Landmark Cases on Business Income and Deductions

Payment of interest cannot be disallowed as business expenditure merely because the assessee is a cash-rich company. Expenditure incurred subsequent to project completion, following the percentage completion method, must be allowed as revenue expenditure.

The Assessing Officer cannot arbitrarily reject the profit margin disclosed by the assessee and must base estimations on a rational and fair basis.

Businesses engaged in works contracts after amendments to Section 80-IA(4) are not eligible for deduction under that section as works contracts have been specifically excluded.

An assessee engaged in transmitting customized electronic data abroad is entitled to deduction under Section 80HHE, as such business activities fall within the scope of the section.

Grants released by the government for repairs and maintenance are capital receipts and not revenue income, thus not taxable.

A provision for expenses can only be recognized for tax deduction when the obligation has already fructified, meaning it has become a present liability.

An assessee is not required to maintain separate books of account for an undertaking eligible for deduction under section 80IB of the Income Tax Act.

An activity is considered 'manufacture' if it results in a new and different good with a distinctive name, use, and character, or if the process is so integral to the ultimate production of goods that it is impossible or commercially inexpedient without it.

Where an obligation requires a receipt to be applied to discharge it after it has reached the assessee, it forms part of the assessee's income. The nature of the obligation is the determining factor.

For the purposes of the deduction under Section 36(1)(viia) of the Income Tax Act, 1961, the aggregate average advances made by rural branches of a scheduled bank should be computed by aggregating separately the advances made by each rural branch as outstanding at the end of the last day of each month comprised in the previous year. The method of taking only the loans and advances made during the year is incorrect.

Interest paid on borrowed funds used for construction is deductible as a revenue expenditure, even if the assessee follows the projection completion method. Such interest can be allowed as a deduction under section 36(1)(iii).

Where interest-free funds available with the assessee are sufficient to meet the investments made, a presumption arises that such investments are out of interest-free funds, and therefore, interest paid on borrowed funds is deductible. The assessing officer must establish a direct nexus between borrowed funds and the investment in capital work-in-progress (CWIP) to disallow interest.

Taxability of an income or expenditure is determined by the provisions of the Income Tax Act, not by the accounting entries made by the assessee. The actual nature of the transaction under the law dictates tax consequences, irrespective of how it is reflected in the books of account.

The construction, delivery, and maintenance of an infrastructure facility constitutes a transfer of property in chattel, not merely a contract for services. This distinction is relevant in determining tax liabilities, especially for deductions and business income.

Interest paid on debentures, whether fully, partly, or optionally convertible, is deductible as a business expense, as debentures are considered debt until the date of conversion.

The assessee bears the burden of proving that borrowed funds were utilized for business purposes, particularly when claiming deductions for interest paid on such borrowings.

Expenditure is revenue in character if the object for which a lease is taken and the nature of payment are for acquiring a short-term asset for disposal, rather than for acquiring an asset of enduring benefit.

The terms "trade, commerce or business" can be explained through the concept of "economic activity", which is relevant for indirect taxes like sales tax, VAT, and excise duty, as the taxable event arises from such activity, not income. This applies even if the activity is conducted on a "no loss no profit" basis.

Research and development charges are to be allowed as revenue expenditure under Section 37 of the Income-tax Act if they are incurred wholly and exclusively for business purposes.

For a business connection to exist under section 42, the non-resident's activity in India must have a continuous, intimate, and real relationship with their business, contributing to profit generation. Rectification under section 154 extends to eliminating errors that may undermine the entire order.

Where an assessee company consistently follows the project completion method for computing profits in the real estate business, the Assessing Officer cannot unilaterally apply the percentage completion method.

Steam generated is considered a form of power for the purpose of claiming deductions under Section 80IA of the Income Tax Act.

If business receipts are accepted based on seized documents, related expenditure must also be accepted, and net income estimated. No separate addition for unexplained expenditure under section 69C is permissible if business receipts under section 28 are already accepted.

Technical know-how fees are recoverable for a specified period, and this recovery is permissible when approved by the RBI. The issue has been decided in favour of the assessee in its own case for identical facts and assessment years.

A business is considered 'set up' when it is established and ready to start functioning as a manufacturing or business organization, distinguishing it from mere operations for setting up or commencement of business. Expenses incurred before the actual commencement but after the business is set up are allowable as revenue expenditure.

