Landmark Cases on Business Income and Deductions

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.

The Supreme Court's decision in Raghunath Prasad Poddar v. CIT has been overruled by a later Supreme Court decision in Davenport & Co. Pvt. Ltd. v. CIT concerning the definition of speculative transactions, particularly regarding the actual delivery of goods.

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.

A loan given by a holding company to a subsidiary, even if the subsidiary goes into liquidation, may be considered a business loss deductible by the assessee, provided the nature of the advantage gained is considered.

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.

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 through an agent cannot be considered illegal in the absence of evidence proving the assessee's intent 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.

Disallowing interest paid on borrowed funds is unjustified if the assessee demonstrates sufficient funds and there is no evidence that borrowed funds were diverted as interest-free advances to members of the HUF. A Tribunal's finding of fact on this matter is final.

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.

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 should be followed in assessment proceedings where there is no change in circumstances, particularly when an allowance was made in previous years.

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 possesses the characteristics of an article or thing for the purposes of taxation.

Manufacture involves a transformation of a commodity through processes, resulting in a new article, though not every change constitutes manufacture.

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.

Where an assessee consistently follows the project completion method of accounting, income is taxed in the year of project completion, irrespective of receipts or expenditure in a particular year. Finance costs incurred on loans for such projects are eligible as period costs in the year they are incurred or accrued, even if the project completion method is followed for income recognition.

Where an Assessing Officer rejects books of account due to the introduction of fake purchase bills to inflate stock or reduced sales, and applies a higher Gross Profit (GP) rate, such a finding of fact is generally not appealable as a substantial question of law.

The Assessing Officer bears the onus to prove that expenditure is excessive or unreasonable, and fails to discharge this burden when making an ad-hoc addition without sufficient evidence.

The proportion of profits arising or accruing in India from sales, in the absence of a fixed formula, involves an element of estimation and approximation, not exact precision.

Unutilized MODVAT credit is not an allowable deduction, as it does not constitute payment of duty. Such a deduction becomes allowable only in the year the credit is adjusted against excise duty payable.

The commencement of business activity, such as securing orders, precedes the commencement of production and forms part of the business activity. Therefore, the business is considered to have commenced when such preparatory activities begin, not necessarily upon the start of actual production.

Section 40A(3) disallowances can be made in block assessment proceedings under Chapter XIV-B.

The Supreme Court case CIT v. United Provinces Electric Supply Co. is not applicable when the dispute concerns taxation of income in a subsequent year based on an interpretation of the Electricity Act and Section 41, if the facts are distinguishable.

Disallowance under Section 14A read with Rule 8D of the Income Tax Rules is restricted to the amount of exempt income.

Advance lease premium paid for leasehold land is considered advance rent and is deductible as revenue expenditure under Section 37(1) of the Income Tax Act, as it is not a capital expenditure.

Losses incurred on the sale of government bonds or securities are allowable as a business loss if they were purchased to increase business with the government or retain its goodwill.

Amounts held in a stale draft account cannot be treated as income of the assessee.

A disallowance under section 14A is bad in law without a finding that expenditure has a relation to exempt income and without recording satisfaction.

The revenue's claim fails when the Tribunal's findings are supported by a Supreme Court judgment, as the court will not disturb such findings. All questions of law are answered in favour of the assessee.

When computing deductions under Section 80HHC, profits from the export of self-manufactured goods and trading goods cannot be considered separately if there is a loss in one, and the deduction is admissible if the overall business income is positive after set-off.