. The true nature of a transaction and whether it has resulted in profit or loss must be considered for taxability.

Assessee must establish the actual financial liquidity position on the relevant date to prove that borrowed funds were used for business purposes, rather than merely showing that profits exceeded investments in the assessment year.

A sum allowable under section 40A(7) is not deductible if it fails the payment criterion of section 43B.

Hedging transactions are considered business losses if they are undertaken to reduce the risk of time fluctuations. Speculative transactions undertaken for profit without correlation to underlying risks are not considered hedging.

Expenditure incurred on obtaining a market survey for setting up a new line of business is capital expenditure.

Interest earned from temporary utilization of borrowed funds, even if used for reducing liabilities, is considered income. This applies even if the primary purpose of borrowing was for business.

Deductions for statutory liabilities like service tax are allowable in the year the liability is incurred, even if paid in a later year, due to the overriding nature of Section 43B.

Expenditure incurred on the construction of a railway track and siding is revenue expenditure, not capital expenditure, when facts are similar to those decided in this case.

Expenditure is allowable as a deduction if it is incurred wholly and exclusively for the purposes of business. The businessman is the best judge of business expediency.

Repossessed vehicles can be considered stock-in-trade for the purpose of income tax, allowing for deductions related to their valuation. A loss on such items is not necessarily a notional loss if the realizable value is estimated.

Expenditure on the right to use leasehold land is allowable as revenue expenditure. Such an issue, being debatable, can preclude the levy of penalty under Section 271(1)(c).

The Bombay High Court ruled that trading in derivatives does not necessarily constitute a speculative business under Section 73 of the Income Tax Act, 1961. This applies even if the assessee's primary activity involves the purchase and sale of shares.

Income earned from inter-corporate deposits or lease rentals from telecom towers should be assessed as business income, not income from other sources, if the activity aligns with the company's objects.

No disallowance can be made under Section 40A(3) of the Income Tax Act if the genuineness of the payment is established, even if made on holidays.

For expenditure to be disallowed under Section 14A, the revenue must establish a nexus between the expenditure and the exempt income. The onus is on the revenue to prove this connection.

Non-compete fees paid by an assessee are not admissible as revenue expenditure. The case can be remitted for verification of certain financial transactions, such as vehicle purchases.

Investments made by an assessee are presumed to be out of interest-free funds, and no disallowance under Section 14A is warranted if no dividend income is received from such strategic investments.

Disallowance under section 14A is applicable to investments made in shares of domestic companies but not foreign companies.

Income that does not arise from the business turnover is not includible in the profits for the purpose of calculating deduction under Section 80HHC. Miscellaneous income and insurance claims are not part of turnover.

Expenditure incurred for setting up a new project, even if abandoned, is not revenue expenditure if it pertains to a period prior to the assessment year in question. Such expenditure relates to the acquisition of a capital asset or the establishment of a new business.

Technical expenses incurred for business purposes are allowable as deductions. Advances written off in the ordinary course of business are deductible as losses.

Ad hoc additions to income are not permissible without specific evidence. Disallowances must be based on concrete findings, not mere presumptions.

Excise duty paid on raw materials, which is not refunded when goods are returned, constitutes an expense deductible under Section 37(1) of the Income Tax Act.

The test of enduring benefit is not a conclusive test for distinguishing capital from revenue expenditure and should not be applied mechanically.

Section 44 of the Income Tax Act, which deals with the computation of profits and gains of insurance business, overrides Section 14A of the Act. This means that Section 14A, concerning disallowance of expenditure incurred in relation to exempt income, is excluded in relation to the computation of income of an insurance company under Section 44.