Landmark Cases on Business Income and Deductions

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.

Manufacture involves changes to a raw material resulting in a new commercial commodity, though the original article need not lose its identity completely.

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.

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.

Where the Assessing Officer estimates net profit at a certain rate of turnover, such estimation can be restricted to a lower rate in appeal, especially if similar estimations were accepted in preceding or succeeding assessment years.

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.

The Bombay High Court upheld the assessee's claim for deduction under Section 80-IB(10) against the Revenue's disallowance, confirming that the Assessing Officer's interpretation and the disallowance were not justifiable.

Income accrues or arises where the business is actually done and services are performed. The right to commission and its accrual are determined by the location of the actual business activity.

Deduction for interest payable under an arbitration award is allowable in the year the liability is incurred, even if disputed or stayed, provided the payee initiates recovery proceedings.

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.

When computing profits and gains for a specific undertaking, only expenses directly related to that undertaking are deductible. Expenses attributable to other units or head office costs irrelevant to the 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.

Ad-hoc disallowances made without cogent reasons are unsustainable in law.

The area of a projected terrace, which is open to the sky, should be excluded when calculating the built-up area for the purpose of assessing compliance with the condition prescribed in Section 80IB(10)(e) of the Income Tax Act.

The loss on forward contracts can be allowed as a deduction if it pertains to the business of manufacture of cotton textiles and the forward contracts are in respect of those goods.

A liability that has ceased to exist, such as a written-off trade creditor amount, can be brought to tax under Section 41(1) of the Income Tax Act. A business loss can also be allowed as a bad debt.

In case of ambiguity, a taxing statute should be construed in favour of the taxpayer does not apply to a provision giving taxpayer relief from a section clearly imposing liability. Exceptions and exemptions must be construed strictly, with any doubt favouring the state.

The withdrawal of a Special Leave Petition (SLP) by the revenue, as reported in DIT v. Linde AG Linde Engineering Division, signifies acceptance of guidelines issued by the CBDT. Payments made by a Joint Venture (JV) to its JV partner are considered diverted income and do not fall under the purview of Section 40A(2) of the Income Tax Act.

Disallowance under section 14A is legally impermissible for investments made using interest-free funds, as the rule of law interprets section 14A in favour of assessees when interest-free funds are sufficient to meet investments.

The claim for deduction under Section 80-IB(10) of the Income Tax Act is allowed in respect of specific wings of a housing project if those wings comply with the conditions. The jurisdictional High Court's decision dismissing the Revenue's appeal was upheld by the Supreme Court.

A deduction under section 80IB(10) is allowable on a pro-rata basis for the portion of a housing project that fulfills all stipulated conditions, even if some units or aspects of the project violate the conditions.

The addition on account of bogus purchases can be made on an estimated basis, specifically at 6% of the bogus purchase value, when the assessee was not given an opportunity for cross-examination and did not provide the whereabouts of the parties. The case also highlights that if books of accounts are not rejected and sales are accepted, only the profit embedded in such purchases can be added.

Revised Accounting Standard 7 (AS-7) cannot be applied retrospectively to an assessee if it was not applicable at the relevant time, and the principle of consistency requires the Revenue to accept the method of accounting consistently followed by the assessee.

When an assessee has sufficient interest-free funds, no disallowance of interest is warranted even if advances are made to associated concerns.