Landmark Cases on Business Income and Deductions

Advances given in the course of business for the purchase of revenue items can be written off as a bad debt under Section 37 of the Income-tax Act, 1961.

Expenditures incurred in terms of an agreement with third parties are allowable as deductions.

Expenditure on leasehold property renovation is allowable as revenue expenditure, not capital expenditure, particularly when relating to tenanted premises. This expenditure is deductible under Section 37 of the Income Tax Act.

A provision for future warranty, even if an accrued liability to be discharged in the future, is an allowable expenditure under Section 37 of the Income Tax Act. Such a provision for future warranty claims, when made on the basis of past experience, is deductible.

Interest received from banks is deductible on the principle of mutuality.

Rental income derived from specialized buildings with comprehensive and inseparable facilities, leased out as part of a business, is assessable as business income, not income from house property. This is particularly true when the agreements for letting the building and providing services are contemporaneous, with the overall object being the enjoyment of the entire property as a whole for carrying on business.

Expenditure incurred on development of infrastructure like flyovers, and on activities like horticulture for environmental compliance, if mandated by government policy or regulations, is allowable as a business expenditure under Section 37(1).

A provision for warranty is allowable as a deduction only if it is computed on a scientific method.

An assessee's choice of accounting method is binding on the tax department, provided it is regularly followed, unless the Assessing Officer finds that the chosen method does not accurately reflect true income.

Ratification by the Board of Approval for an EOU scheme relates back to the date of the initial approval by the development commissioner, validating the approval from that earlier date.

Where a housing project does not fully satisfy the conditions for deduction under section 80-IB(10), the assessee is entitled to a proportionate deduction on the units that do meet the requirements.

Circulars issued by the CBDT are binding on the Income Tax Department. The Assessing Officer cannot disregard a circular and add back profits from the sale of investments made by a general insurance company.

Deferred revenue expenditure is a revenue expenditure that provides enduring benefits, but does not create a new asset or advantage of an enduring nature in the capital field. Such expenditure is allowable as a deduction.

Disallowance of expenses under Section 14A of the Income Tax Act, 1961, cannot exceed the amount of exempt income earned by the assessee in that assessment year.

The claim for deduction under section 80IB(10) can be allowed on a prorate basis, as supported by earlier judicial pronouncements.

A company is eligible for deduction under Section 80-IB(10) if it fulfills all conditions prescribed by the Income Tax Act and relevant notifications, regardless of whether the project was completed within the prescribed period.

Discrepancies in stock, advances, and receivables discovered during a survey, where the Assessing Officer does not dispute business losses or reject books of account, should be treated as business income, not income from other sources. Surrendered income arising from such discrepancies cannot be automatically classified as undisclosed income under sections 68 to 69.

Expenditure incurred for scientific research outside an approved R&D facility is not eligible for weighted deduction under section 35(2AB) of the Income Tax Act.

When purchases are found to be genuine, any addition to income on account of such purchases should be restricted, with the Gujarat High Court in one instance reducing an addition from 25% to 5% of the amount in question.

Section 14A of the Income Tax Act applies to expenditure incurred in relation to income that is not includible in the total income. If no exempt income is earned, there is no need to invoke Section 14A.

Expenses incurred exclusively for an Indian project can be excluded from revenue under Section 44C of the Income Tax Act if the assessee proves it with daily timesheets and man-hour records.

A CBDT Circular cannot override the express provisions of Section 14A of the Income Tax Act and Rule 8D when no exempt income has been earned by the assessee.

Income can be estimated based on available materials and past assessment records when the assessee fails to produce acceptable accounts.

Interest paid on borrowed funds used for business purposes, including investments in partnership firms, is deductible as a business expenditure under Section 36(1)(iii). Disallowance of interest is not justified if the assessee has sufficient interest-free funds or owned funds, especially when the interest income is not demonstrably excessive compared to expenses.

When purchases are found to be entirely bogus and the assessee fails to prove their genuineness, the entire purchase amount can be added under section 69C, and estimation is not permissible.

