Landmark Cases on Business Income and Deductions

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.

Expenditures such as salary, travelling, and conveyance linked to setting up a new business are revenue in nature and allowable as deductions, especially when some linked expenses (like salary) have already been allowed.

The reasonableness of director's remuneration or commission expenditure cannot be determined solely by comparing it to previous years' payments, as there may be valid reasons for variations.

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.

Section 44D of the Income Tax Act does not apply to income characterized as business profits, particularly when the assessee has a Permanent Establishment (PE) in India and the income falls under Section 28, which mandates computation under Sections 30 to 43D, excluding Section 44D.

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.

When an assessee opts for presumptive taxation under Section 44AD and does not maintain books of account, the Assessing Officer cannot invoke Section 68 to add alleged unexplained cash credits to the returned income, especially if the returned income is declared as per Section 44AD provisions.

Expenditure in relation to earning exempt income is to be disallowed under Section 14A, even if no exempt income is actually earned. If interest-bearing borrowed funds are used for share investments and no dividend income or only meagre dividend income is received, the entire interest expenditure is subject to disallowance.

Section 40A(3) limits do not apply to payments made to the same person at different times during the day if the assessee had no prior knowledge of exceeding the aggregate limit, unless any single payment exceeds the prescribed threshold.

Entries in an assessee's books of accounts are not determinative of the treatment of income or expenditure for the computation of income under the Income Tax Act. The ascertainment of income is based on the provisions of the Act.

Profits derived from forward contracts entered into to avoid the risk of loss due to foreign exchange fluctuation are to be assessed as speculative profit and are not considered part of export turnover eligible for deduction under Section 10B, especially when the contracts are not isolated transactions.

An activity undertaken by an institution is considered business if it is carried out with reasonable continuity and there are facts and circumstances justifying its business nature. Each case must be examined on its own facts to determine if the activity is in the nature of business, trade, or commerce.

Expenses incurred for shifting or relocating a business are allowable as revenue expenditure and not capital expenditure.

Income directly linked to the activity of an industrial park is eligible for deduction under Section 80IA of the Income Tax Act.

Disallowance under Section 14A applies to all forms of expenditure, direct or indirect, fixed or variable, administrative, managerial, or financial, that are connected with earning income exempt from tax.

The Assessing Officer is not empowered to reallocate expenses under section 80IA(8) when determining eligible profits for deductions.

An assessee cannot claim a deduction under Section 80P(2) if it was not claimed in the original return of income, even if otherwise eligible, due to the conditions stipulated in Section 80A(5).

Losses incurred by a company participating in chit funds to raise business funds are allowable as a business loss.

No disallowance under section 14A is required if the assessee has not earned any exempt income during the assessment year.

An assessee is not eligible for deduction under section 80-IB(10) if it acts merely as a contractor and not a developer. This is the case where the assessee sells plots to customers, registers sale deeds, and subsequently constructs buildings at an agreed price, indicating it did not fulfill the developer role.

When determining whether an asset is capital or stock-in-trade, the assessee's intention at the time of purchase is paramount. This intention dictates whether the asset was acquired for investment or for resale.

The estimation of profit at 3% for diamond trading is considered just and fair, especially when supported by industry reports and when the revenue has not appealed against such an estimation.

Disallowance of interest expenses on loans given to sister concerns is not permissible if the assessee has sufficient interest-free funds available to meet its investments. Such investments are presumed to be made from these available interest-free funds.

Extensive processing activities that make a product marketable and fit for use constitute "manufacture," entitling the assessee to deductions under Sections 80HH, 80I, and 80IA.

The meaning of words and phrases in tax law must be interpreted within the context of the specific statute. For instance, 'manufacture or produce' can have a different meaning in excise law than in a statute granting exemptions or deductions.

Disallowance under Section 40(a)(ia) cannot be made if the recipient has already paid tax on the impugned payment, to avoid double taxation. The legislative intent of Section 40(a)(ia) and its proviso is to prevent undue hardship.

Income from services rendered to non-members by a club, even if it has a separate legal personality, is not covered by the principle of mutuality and is therefore taxable.

An assessee is not entitled to a deduction under section 35(1)(ii) if the claim is the outcome of an organized fraud with the help of manipulators.

The rejection of books of accounts and estimation of income is upheld when the assessee fails to provide details of stock.

Shares held as stock-in-trade should be excluded when calculating disallowances under Section 14A, as they are not considered 'investments' made for earning dividend income.

Dividend income received on redeemable preference shares is not considered profits derived from providing long-term finance for the purpose of Section 36(1)(viii) of the Income Tax Act.

The Assessing Officer cannot reject the books of accounts under section 145(3) solely based on a difference in accounting method when there is no evidence of income or expenditure suppression or inflation.

The character of an amount received as income is not conclusively determined by how it is assessed under the Income Tax Act. The head of income enumerated in Section 14 of the Act does not define the essential characteristics of income.

An assessee on the mercantile system of accounting can claim a deduction for a liability in the year it is finally adjudicated upon or settled, even if the liability arose in an earlier year but was disputed.

A claim for deduction under Section 80JJAA cannot be denied solely because Form 10DA was not filed within the prescribed time, especially if the requisite audit report was available to the Assessing Officer before the assessment order was framed. Procedural lapses or mistakes in filing the form do not justify denial of the claim.

Addition on account of alleged bogus purchases is not sustainable if the Assessing Officer has not brought any cogent and convincing evidence to prove his decision. If the Tribunal simply adopted a margin for disallowance despite finding the AO's order untenable, it deserves to be set aside.