Landmark Cases on Business Income and Deductions

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.

Interest on securities is taxable only on specified dates when it becomes due for payment, not on an accrual basis, especially after the deletion of Section 18 of the Income-tax Act, 1961.

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.

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

The revenue cannot take a different view on the taxability of amounts previously accepted as not taxable under Section 36(1)(iii) in subsequent assessment years.

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

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.

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.

Excise refunds and interest subsidies received by an assessee under government incentive schemes for industries in Jammu and Kashmir are capital receipts and therefore not taxable.

Expenditure incurred for the purposes of business is allowable even if some benefit arises to a third party.

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 allowable as a deduction 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).

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.

Profits on the sale of investments made by a general insurance company should not be taxed if Circular No. 528 of 1988 has been issued, especially in light of the deletion of Rule 5(b) and the binding nature of CBDT circulars on the revenue.

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 case is authority for allowing deduction under section 80IB(10) on a prorate basis.

A taxpayer is justified in claiming a deduction under section 80IB(10) on a reduced amount, and the deduction can be granted on a proportionate basis.

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.

Expenditure incurred in relation to earning exempt income is not deductible, even if no exempt income is actually earned in a particular year. The introduction of an explanation to Section 14A by the Finance Act, 2022, making disallowance applicable even without actual exempt income, is prospective in nature.

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.

The case is authority for the proposition that charges recovered from contractors and reimbursement of expenses are eligible for deduction under Section 80IA.

For the purpose of claiming a deduction for bad debts under section 36(1)(vii) of the Income Tax Act, it is sufficient for the assessee to write off the debt in its accounts; it is not necessary to prove that the debt has actually become irrecoverable. The value of shares transacted by a broker-assessee on behalf of a client is allowable as a bad debt.

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.

The Delhi High Court's decision in Uttar Bhaat Wool Exchange Ltd. v. CIT Delhi (1965) is cited to establish that certain expenditures may not be allowable deductions under Section 30(a)(i) or Section 37 if they constitute additions to buildings.

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 by an assessee in currency swap contracts, used for working capital loans essential to its import/export business, are allowable business losses and not speculative losses. Section 43(5) of the Income-tax Act, 1961, does not apply to currencies, allowing such losses to be set off against other income.

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