Landmark Cases on Business Income and Deductions

Depreciation must be reduced when computing profits eligible for deduction under Section 80-IA as it is a self-contained code.

Excise duty payable on closing stock does not form part of the valuation of closing stock and should be allowed as a deduction under section 43B upon actual payment.

Amounts received on sale of CER are capital receipts not chargeable to tax. This is because they represent a capital receipt and not a trading receipt.

The duty drawback scheme aims to reimburse exporters for tariffs paid on imported raw materials and domestic excise duties on inputs used in export production. This reimbursement is intended to neutralize increased production costs and maintain export competitiveness.

Expenditure incurred on repair and maintenance of a generator set is treated as revenue expenditure, deductible from business income. The disallowance of such expenses by the Assessing Officer is deleted.

The Supreme Court affirmed the Gujarat High Court's decision that amendments to Section 10(23G) should not operate retrospectively to the detriment of assessees.

This case establishes four tests to determine whether income is diverted by an overriding title or is merely an application of income. If a third party is entitled to receive an amount before the assessee can claim it as income, it constitutes diversion by overriding title.

The improbability of realization of a debt must be considered realistically and from a practical point of view to determine its deductibility.

Disallowance under Section 40A(3) may not be practicable for businesses that are inherently illegal, as compliance with payment methods might be impossible.

Expenditure incurred for restoration of damages at the time of removal of structures, if not covered by any clause of the agreement, cannot be disallowed without a scientific basis for estimation.

The principles of statutory interpretation, particularly concerning legislative intent and the purpose of granting deductions for infrastructure development, remain relevant. The creation of a nodal agency does not negate the legislative intent to provide such deductions.

Limitation of time is not a determining factor in matters relating to remission or cessation of trading liabilities under Section 41(1). Addition under Section 41(1) cannot be made without evidence of remission or cessation of liability, or a unilateral write-back by the assessee.

Common corporate expenses should not be allocated when computing the profit of an SEZ unit, if the expenses were not incurred for that specific unit.

Lease rentals paid for equipment not owned by the assessee are allowable as revenue expenditure under Section 37(1) of the Income Tax Act. Hire charges for leased equipment are deductible business expenses.

Unrealized losses due to foreign exchange fluctuation on loans taken for revenue purposes are allowable as a deduction. The Supreme Court's decisions in CIT v. Maruti Udyog Ltd. and others did not address the allowability of hedging transaction losses.

Advances given to employees that become unrecoverable are treated as a business loss deductible under Section 28 of the Income-tax Act. Ex-gratia payments to staff can also be deductible under Section 37(1).

Expenditure incurred for replacing a sound system in a theatre is considered revenue expenditure, not capital expenditure.

Disallowance of interest expenditure under Section 36(1)(iii) is not permissible if the Assessing Officer fails to establish a nexus between borrowed funds and funds diverted for investment or loans, especially when sufficient interest-free funds are available with the assessee.

The nature and character of a receipt, whether it is of a capital or revenue nature, depends on the facts and circumstances of each case, particularly the purpose for which the payment was made.

Expenditure incurred for partitions, vinyl flooring, and interior decoration to make leasehold office premises functional is considered revenue expenditure.

A new industrial undertaking qualifies for deduction under section 10A of the Income Tax Act even if it commenced production before seeking registration as a Software Technology Park (STP), provided it meets the requisite conditions.

An addition to income cannot be made solely on the basis of profit margins matching past assessment years if the Assessing Officer does not bring on record concrete material or evidence to support the addition. A higher profit margin shown by the assessee compared to past assessments can strengthen the argument against additions.

Profits from housing projects are eligible for deduction under section 80-IB(10) if the construction is completed, as evidenced by relevant certificates.

A builder is eligible for deduction under section 80-IB(10) for developing and building housing projects, irrespective of the level of registration transfer to the customer. The development of the housing project is the key requirement for the deduction.

Section 40(a)(ia) disallowance for TDS default does not apply if tax has been deducted under a different provision, or in cases of short deduction. This follows decisions from the Calcutta High Court.

Income must be computed according to the Income Tax Act, and accounting entries in the books of account do not definitively determine taxable income. The Act allows deductions for expenses as claimed by the assessee in their return.

Expenditure treated as deferred revenue expenditure is considered revenue expenditure even if it has enduring benefits, as long as it does not create a new capital asset. Such expenditure is distinct from capital expenditure.

Payments made for acquiring a long-term right to extract minerals or stones, even if structured as rent or royalty, constitute capital expenditure as they result in acquiring an asset of enduring benefit, and are therefore not allowable as revenue deduction.

Outstanding balances arising from regular business transactions are considered for alternate claims under Section 28 when conditions under Section 36(1)(vii) read with Section 36(2) are not met.

The Income Tax Appellate Tribunal's decision in Super Cassettes Industries Pvt. Ltd. v. CIT upholds the deletion of additions made by the Assessing Officer concerning royalty expenses, treating them as revenue expenditure. This decision emphasizes that payments made to acquire raw material, even with initial lump-sum payments, are revenue in nature and not capital.

When determining whether the intention of availing loans was for share purchase or other purposes, the dominant intention must be discovered from various angles, including expenditure, holding period, volume and frequency of transactions, source of funds, and maintenance of separate accounts.

Interest disallowance is not called for when an assessee bank's interest income is significantly greater than its interest expenditure. This principle is applied in situations concerning interest expenditure.

A receipt is only income if it falls within the definition of income under section 2(24) of the Income-tax Act; otherwise, its character remains unchanged. The nature of a receipt, particularly whether it is a trading receipt, is determined by the terms of the agreement between the parties, not by its nomenclature.

Where an assessee has not earned any exempt income in a relevant year, no disallowance under Section 14A can be made.

Section 40A(3) disallowance applies to land purchased as trading stock, even if the payer has a bank account and there's no evidence of exceptions under Rule 6DD.

A builder and developer is not bound by Accounting Standard 7 (Construction Contracts) and can opt for the project completion method of accounting, rather than the percentage completion method, for recognising income.

The case is cited for the proposition that deduction under Section 80IA(4) is available for infrastructure facilities that serve a public purpose.

The disallowance under Section 14A read with Rule 8D cannot exceed the exempt income earned by the assessee.

The Assessing Officer is not justified in disallowing purchases solely for non-filing of supplier confirmations when the assessee provides bank certificates showing cheque clearance and no defects in account books. The disallowance of expenditure cannot be made merely because the seller admitted to issuing bogus vouchers, without evidence that the assessee received bogus vouchers.

A business processing gherkins (cucumbers) into gherkin pickles, through various manufacturing processes, is entitled to deduction under Section 10B of the Income-tax Act, 1961.

A payment computed in relation to profits is still an expenditure, not merely an appropriation of profits, unless it constitutes a division of profits. Such expenditure may be allowable even if not for direct and immediate benefit, but for commercial expediency to indirectly facilitate business.

Amounts paid by an assessee under protest against a statutory duty demand are allowable as a deduction under Section 43B of the Income Tax Act, 1961, as they represent a statutory liability deductible on a payment basis.

A transaction, even if it involves foreign exchange dealing, is not speculative if it is incidental to and related to the assessee's main business.

Interest on loans and borrowed funds utilized for business purposes is not disallowable under Section 36(1)(iii) of the Income Tax Act if the amounts advanced to sister concerns or related parties have a nexus with the business purpose.