Landmark Cases on Business Income and Deductions

Forfeited portions of deposits are 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 full details of purchases, including payment through account payee cheques, bills, 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.

Customs duty liability is not a contingent liability and arises during the year of clearance of goods, when the goods are brought into India.

Head office expenses allocated to units are not to be considered for computing income eligible for deduction under sections 80I, 80HH, 80M, and 80-O. Expenses directly connected with periods do not require allocation.

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.

A bank is eligible to claim a deduction for bad debts under section 36(1)(vii) for its advances, even when a provision for bad and doubtful debts is made under section 36(1)(viia), provided the deduction claimed under section 36(1)(vii) is the excess over the credit balance in the provision account.

A transaction is not speculative if actual delivery of goods is effected. The outcome of a speculative transaction depends on whether the contract is performed.

Interest awarded under Section 28 of the Land Acquisition Act, 1894, is taxable income for the assessee. The ITAT Pune followed its earlier decision in this case, which in turn followed the Apex Court decision in CIT v/s Ghanshyam HUF, establishing the binding nature of the order on lower authorities.

Provisions made against standard assets cannot be considered as provisions for bad and doubtful debts for the purpose of deduction under Section 36(1)(viia).

For the purposes of Section 36(1)(viia) of the Income Tax Act, the aggregate average advances made by the rural branches of a scheduled bank are to be computed by aggregating the advances outstanding at the end of each month.

Foreign exchange gains arising from export transactions are includible in the profits eligible for deduction under Section 10A/10B of the Income-tax Act, as they have a direct nexus with the export proceeds.

An addition cannot be made under section 41(1) for unexplained purchases if the amount is shown as payable in the balance sheet, as this does not constitute a cessation of liability. Furthermore, an addition made without specifying the precise provision of law is invalid.

The consideration an assessee receives for contributing personal assets to a partnership firm is the right to share in profits during the partnership's existence and to receive the net asset value upon dissolution or retirement, after deducting liabilities.

An ad hoc disallowance of expenses cannot be made without rejecting the books of accounts, especially when the historical treatment of such expenses is reasonable and no defects are found in the accounts.

For projects approved before April 1, 2005, the eligibility for deduction under section 80IB(10) is determined by the law applicable at that time. Balconies are excluded when measuring the area of flats for the purpose of this deduction.

A payment made in connection with services rendered by an agent is not illegal if there is no evidence that the assessee intended to make an illegal payment.

A Hindu Undivided Family (HUF) cannot be a partner in a partnership firm. An individual acting as the karta of an HUF can only be a partner in his individual capacity, not on behalf of the HUF.

Departmental authorities cannot discard a taxpayer's consistently adopted method of accounting or valuation simply because they believe a different method should have been used. The consistent method should not be disturbed as the closing stock of one year is the opening stock of the next.

Expenditure is deductible in the year the bills are received, even if the services were rendered in a prior period. This applies when the exact liability was not known until the bills were submitted. Additionally, disallowance of interest on borrowed funds is unjustified if the assessee has sufficient funds and there's no evidence that borrowed funds were diverted as interest-free advances to members.

The actual business activity undertaken by a company, not its Memorandum or Articles of Association, determines the nature of its business for tax purposes. This principle applies even if the company's objectives list a variety of potential activities.

If purchases from parties are recorded in the books and lead to profits that are taxed, and sales are effected out of these purchases, then the purchases cannot be considered bogus. A finding of bogus sales can only lead to the deletion of the corresponding amount from the assessee's turnover.

No disallowance of expenditure under section 14A of the Income-tax Act can be made to the extent it exceeds the actual amount of exempt income earned by the assessee.

The assessee was considered to be in business of owning and managing hotels and had invested in a wholly-owned subsidiary for effective control of newly acquired hotels.

For the purpose of Section 40(b)(v) of the Income Tax Act, 1961, which deals with the disallowance of remuneration to partners, 'book profit' includes interest income from fixed deposits held for business purposes, and net profit should be ascertained from the profit and loss account, not just business income alone.

Expenditure is allowed as a deduction if it is based on pure commercial expediency, and the revenue ought to recognize and allow such expenses.

Penalties paid to the Department of Telecommunications for breach of contractual obligations are allowable as a deduction under section 37 of the Income Tax Act.

A deduction for interest expenditure on borrowed funds used for acquiring assets cannot be allowed if the assessee fails to establish that such assets were put to use for the firm's business purposes.

Service tax liability, along with interest paid based on a show cause notice, is an allowable deduction under Section 43B of the Income Tax Act in the year of payment, even if paid under protest and while the matter is sub-judice.

Education cess is not an allowable deduction under section 37(1) read with section 40(a)(ii) of the Income Tax Act, 1961. This is because it is in the nature of a tax, not an expenditure incurred for the purpose of business.

Where loans and advances are made to group companies without interest, and these are funded by interest-free funds, disallowance of interest expenditure in a subsequent year is not proper.

Expenditure incurred on a debt that is not part of the assessee's stock-in-trade and not incurred in purchasing or selling goods is not an admissible deduction.

Prior period expenses are allowed as a deduction when they constitute a meager percentage of the turnover.

A written-off stale stock expense, even if incurred in a prior year, can be adjusted against current year income when assessing taxable income. The income-tax authorities cannot factually misrepresent the assessee's financial position to disallow such adjustments.

The principle of consistency must be followed in assessments when there is no change in circumstances.

When approval for a deduction is withdrawn with retrospective effect, the order of the assessing officer cannot be considered erroneous or prejudicial to the interests of the revenue, as the assessee should not suffer for a mistake made by the department. There is no provision for withdrawal of recognition under Section 35(1)(ii) of the Act.

Exchange differences are required to be capitalized if the liabilities are incurred for acquiring fixed assets, such as plant and machinery. The purpose for which the loan is raised is of prime significance.

The classification of investments in a balance sheet does not determine the intent of holding them; entitlement to deductions depends on the relevant legal provisions. Entries in account books are not conclusive regarding the nature of investments.

Electric energy is considered 'goods' for the purpose of sales tax. Properties that can be abstracted, consumed, used, transmitted, transferred, delivered, stored, or possessed are deemed 'goods' for sales tax purposes.

Intellectual property, once embodied in a physical medium such as computer discs, constitutes "goods" for the purposes of sales tax. This classification applies regardless of whether the transaction is viewed as a sale of goods or a transfer of a license.

Payments made in violation of RBI directions are not allowable as deductions under section 37(1) read with Explanation, as such violations are punishable under the Banking Regulation Act.