Landmark Cases on Business Income and Deductions

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.

The transfer of know-how or goodwill to an Indian assessee is not automatically vested in the assessee if the agreement can be terminated upon expiration or termination.

Income derived from contracts related to an industrial park is includible for deduction under Section 80-IA, provided it is directly linked to the industrial park's activity. This includes interest and penal interest received from allottees for late payments.

Disallowance under Section 14A applies to all forms of expenditure, including fixed, variable, direct, indirect, administrative, managerial, or financial, incurred for earning income exempt from tax.

The Assessing Officer is not empowered to reallocate expenses under Section 80IA(8) when calculating the eligible income for deductions. An eligible unit needs to be assessed independently, and there is no provision in the Act for allocating expenses like office expenses or bank and loan processing charges.

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.

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.

Disallowance under Section 40(a)(i) cannot be made based on retrospective amendments introduced by the Finance Act, 2010. Payments for market survey/research for improving exports outside India do not accrue in India due to the exclusion clause in Section 9(1)(vii)(b).

The intention to sell property at the time of purchase must be proven by the Revenue for a transaction to be considered an adventure in the nature of trade, and merely carving out plots is insufficient evidence.

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.

Section 14A of the Income-tax Act, 1961, which deals with the disallowance of expenditure incurred in relation to exempt income, will not apply where no exempt income has been received or is receivable by the assessee during the relevant previous year.

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.

A refund of sales tax is considered a capital receipt and is therefore exempt from tax.

Expenditure crystallized during the year is allowable as a current year deduction, even if it pertains to previous years. The Assessing Officer and Commissioner (Appeals) have the discretion to allow such claims when the commercial expediency is not in dispute.

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.

Where an assessee's books of account lack details of stock, the Assessing Officer may reject the books and make an estimation of income under Section 145(3) of the Income Tax Act, 1961.

Share trading by a company can be considered incidental to its main business of stock-broking, provided there is unity of control and management, and the company has no intention to distort income. In such cases, the Explanation to section 73 may not be invoked.

A Joint Venture Company that acts merely as a façade, with work executed and revenue transferred back-to-back to its partners, is considered a paper entity and not a developer eligible for deductions.

Dividend received in respect of redeemable preference shares does not constitute 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.

The treatment of interest reimbursement on the technology up-gradation fund scheme and the reduction of 10% of other income from indirect cost for Section 80HHC are issues that can be admitted as additional grounds, especially when they are legal in nature and supported by previous judgments.

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.

The ITAT Mumbai in M/S Novozymes South Asia Put Ltd. v. ACIT (2018) has allowed employee stock option plans (ESOPs) as a deduction, recognizing them as an effective tool for employee reward and retention.

An undertaking engaged in generating power for captive consumption does not require separate permission from the Central/State Government or Local Authority to carry on eligible business under Section 80IA of the Income Tax Act, unless it falls under the specific category of infrastructure facilities as defined in Section 80IA(4)(i).

Sums received from employees as EPF & ESI contributions, even if deposited late but before the due date for filing the return of income, are entitled to deduction.

Advances for expenses such as tour expenses, organizing parties, laundry services, employee advances, vehicle repairs, and painting are not for procuring capital expenditure.

Expenditure incurred on maintenance of computers, their upgradation, and software development is revenue expenditure, not capital expenditure.

The Karnataka High Court's decision in CIT v. Nippon Electronics (India) P. Ltd. supports the view that certain deductions under sections 10A and 10AA are permissible regarding the undertaking, although its direct applicability may be rendered academic in specific circumstances.

Expenditure incurred in relation to earning interest income that is not taxable in the hands of the assessee is not subject to disallowance under Section 14A of the Income Tax Act, 1961.

The principal amount written off as a loan or advance is allowable as a deduction under section 36(1)(vii) read with section 36(2) of the Income Tax Act, even if the company is not primarily in the money lending business.

For a provision for gratuity to be allowed as a deduction, the assessee must create an approved gratuity fund for the exclusive benefit of its employees under an irrevocable trust, and the application for approval must be made to the Commissioner.

Estimations of income by the Assessing Officer must be based on cogent material and cannot be arbitrary, capricious, or based on mere guesswork, suspicion, or presumption.

Interest paid on borrowed capital for investment in a firm is deductible against remuneration received by the partner from that firm. The salary received by a partner from a firm is considered business income under section 28(v), making interest paid on borrowed funds for capital contribution allowable.

Expenditure incurred by an assessee for acquiring a controlling interest in subsidiary companies is not part of the assessee's own business. Consequently, interest income earned from such investments cannot be treated as business income, and related expenses are not deductible.

A presumption that investment in tax-free securities is made from the taxpayer's own funds, if such funds exceed the investment amount, applies to Section 14A of the Act, even if the taxpayer has borrowed funds.

Commission paid to a Managing Director for services rendered is eligible for deduction under section 36(1)(ii) of the Income-tax Act, 1961, provided it is paid as per the terms of employment and not merely to avoid Dividend Distribution Tax (DDT).

A business that occasionally hires out vehicles, but whose primary activity is not transportation, is not considered to be in the business of running vehicles on hire simply because the vehicles are occasionally hired out for nominal amounts.