Landmark Cases on Business Income and Deductions

Advance or earnest money received under a Memorandum of Understanding cannot be treated as income unless the obligations undertaken are completed. The taxability arises only upon completion of the contractual obligations.

Where a business has a mixed fund of own and borrowed money, there is no presumption that payments are made solely from borrowed funds, particularly when advances are made from mixed bank accounts where current sales receipts are credited.

Once a deduction under Section 80-IB has been allowed in the initial assessment year, it cannot be re-examined and disallowed in subsequent assessment years, provided the conditions for the deduction were met.

Market fees collected by a commission agent from sellers of agricultural produce, which the agent is accountable for, are not part of the agent's taxable income as they do not constitute a trading receipt.

Income derived from the sale of scrap generated during the manufacturing process is considered revenue and eligible for deduction as business income. This decision was previously held by the Madras High Court in CIT vs. Sundaram Clayton Ltd.

Under the mercantile system of accounting, a liability arises when an amount becomes due, even if not yet paid. However, if negotiations for waiver of a debt occur before the end of the previous year, the accrual of that debt can be stopped for that year.

An assessee can change their method of valuing closing stock, including changing to market price or cost price, whichever is lower, provided the change is bona fide and consistently followed thereafter. Land under encroachment or litigation, not in possession of the assessee, should be valued at Nil following the principle of prudence.

Where an assessing officer relies solely on conjectures and surmises to doubt the genuineness of cash sales without independent verification or corroborative evidence, such doubt is not sustainable.

A claim for deduction under section 80-IA(7) of the Income-tax Act, 1961, made after the due date for filing the return, can be entertained if the delay is construed as procedural and not fatal to the substantive claim. Claims not made in the original return but before the appellate authority for the first time may be considered.

Deduction under section 36(1)(viia) is not restricted to banks having rural branches. The provision for such deduction does not need to relate to rural advances.

Receipts from the sale of carbon credits are considered revenue receipts if they arise in the course of business activity and fall within the definition of income under section 2(24)(vd) of the Income Tax Act.

Investment made in business assets or inventory from unexplained sources is to be treated as business income taxable under Section 28 of the Income Tax Act, rather than unexplained investment under Section 69B.

Interest expenditure not directly attributable to any particular income cannot be disallowed under section 14A by applying sub-rule 2(ii) of Rule 8D.

Where the Assessing Officer adds 100% of bogus purchases based on an investigation report, the Tribunal can limit the addition to the profit element embedded in those purchases.

The way an assessee makes entries in its books of account does not determine whether income was earned or a loss was suffered. Income must either accrue or be received to be taxable.

Shares issued against assets contributed by shareholders are not revenue expenditure.

Section 14A of the Income Tax Act does not apply when no exempt income has accrued to the assessee. This principle is affirmed by the Madras High Court in CIT v. Chettinad Logistics P Ltd.

An assessee is entitled to deduction under Section 80-I of the Income Tax Act, 1961, even if the product is consumed captively within its own units, provided such product is valued at market price for the purpose of calculating the deduction.

Where an assessee has mixed funds and possesses more interest-free funds than interest-free advances made, it is presumed that such advances were given out of the available interest-free funds, precluding any disallowance of interest expenditure.

Amendments made to Section 37 of the Income-tax Act, 1961, by the Finance (No. 2) Act, 2014, are prospective and not retrospective. These amendments are applicable from Assessment Year 2015-16 onwards and do not apply to prior assessment years.

Expenditure on rent, repairs, insurance, and maintenance of guest houses is allowable under Sections 30 and 31 of the Income Tax Act, even if Section 37(4) (or 37(3) as cited in the passages) restricts disallowances for such expenses.

Expenditure incurred for business purposes is allowable as a deduction even if the business has been transferred or is no longer actively operating, provided there are ongoing litigations or requirements to keep the business alive. This applies to professional charges, consultancy fees, and staff retention costs.

Expenditure incurred on the feasibility of a new business is not an admissible deduction. This is because it is considered capital expenditure and not an expense incurred in the ordinary course of the existing business.

