Landmark Cases on Business Income and Deductions

Non-maintenance of stock by an assessee, which has a substantial effect on profit determination, justifies an inference that accounts were not maintained properly, allowing for estimation of income.

Interest paid on borrowed capital is not disallowable if investments or advances are made to subsidiary companies for the purpose of furthering the assessee's business.

Expenditure on a special advertisement campaign is not necessarily capital expenditure, even if incurred for opening new branches. The nature of the advantage derived from the expenditure is the key consideration.

Expenditure is deductible as wholly and exclusively for the purpose of trade or business if it is incurred as incidental to trade to keep the business going and profitable, not in any other capacity than as a trader. The assessee must satisfy the department regarding the purpose of the expenditure to be eligible for an allowance under Section 37(1).

The intention of the assessee is relevant in determining whether shares are held for trading or investment purposes.

Income derived from temporary deployment of funds is generally assessable as business income rather than income from other sources.

Cess is not in the nature of tax, and therefore, not disallowable expenditure under Section 40(a)(ii) of the Income-tax Act.

Deductions under Section 80-HH and Section 80-I are independent, meaning a deduction under Section 80-HH does not need to be reduced from profits before calculating the deduction under Section 80-I.

Interest received from others must be excluded when computing the net amount eligible for deduction under section 80IA of the Act.

The process of heat treatment applied to automobile parts like crankshafts constitutes manufacturing and is eligible for deductions, as it renders the parts marketable by imparting essential qualities for their intended use, even without a physical change.

A Tribunal allowing a claim for share loss cannot be considered erroneous or perverse if the loss is genuine and eligible for deduction.

Compensation received for the cancellation of a distribution agreement, which leads to the impairment of the profit-making apparatus and sterilization of the source of income, is considered a capital receipt and exempt from tax.

Extraordinary profits alone do not prove an "arranged" manner for claiming higher deductions under Section 10A; the Assessing Officer must prove an arrangement between parties that resulted in such profits.

Expenditure paid in cash is not disallowable under section 40A(3) if the assessee establishes that the payment was made in exceptional and unavoidable circumstances or if payment by cheque was not practicable and would have caused genuine difficulty, provided the transaction is genuine.

Industrial undertakings do not need to be registered under the Factories Act, 1948, to qualify for deductions under sections 80J and 80HH of the Income Tax Act. The issue of needing permission for generating steam or cooling power is also not a prerequisite.

The deduction for employee contributions to PF and ESIC is not allowed if not deposited by the employer before the due date prescribed under the Act. The time for deposit can be extended by the EPF Officer.

Interest paid on borrowed funds is disallowed to the extent these funds are advanced interest-free to sister concerns or used for non-business purposes. This is because the borrowed funds are not being used for the purpose of the assessee's business.

Processing film and printing photographs from negatives is considered a manufacturing or production activity for tax purposes.

Expenditure incurred by an artificial juridical person to maintain its existence and continue its business operations is allowable as a business deduction, provided it is not excessive or unreasonable for legitimate business needs.

Amounts due from government bodies cannot be allowed as bad debts.

Expenditure incurred by a real estate developer under a development agreement, such as for air conditioning, car parking, advertisement, sales promotion, and legal charges, is considered a business expenditure deductible from income.

Interest income earned from deposits of export proceeds in a bank does not have a direct nexus with an industrial undertaking and therefore cannot be considered as business income for the purpose of claiming deductions.

Section 44AD of the Income Tax Act, 1961, which allows for presumptive taxation, does not apply if the assessee's total turnover exceeds the limit specified in that section.

Disallowance under section 40A(3) read with section 6DD of the Rules is not justified when the assessee demonstrates circumstances that warrant an exception, as per the conditions laid out in the rules.

An assessee is justified in not recognizing income if assets are classified based on RBI notifications, and the principle of accrual is not applicable in such scenarios. Expenditure incurred under Section 37 and the accrual of income are distinct concepts.