Expenditure treated as deferred revenue expenditure, where the benefit is enduring but the expenditure is in the revenue field, is considered revenue expenditure. This implies that tax law does not recognise a separate concept of deferred revenue expenditure distinct from capital or revenue expenditure.

Income from the sale of scrap generated during manufacturing activities is eligible for deduction under Section 80IB of the Income Tax Act.

Expenses incurred wholly and exclusively by an Indian branch are not allocable to other branches or the head office, and Section 44C of the Act is not applicable in such cases.

The employer's contribution to employees' provident fund paid after the due date is not eligible for deduction if paid after the due date for filing the return of income.

When rejecting an assessee's books of account, the Assessing Officer should use the assessee's past profit history as the best guide for estimating trading results. This past history takes precedence over comparable cases.

The Assessing Officer (AO) cannot intervene in business decisions made by an assessee for commercial expediency, nor can the AO replace the assessee's judgment in such matters. Decisions made by the assessee are presumed to be taken out of commercial expediency.

Sales promotion and publicity expenses are considered business expenditures aimed at generating goodwill and facilitating business operations, falling under commercial expediency. These activities are not limited to direct media propaganda but can include indirect approaches to market presence.

A transport subsidy intended to stimulate industrial activity and development in a backward region is a capital receipt, not a revenue receipt, regardless of the accounting procedure followed by the assessee.

The Income Tax Appellate Tribunal (ITAT) confirmed a decision regarding the eligibility for deduction under Section 80-IA of the Income Tax Act, 1961. The High Court formulated a question of law concerning whether the assessee fulfilled the conditions for this deduction.

Payments made by a milk cooperative union to its member societies based on the quantity of milk supplied, representing a final rate difference, are not distributions of profit and are allowable as business expenditure. This is because the resolutions to pay were passed before the end of the financial year, even if disbursement occurred later.

Provisions of Section 41(1) cannot be invoked to treat an unpaid liability as income unless there is a declaration by the assessee that it does not intend to honor the liability, or there is a discharge of debt.

An assessee must maintain separate books of accounts for an industrial undertaking to be eligible for deductions under Section 80-IA, even if centralized accounts are maintained, provided there is no interlacing or interdependence between units.

Expenses incurred by an assessee are considered revenue in nature if they are ongoing and incurred for the purpose of earning profits, rather than for establishing the profit-earning machinery.

Forfeited security deposits paid by a tendu leaves trader under a contract with a forest corporation, when the contract is not fulfilled, can be claimed as a business loss. The disallowance by the Assessing Officer is incorrect, and the claim can be allowed by the appellate authorities.

The Assessing Officer (AO) cannot override the decision of the prescribed authority (DSIR) regarding the approval of expenditure for weighted deduction under section 35(2AB). The AO must allow the assessee an opportunity to be heard before quantifying any expenditure.

Expenditure is capital in nature when its purpose is to bring a capital asset into existence, as determined by settled tests.

Income arising from the sale of shares is assessable as business income when the assessee is selling shares very frequently with high volume and magnitude, and earning only a meagre amount of dividend.

When an amount is written off as a bad debt in the assessee's books, it is sufficient compliance for claiming it as a deduction under section 36(1)(vii) of the Income-tax Act, 1961, without requiring the assessee to prove that the debt has actually become bad or unrecoverable.

Where an assessee fails to furnish necessary details for a claim, the claim can be disallowed on the ground that the assessee has not established that the expenditure was incurred wholly and exclusively for the purposes of business.

The reasonableness of an expenditure must be judged from the viewpoint of a prudent businessman, considering the legitimate business needs and the benefit derived by the company, and not solely from the revenue's perspective. The approach should be that of a businessman.

Deductions under Section 40(a)(ia) for payments where TDS was not deducted are not permissible if the liability was contingent and no bills were issued in the year of consideration.

Payment for acquiring technical know-how for the manufacture of a plant for a limited period is revenue expenditure, not capital expenditure.

If an assessee proves that an expenditure was incurred in its commercial expediency for running the business effectively, the Revenue cannot deem it unnecessary or uncalled for.

RBI norms permitting recognition of interest on NPAs on a cash basis for accounting do not override tax provisions; such interest income is taxable under the Income Tax Act even if not accrued in the assessee's books.