Landmark Cases on Business Income and Deductions

Business commencement is a mixed question of law and fact, where it is sufficient if an essential activity contributing to the carrying on of the business has begun, even if all constituent activities are not yet operational. There is a distinction between setting up a business, which means being ready to commence, and the actual commencement of business operations.

Interest expenditure incurred on a loan taken for the purchase of capital assets is treated as revenue expenditure once the capital assets are put to use, as per Explanation 8 to section 43(1) of the Income Tax Act.

Expenditure incurred for rebuilding a wall demolished due to a road-widening necessity is considered revenue expenditure as it is in the nature of repair for running the business, not the creation of a new capital asset.

A deduction for bad debt is allowed if it is written off as irrecoverable in the assessee's accounts for the previous year, as supported by Section 36(2) and Section 36(1)(vii) of the Income Tax Act and CBDT Circular No. 551.

The term 'business' is of wide connotation and interest income generated from bank deposits, which are part of circulating capital, should ordinarily be treated as business income, unless the investments are independent of the business and made out of surplus funds in long-term deposits.

A new industrial unit established as part of an existing establishment can be considered a separate and distinct industrial undertaking, even if dependent on the existing unit, provided it is integrated, independent, uses new plant and machinery, and is capable of independent production. This classification is relevant for deductions under Section 80HH.

Section 40A(3) disallowance is not applicable if the seller insisted on cash payment and the payment was genuine, disclosing the identity of the seller.

Expenditure on the development of a website is generally considered revenue expenditure and allowable as a deduction under Section 37(1) of the Income Tax Act.

Expenses necessary for the development objectives of an appellant are allowable expenses, and an Assessing Officer's action in treating such expenses as capital expenditure is not justified.

The case supports the ratio laid down in various High Court decisions and the Apex Court's ruling in T.R.F. Ltd. vs CIT concerning the amendment of Section 36(1)(vii) prior to April 1989.

Expenditure incurred for the education and training of a partner in a firm is considered business expenditure and allowable as a deduction under Section 37.

Commission paid for services rendered outside India is not subject to disallowance under Section 40A(i) of the Income Tax Act, even if paid to a non-resident, provided no part of the services were rendered in India.

A subsidy is a capital receipt if the assessee is free to use the money in its business entirely as it likes and is not obliged to spend it for a particular purpose.

Expenditure incurred in defence of an assessee's business or good name is an allowable business deduction, provided it is for the protection of the business.

Contingent liabilities do not constitute expenditure and cannot be deducted for income tax purposes, even under the mercantile system of accounting, as they do not represent a liability actually existing at the time.

Fabrication services requiring dispatch of materials for further processing can be considered as part of an industrial undertaking's activity, relevant for licensing purposes.

For a bad debt deduction, while strict proof is not required and the assessee's judgment is paramount, there must be some material to support the entry showing genuineness, a trading origin, a debtor-creditor relationship, and irrecoverability.

Expenditure incurred on Corporate Social Responsibility (CSR) can be disallowed. The CIT(A) directed the Assessing Officer to disallow only 10% of CSR expenditure, relying on prior High Court decisions.

Ex-gratia payments made by an employer are generally deductible as business expenditure under Section 37(1) of the Income Tax Act, provided they are not capital in nature. The deductibility is assessed on a case-by-case basis, and decisions like Kumaran Mills Ltd. vs CIT are considered when determining the allowability of such payments.

Disallowances made by allocating expenses from one head to another are baseless and without merit when a business operates as a consolidated and interlinked unit. No allocation can be made in the case of a consolidated business.

Excise duty is not includible in the valuation of closing stock if no deduction has been claimed for it.

When a payment comprises both penalty and compensation, only the compensatory portion is allowable as a deduction under Section 37(1) of the Income Tax Act.

Interest expenditure incurred on loans for investment in a subsidiary is allowable as a business deduction under Section 36(1)(iii) if the investment is made for the purpose of business.

The Assessing Officer must follow the decision in South Madras Electric Supply Corporation Ltd. v. CIT (244 ITR 780) and Shree Sajjan Mills Ltd. v. CIT (156 ITR 585) when deciding issues related to sections 30 to 39 of the Income Tax Act.

