Landmark Cases on Business Income and Deductions

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.

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.

No disallowance of interest is warranted on interest-free advances to associated concerns when the assessee possesses substantial interest-free funds, such as shareholders' funds.

Expenditure is not allowable if the assessee fails to discharge the onus of proving that it was incurred out of business expediency and for business purposes.

Expenditure incurred by pharmaceutical companies providing gifts or freebies to doctors is not deductible if it violates MCI Regulations.

Losses arising from forfeiture of security deposits due to non-performance of a trading contract are allowable as a deduction. Similarly, liquidated damages deducted from consideration for late delivery of goods as per contractual terms are also deductible as business expenses.

Commercial manufacture, not experimental production, determines the commencement date for deductions under provisions like Section 84 of the 1961 Act (and its predecessors).

Interest paid on money borrowed by an assessee, even when advanced to a subsidiary for a business purpose, is allowable as a deduction. The business or commercial expediency of the advance is the primary consideration.

Expenditure incurred for the purchase of catalogues and brochures, if wholly and exclusively for the purpose of business, is an allowable deduction. This principle is supported by the Bombay High Court decision in F.E. Dinshaw Ltd. (36 ITR 114).

Profits from the sale of land are taxable as business income when the assessee takes steps to exploit the land, such as converting its land-use, regardless of the time lag between purchase and sale.

Interest income earned by an assessee on margin money deposits with a bank is considered profits and gains of the assessee's business and is eligible for deduction under Section 80-IA of the Income Tax Act.

Expenditure relating to earlier years is allowable in the year the liability has crystallized. The burden is on the assessee to show that the liability crystallized in the relevant year.

Disallowance of interest expenses claimed as a deduction is not warranted when the assessee has sufficient own funds to cover the advances made to sister concerns, even if the advances are interest-free.

Disallowance of interest on borrowed funds advanced to a sister concern is confirmed where the funds were not utilized for business expediency and constituted a loan transaction, particularly when the advance was not utilized for the project within a reasonable time.

Consideration received for the sale of time-share for 99 years is taxable over the years in which the assessee is to provide services and facilities.

A capital receipt that is not chargeable to tax and does not fall within any charging section or head of income cannot be treated as part of net profit for tax purposes. Only receipts in the nature of income, falling within a charging section, are subject to tax.

Expenditure incurred on the production of TV serials and programmes can be treated as revenue expenditure. The distinction between 'news content' with no repeat telecast value and TV serials/programmes with repeat telecast value is relevant in determining the nature of expenditure.

Prior period expenses are allowable as a deduction in the year in which the liability crystallizes, even if they pertain to a previous period, provided the assessee followed the mercantile system of accounting and can substantiate the crystallization of the liability.

After April 1, 1989, it is sufficient to write off a debt as irrecoverable in the books to claim a bad debt deduction; it is not necessary to establish that the debt has become irrecoverable.

There was no conflict between the Supreme Court decisions in Pingle Industries and Gotan Lime Syndicate regarding the classification of rent paid for lime excavation as revenue or capital expenditure, as the facts of Pingle Industries differed significantly from Gotan Lime Syndicate.

Expenditure incurred for acquiring premises on lease is allowable as a business deduction. The period of the lease is not decisive of whether the asset is of an enduring nature.

Expenditure on computer software is revenue in nature if it does not have a long-term enduring benefit due to rapid technological changes and obsolescence.

Commission payments to agents are allowable as business expenditure if the agents are not bogus, the payments are evidenced, and the commission is paid by crossed cheque, especially when it helps achieve higher turnovers.

Expenditure incurred voluntarily towards charity, without business expediency, is an application of income and not allowable as a deduction under section 37(1).

Where an Assessing Officer makes additions on account of bogus purchases and the Commissioner (Appeals) and Tribunal find that the assessee yielded huge profits from sales, the Tribunal is justified in restricting additions on account of bogus purchases to a specified percentage (e.g., 25%).

Buyback of its own shares by a company is neither capital expenditure nor does it result in enduring benefits to the company. The consideration of non-deduction of TDS, which was evident from Form 3CD and not considered in the original assessment order, is not a change of opinion for reopening.

Expenditure incurred by a holding company on investments in its subsidiary can be considered a business expenditure and cannot be disallowed.

Deduction allowed in the initial year under Section 80-IA cannot be denied in subsequent years due to alleged breach of conditions, if no distinguishing facts are brought on record.

Duplication or recording of audio cassettes amounts to manufacture as goods are produced, which involves incorporation of intellectual copyrights on the media for transfer.

A loss incurred on account of a deposit becoming irrecoverable is allowable as a business loss if the deposit was made for the purpose of business.

Section 14A of the Income Tax Act disallows expenses that have a nexus to tax-free or exempt income. The existence of such a nexus is the primary condition for the application of Section 14A.

Payments made for delayed purchase bills are not considered interest under section 2(28A) if they have a direct link and immediate nexus with a trading liability.

Expenses relating to a composite business, which includes manufacturing and trading, are allowable if the trading business has commenced, even if the manufacturing activity has not yet begun.

Forfeiture of advance money paid by a purchaser under an agreement to purchase property, even if arising from the purchaser's fault, may result in the retained amount being taxable.

When sufficient non-interest bearing funds are available to an assessee, the presumption is that investments were made out of these funds, not borrowed funds, impacting the disallowance of expenditure under Section 14A.

Non-compete fees are taxable under Section 28(va) only when the assessee is carrying on a business, not when the consideration is embedded in the purchase price of shares and the assessee is merely a shareholder.

Commission on a bank guarantee accrues entirely at the time the guarantee is given and cannot be spread over the period of the guarantee for tax purposes.

Disallowance under section 14A read with rule 8D is restricted to 1% of exempted income where advances in the form of share application money were made to a subsidiary to facilitate the assessee's own financial interest.

The 'source' of income refers to the specific origin of the income or expenditure, not the head of income under the Income Tax Act.

Disallowance of expenses based solely on previous years' disallowances is invalid. The Assessing Officer must provide fresh justification for disallowances in the current year.

The Project Completion Method (PCM) for accounting is a recognized and scientifically sound method that has judicial approval for real estate businesses, allowing profit or loss to be recognized only upon project completion.

Income does not accrue until the sale deed is signed or possession of property is handed over, meaning receipts disclosed in subsequent returns are relevant to determining accrual.