Expenditure incurred for acquiring the right to reproduce music cassettes or CDs, especially a minimum guaranteed royalty essential for production, is considered a capital asset. This distinguishes it from general royalties which are variable with sales and may be revenue in nature.

Income received by way of charges recovered from contractors and reimbursement of expenses for sports meets is eligible for deduction under section 80IA.

For the purpose of claiming a deduction under section 36(1)(vii) of the Income Tax Act, 1961, it is not necessary for the assessee to establish that the debt has actually become irrecoverable; mere writing off the debt in the accounts is sufficient.

Recognition of a Scientific Research and Development facility by the prescribed authority is sufficient for claiming deduction under Section 35(2AB), even if the formal approval for the facility was not granted by the prescribed authority for the entire period of expenditure. The entitlement to deduction is not negated by the absence of subsequent formal approval.

Disallowance of expenditure on an estimated basis is not sustainable if the assessee has filed complete details and the assessing officer has not pointed out specific inflation or unvouched expenditure.

A rural branch of a scheduled or non-scheduled bank is defined as one located in a place with a population of not more than ten thousand, based on the most recent published census figures prior to the relevant previous year.

Expenditure incurred by an assessee on alterations and additions made to leasehold premises is considered capital in nature.

Payment of royalty for the right to use or access technical know-how and information is revenue expenditure. This applies even when the know-how provides benefits of an enduring nature.

Losses incurred on currency swap contracts, entered into for working capital loans that are a prerequisite for export and import business, are allowable as business losses.

Ad hoc disallowances made in the absence of specific unvouched expenditure are untenable.

A provision for executive pay revision is not deductible if Cabinet approval, which was a condition precedent for the revision, was not received by the close of the accounting period.

Income is diverted by overriding title before it reaches the assessee, meaning it never forms part of the assessee's income, if the obligation dictates that the income cannot be considered the assessee's income. This contrasts with an obligation to apply income after it has been received by the assessee.

Foreign exchange loss on marked-to-market forex derivative contracts is not to be treated as a speculation loss, especially when the underlying transactions are genuine and permitted by RBI guidelines.

Expenditure incurred in defense of litigation relating to a discontinued business may be deductible as it is a necessary expense for winding up the business affairs.

Strategic investments made for the purpose of gaining control over a concern are not subject to disallowance under Rule 8D(2)(iii). Such investments should be excluded when calculating disallowance under that rule.

The Income Tax Appellate Tribunal (ITAT) may consider certain expenses as meeting social responsibilities with an indirect business nexus, referencing previous decisions on the matter.

Where the Assessing Officer has not rejected the books of account and has accepted the assessee's sales, any disallowance of purchases is unsustainable, especially if there are no discrepancies between purchases and sales declared.

An assessee is entitled to the benefit of Section 80JJAA as long as an employee has worked for 300 days, even if this period is split across the assessment year or financial year. The deduction under Section 80JJAA is allowed for three years, including the year employment is provided, and each year requires verification of at least 300 days of work by a non-casual employee.

Disallowance under section 40(a)(ia) does not arise if the assessee complies with the provisions of section 194C(6), even if section 194C(7) is not strictly followed, provided the assessee has provided PAN and addresses of transporters.

No disallowance can be made under Section 14A if the assessee has sufficient own funds to make investments that generate tax-exempt income.

If an assessee's case can be governed by two alternative provisions, they have the right to choose the provision that imposes a lesser burden.

Compensation received for the cancellation of an agreement that impairs the assessee's trading structure or results in the loss of income source is considered a capital receipt and is therefore not taxable.

Only investments that yield exempt income are to be considered for the computation of disallowance under Section 14A. Investments held as stock-in-trade for computing disallowance under Section 14A are to be excluded.

The classification of shares by an assessee as 'investment' or 'stock-in-trade' is not conclusive in determining the nature of the transaction for tax purposes. Activities closely connected to the assessee's main business line are inferred as business income.

ITAT Ahmedabad in Sun Pharmaceuticals Industries Ltd. v. ACIT (2017) held that product registration expenses and patent application expenses qualify for weighted deduction.