Rules framed under an Act cannot override the provisions of the Act itself. If there is a conflict between the Act and its Rules, the Act will prevail.

Interest income from inter-corporate deposits is assessed as business income. Section 36(2) of the Income Tax Act allows for deductions related to bad debts even if the company is not primarily in the money lending business, provided certain conditions are met.

Disallowance under section 40A(3) may be deleted if the assessee's case falls under the second proviso to section 40A(3), considering business expediency and genuine transactions.

Unaccounted income determined from a business must be assessed as undisclosed income after allowing for all expenditures incurred by the assessee, regardless of whether they were recorded in the regular books.

A notification issued by the CBDT cannot curtail the scope of a deduction granted by the Income Tax Act, nor can a circular override the provision of law.

Income that is the subject of a dispute cannot be considered to have accrued to the assessee and is only taxable upon settlement of the dispute.

Expenditure incurred for acquiring technical know-how for setting up a factory and its operation is not a revenue expenditure if it provides an enduring benefit to the assessee.

Contributions made by an assessee to a benevolent fund, if established in terms of a Memorandum of Settlement under section 18(1) of the Industrial Disputes Act, 1947, are allowable as a deduction, notwithstanding section 40A(9) of the Income-tax Act.

Expenditure incurred by the head office and directly related to a permanent establishment (PE) should be allowed as a deduction without applying the restrictions of Section 44C of the Income Tax Act.

The conversion of a firm into a company, with all assets and liabilities transferred and the business continuing as a going concern before the commencement of the previous year, makes the new company eligible for deduction under section 80IA(4). The proviso to section 80IA(4)(c) also applies to a transferee enterprise undertaking development, maintenance, or operation.

Expenditure incurred for the purpose of earning income is deductible, even if no income is ultimately earned, provided there is a nexus between the expenditure and the potential income. Deduction is allowed under Section 57(iii) if there is a proven link between the expenditure and the income sought to be earned.

Interest earned on funds not immediately required for business is taxable as 'Income from Other Sources'. The borrowing of funds for project construction and placing receivables in an escrow account does not alter this treatment.

Duty drawback amounts are not income derived from an industrial undertaking for the purposes of deduction under sections like 80-I or 80-IB. These refunds are considered a reduction in the cost of goods sold or a reimbursement of duties paid, not a profit generated by the undertaking itself.

Thrashing and re-drying of tobacco leaves is considered a manufacturing activity for income tax purposes.

A net provision for pension, actuarially quantified and made to account for pension payable to Directors for services rendered, is allowable as a deduction when the assessee follows the mercantile system of accounting.

Under Section 145A, unutilized MODVAT credit must be included in the closing stock of raw material and work-in-progress, and excise duty paid on unsold finished goods must be included in the inventory of finished goods.

Disallowance under Section 36(1)(iii) cannot be made for advances given from surplus funds when no borrowed funds were used for such advances, especially if no disallowance was made in prior years on identical facts.

The Revenue cannot adopt a different stance on the taxability of amounts under Section 36(1)(iii) if it had accepted the assessee's plea in prior years and did not bring such amounts to tax, especially when there was no finding that general reserves and surpluses were unavailable.

Payments made for security and supervisor salary are deductible as business expenditure, provided they are not made before a specific date (likely April 15th, based on the context).

Money received on account of share capital is capital in nature and not chargeable to tax.

An assessee is not required to prove that a debt has actually become bad in the relevant year to claim a deduction; it is sufficient if the debt is written off in the books of account, treating it as bad, following amendments to Section 36(1)(vii) of the Income Tax Act.

A provision towards country risk cannot be claimed as a deduction solely because it is made as per RBI regulations.

Estimates of income are questions of fact. When books of account are rejected, depreciation is not allowed on those rejected accounts, and income is assessed on an estimated net profit rate.

Expenditure on relaying worn-out flooring of a print shop may amount to current repairs, distinguishing it from capital expenditure incurred on demolition and new construction.

The court considers the implications of proprietary rights in know-how in relation to tax law, particularly where an assessee is a mere licensee.

Savings in fuel consumption due to the use of by-product steam in electricity generation are allowable for deduction under Section 80-IA of the Income Tax Act. The concept of a 'savings approach' to compute profitability for such deductions is recognized.