Expenditure is deductible if it is incurred wholly and exclusively for the purpose of keeping the assessee company in operation and earning income, even if it is unremunerative. The quantum of money expended relates to the concept of 'wholly'.

Expenses incurred for buyback of shares are an allowable business expense for the purpose of computation of income. Such expenditure is not in the nature of capital expenditure and is not required to be capitalised.

Excess price realised on sugar, where the assessee's right to collect it was subject to a dispute pending in court and interim orders allowed collection, was held not to be a trading receipt and hence not taxable.

A liability for interest, even if accrued during the year, is not deductible unless it is certain and the amount is ascertainable in that assessment year.

Expenses incurred for land acquisition, diversion, development, and implementation are not necessarily capital in nature and can be treated as revenue expenditure if they do not result in an enduring benefit.

When making additions for unaccounted sales, only the gross profit or net profit on those sales can be added to total income, not the entire sale price, unless there is material showing the assessee made investments for such unaccounted sales. The gross profit rate should be applied to the unaccounted sales.

Waiver of a loan does not constitute income chargeable to tax in the hands of the assessee.

Interest income accrues to an assessee and is taxable irrespective of whether it has been entered in the assessee's accounts. The accrual of income cannot be postponed merely because it has not been recorded.

An assessee crediting the difference between the face value of deposits and the settlement amount to the Profit & Loss account indicates an intention to treat this difference as part of its income.

Processing charges, commission paid to bankers and insurance companies for obtaining loans for purchase of machinery, and upfront fees for loans are revenue expenditures deductible under Section 37 of the Income-tax Act, 1961.

Expenses related to an earlier year's transaction are deductible in the current year if the liability was determined and crystallized based on mercantile accounting.

A decision of the Delhi Tribunal in ACIT vs. Samrat Rice Mills (P) Ltd. (2012) 23 taxmann.com 350 (Delhi) is not relevant when an addition has been deleted due to the availability of surplus interest-free funds with the assessee, irrespective of whether the funds were used for business or non-business purposes.

The receipt of an amount by itself is not sufficient to attract tax; only the portion of income that pertains to the relevant year can be taxed.

An assessee should not suffer due to a mistake by the department. Withdrawal of approval for a society, even if permissible, must have prospective effect and cannot disentitle an assessee to a deduction for genuine donations made prior to withdrawal.

Furnishing of an audit certificate along with the return of income is a directory, not a mandatory, requirement. The deduction under such provisions cannot be denied solely on the ground that the certificate was not filed with the original return, provided it is filed at any time before the completion of assessment.

Deduction under Section 80IA of the Income Tax Act for a power generation undertaking can be claimed for any 10 consecutive years out of 15 years commencing from the assessment year in which the power generation activity begins.

Deductions under section 36(1)(vii) read with section 36(2) are allowable even if the company is not in the money lending business, provided the interest income from inter-corporate deposits is assessed as business income.

For income to be considered accrued, the assessee must have a vested right to receive it, meaning it cannot be taxed until a dispute is settled.

An amount received in the course of a trading transaction, even if not taxable in the year of receipt, becomes taxable income when it becomes the assessee's own money due to limitation or other statutory/contractual rights.

Expenditure incurred to facilitate trading operations and enable the assessee's business activities is revenue in nature, even if it provides a benefit of an enduring nature.

When a statute does not define a word or expression, it should be interpreted according to ordinary commercial parlance or definitions in similar enactments.

The value of technical know-how contributed in kind by way of issuing shares is to be treated as capital expenditure, not revenue expenditure.

Ad hoc additions to income are not legally sustainable. Mere non-compliance with notices under section 133(6) does not invalidate genuine expenditure. Losses incidental to business should be allowed as deductions in the year of discovery.

Separate accounts are not required for claiming deductions under sections 80HH and 80-I of the Income-tax Act, 1961. This decision was also applied to section 80-IB.

The case is cited as authority for the treatment of advertisement revenue as business income taxable in India.

A debt written off is allowable as a deduction if the assessee establishes that the debt was written off in its books of account.