Frequency of transactions, volume, magnitude, use of borrowed funds, period of holding, and assessee's infrastructure are key factors in determining whether transactions constitute business income or capital gains, based on the facts of each case.

Discounting charges paid by an assessee are not interest income under Section 2(28A) if they are not payable in respect of money borrowed or debt incurred. Such charges are not disallowable under Section 36(1)(iii) of the Income Tax Act.

The nature of an agreement, including its duration, renewal terms, and the basis of commission payments (percentage of net sales versus lump sum), are factors considered in determining its characterization for tax purposes. The termination or expiration of such agreements is also relevant.

Interest earned on Fixed Deposits/Demand Drafts/Earnest Money Deposits made for business purposes is to be treated as business income, not income from other sources. The Revenue cannot treat such interest as income from other sources solely on the grounds that details of the FDRs were not furnished to the Assessing Officer if such details were otherwise on record and the FDRs were demonstrably for business purposes.

Expenditure incurred on acquiring a software license with a shelf life of less than two years is allowable as revenue expenditure.

A loan taken for the acquisition of a capital asset, when subsequently waived, is not chargeable to tax.

Profits derived from industrial undertakings are eligible for deductions under sections like 80-IB or 80-IC, provided there is a direct nexus between subsidies received (such as transport, interest, power, or insurance subsidies) and the profits and gains generated by the industrial undertaking's manufacturing activities.

Expenditure incurred for the purchase of application software is allowable as a revenue expenditure if it is part of business operations.

Expenditure incurred on bond issue expenses is treated as revenue expenditure. Lease equalization charges may be disallowed/deleted from the profit and loss account for computing book profit under Section 115JA.

When the Assessing Officer rejects the books of account and estimates the net profit, no separate deduction, including depreciation, is allowable.

Expenditure incurred for laying power transmission lines, which upon erection constitute the exclusive property of the electricity supply company, is not capital expenditure for the assessee.

Income accrues or arises to an assessee when it becomes due to him, even if it is not actually received. The taxing of income is based on real income, not notional income.

A liability incurred by an assessee, even if disputed, is deductible in the year it is incurred and becomes enforceable, such as through an arbitration award or court decree, regardless of subsequent legal challenges or stays.

The doctrine of 'lifting the corporate veil' is not applied as a matter of course and requires cogent and compelling reasons with detailed factual investigation. Payments made to related parties cannot be disallowed without proving they were not for bonafide reasons.

Interest received on margin money placed for business purposes is not taxable as income from other sources and is eligible for deduction under Section 80-IA as it is incidental to the assessee's business.

Expenses relatable to a specific industrial undertaking can only be deducted while computing profits and gains of that undertaking. Expenses not relevant to the industrial undertaking cannot be deducted.

State taxes paid overseas cannot be allowed as a deduction in view of Section 40(a)(ii) of the Income Tax Act, 1961. However, subsequent judicial pronouncements may alter this position.

Expenditure incurred in relation to income earned from securities held as stock-in-trade is not disallowable under Section 14A read with Rule 8D.

The Supreme Court held that the term 'tax' under section 40(a)(ii) of the Income-tax Act includes cess. This decision clarifies that disallowance under section 40(a)(ii) applies to education cess, and subsequent retrospective amendments to the section are relevant.

The rate of profit to be applied for assessment purposes is the average profit reported in the preceding three years. This rate should be adopted from contract receipts as total income.

Income derived from leasing out commercial property, such as warehouses constructed by the assessee, constitutes business income. This is especially true when the property is specifically constructed for a particular business purpose and licensed accordingly.

Amounts received from sales do not automatically represent the income of an assessee when the assessee has not disclosed these sales, and such sales only represent the price received for goods acquired at a cost.

Electric energy can be treated as movable property, capable of being transmitted, transferred, delivered, and stored. The generation of electricity is considered production.

Losses incurred in a trade transaction, even if due to an error and not recovered for business reasons, are considered losses in the course of business and should be allowed as such.