Landmark Cases on Business Income and Deductions

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 by a theatre assessee for replacing an old sound system with a new one is treated as revenue expenditure if the replacement aims to improve or update the existing facility rather than acquiring a new one.

Interest on borrowed funds is allowable as a deduction under Section 36(1)(iii) when the Assessing Officer fails to establish a nexus between the borrowed funds and the funds diverted or lent. Denial of interest allowance is not permissible if sufficient interest-free funds are available with the assessee, and there is no evidence of personal, non-business, or purely charitable use by the recipient.

Payment of liquidated damages by a company for failure to deliver goods within the stipulated contract period is allowable as revenue expenditure under Section 37(1) of the Income-tax Act, 1961.

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.

Multiple housing projects can be considered part of a single housing project for the purpose of the one-acre minimum land area requirement under Section 80-IB(10)(b) if they are situated on a single plot of land exceeding one acre. The section does not mandate separate one-acre plots for each project nor prohibit multiple projects on one plot.

When determining the net profit of a sub-contractor undertaking construction works, tax authorities must exercise their discretion based on relevant factors such as the assessee's past tax history, an appraisal of the contract's value, and the cost of raw materials and labor.

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.

Contracts between parties must be understood based on their intrinsic nature and the intention of the parties, and tax authorities cannot dictate how a businessman should conduct their affairs.

Income tax cannot be imposed on hypothetical accrual of income; tax is levied only on profits actually received, not on profits that might have been received but were not.

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.

Notional interest is not taxable when Optionally Fully Convertible Debentures (OFCDs) are converted into equity within the stipulated time as per the agreement.

A waiver of a loan upon prepayment is a capital receipt and not revenue income, therefore, not exigible to tax. This principle has been confirmed by the Bombay High Court.

A High Court directs deletion of an addition made by the Assessing Officer if it's not supported by records and the assessee can demonstrate the correct figure, potentially allowing deductions under Section 43B on a payment basis.

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 Calcutta High Court's decision in 444 ITR 75 confirms that a claim for deduction under Section 80IA, specifically concerning Rail Infrastructure, is valid and should be allowed by the Assessing Officer.

For the purpose of computing disallowance under section 14A read with Rule 8D, only those investments that have yielded exempt income in the relevant year should be considered.

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.

Manufacturing activity, such as processing gherkins into gherkin pickles, may qualify for 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.

Incidental foreign exchange dealings related to the main business are not considered speculative transactions, even if they involve some risk.

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.

The forfeited portion of a deposit is not income subject to tax.

Expenses not reported in a Department of Scientific and Industrial Research (DSIR) certificate are not eligible for deduction under Section 35(2AB).

Purchases cannot be disallowed if the assessee provides particulars and details of purchases, including payment through account payee cheque numbers, bills with sales-tax numbers, and addresses, and the assessing officer does not controvert this information.

The rate of profit to be applied for estimation purposes is the average profit reported in the preceding three years. This case is cited as following the decision in Abdul Baree Chowdhury v. CIT.

Expenditure incurred for preserving an asset by way of investment in a subsidiary for business or strategic consideration is an allowable business loss. Losses of any business carried on by the assessee are allowable.

Income arising from the leasing of factory buildings and plant/machinery used for commercial exploitation is considered business income.

The wording used in the Excise Act cannot be imported for the purpose of the Income Tax Act definition. Expenses reimbursed to a club formed for employee benefit are not subject to the disallowance under section 40A(9).

Disallowance under section 40A(3) can only be made if an assessee incurs expenditure but violates the mandate of section 40A(3), provided the genuineness of the expenditure is not in doubt.

An addition or disallowance cannot be made if the assessee claims a deduction for interest payable on bonds which is subsequently adjusted as part of a settlement arrangement.

Head office expenses allocated to units are not to be considered for computing income eligible for deduction under sections 80HH, 80I, 80M, and 80-O, as there is no necessity for allocating expenses directly connected with periods.

Income surrendered during a survey on account of discrepancies in construction cost, stock, advances, and receivables is considered business income and not deemed income under Section 69, particularly when the Assessing Officer has not pointed out any unexplained credits or investments. Application of Section 115BBE in such cases may be bad in law.

Deletion of ad hoc disallowance of commission is upheld when the revenue fails to place any distinguishing factual features compared to a sister concern's case where such disallowance was deleted. Royalty and WPC charges treated as capital expenditure are held to be revenue in nature.

Interest paid on capital borrowed for the purpose of business cannot be disallowed, even if the interest charged on funds advanced by the assessee is lower.

Expenses for business promotion and vehicle running/maintenance cannot be disallowed on an estimate basis without cogent material. Capital gains on the sale of house property can be invested more than once for the same new property if the cost of the property is within the capital gains, and claiming the benefit in two different years is not barred by law.