Landmark Cases on Business Income and Deductions

An ad hoc provision for pay revision, even if based on a Cabinet Note, is not deductible if Cabinet approval was not received by the end of the accounting period and the amount was paid in the following year.

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.

The court considers whether certain income constitutes business income or capital gains.

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.

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.

The court considers whether compensation received for the surrender of rights constitutes business income or capital gains. It is not business income if there is no cost of acquisition for the surrendered rights.

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 the purpose of Section 14A disallowance should 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.

Weighted deduction is allowable for product registration expenses and patent application costs. This aligns with the treatment of expenses that contribute to the development of new products or intellectual property.

Disallowance under Rule 8D(2)(iii) is incorrect when the assessee's own funds significantly exceed the value of shares and securities held as stock-in-trade.

The assessee has the duty to allocate expenditure to exempt income under section 14A.

Taxing authorities cannot tax goods transferred at less than market price if the transaction is bona fide, ignoring the actual price fetched to ascertain profit. Additions based on selective rate comparison without considering the full business model are legally untenable.

Delay or non-issuance of Form 3CL by DSIR does not result in denial of deduction under Section 35(2AB) if the assessee's in-house R&D facilities were recognized by DSIR and the genuineness of expenditure is not doubted.

Expenditure incurred by an assessee for a license to use software is eligible for revenue expenditure deduction under section 37(1) if it does not confer an enduring benefit on the assessee.

No disallowance under section 40A(3) should be made if the identity and source of cash payments are established from the assessee's bank account, and the genuineness of the transaction is evidenced by registered sale deeds and business expediency.

Packaging drinking mineral water is not considered 'manufacturing' for the purpose of certain tax provisions. Manufacture implies a change resulting in a new article with a distinct name, character, and use.

An addition under section 41(1) cannot be made without establishing that the deduction was claimed or the credit balance has been remitted, or that cessation of liability occurred in the year under appeal.

Foreign exchange fluctuation loss on circulating capital is a revenue expenditure if mercantile accounting is followed. A gain on cancellation of a forward contract taken to cover a foreign currency loan for capital assets is a capital receipt to be reduced from the cost of the asset.

Interest income earned by an assessee on fixed deposits made from surplus funds during export business is eligible for deduction under Section 10A or Section 80IA, provided such deposits were made in the ordinary course of export business.

Expenditure incurred on an abandoned project is allowable as revenue expenditure if the new project is an extension of the existing business, demonstrating unity of control and management from common funds. This applies even if the assessee intended to start a different line of business, provided there is an overarching control and integration with existing operations.

Unpaid service tax cannot be disallowed under section 43B if the service tax amount has not been received by the assessee from its clients.

The case establishes that expenses incurred by an association for the purpose of its registration and for the benefit of its members can be considered business expenditure.

Revenue recognition under project completion method is permissible if the outcome of the contract can be estimated reliably. Until an enforceable transaction occurs, no profit can be recognized, even if advances are received.

Income from bill discounting accrues on the date of discount and is equivalent to interest. This income cannot be spread over the unexpired period of the discount.

Expenditure incurred under Corporate Social Responsibility (CSR) cannot be allowed as a deduction under Section 37(1) of the Income Tax Act for Assessment Year 2014-15, as the Explanation to Section 37(1) is prospective in nature and not applicable to that year.

Amendments to Section 40(a)(ia) of the Income Tax Act are not retrospective from April 1, 2005, and therefore disallowance under this section is applicable from Assessment Year 2010-11.

Payments made for acquiring know-how related to a manufacturing process are considered revenue expenditure if they are for consultancy and do not result in an enduring asset.

Income earned from systematic investment of funds generated by eligible undertakings in fixed deposits, mutual funds, or inter-corporate deposits should qualify for tax benefits.

An undertaking or enterprise established after January 7, 2003, carrying out substantial expansion within the specified period, is entitled to 100% deduction on profits under Section 80IC for the remaining assessment years, and the eighth assessment year can be considered an 'initial assessment year' again for this purpose.

Disallowances made by the Assessing Officer (AO) on account of expenditure can be deleted if the AO fails to point out any specific defect or discrepancy in the bills and invoices submitted by the assessee. The expenditure should be considered allowable if it is not excessive and related to business operations or staff welfare.

The explanation to Section 43B of the Income Tax Act, which refers to the amendment of the term 'any sum payable', applies only to clause (a) of Section 43B and not to clause (f). Therefore, a claim of leave salary is not attracted by Section 43B(f).

Income derived from the sale of by-products and scrap is to be considered business income. Principles laid down in Pandian Chemicals Ltd. are relevant for determining such income.

The specific context of Section 80A(5) is a prescription that is clear and unambiguous, and jurisdictional High Court decisions on the matter are binding.

Interest paid on borrowed funds advanced to a subsidiary for business purposes is deductible, provided the borrowed funds are not used for the assessee's personal benefit or non-business purposes.

An assessee need not prove a debt is bad if it is written off as such in its accounts, following the amendment to Section 36(1)(vii) of the Income Tax Act, 1961, effective from April 1, 1989.

For a debt to be considered a revenue expense under Section 36(2) of the Income Tax Act, it only needs to have been advanced in the ordinary course of business, proving its revenue nature. No further conditions applicable to general bad debts need to be met.

An entity is eligible for deduction under Section 80-IA(4) if it enters into an agreement with a government agency for infrastructure development, even if that agency is a statutory body or a government-owned company.

Where an assessee declares a higher gross profit rate than in the preceding year, their trading results are generally accepted and trading additions deleted. Comparisons with unrelated third parties or future financial periods are not valid grounds for additions.

Provision for doubtful debts is an operating expenditure. This provision should be considered when computing operating profit margins and reworking the price-level index.

Expenditure incurred for procurement and uninterrupted supply of raw materials is closely related to the business and is allowable as a business expenditure, even if mislabeled, provided the payment and its purpose are not disputed.

Profits and gains must be computed in their commercial sense, which includes deducting expenditure necessary for earning receipts, even if the exact amount is not quantified or the liability is accrued but payable in the future.

A process that results in a distinct article or thing is eligible for deduction under section 80-IC, even if it involves diluting a raw material.

The High Court follows the Supreme Court's decision in CIT vs Glaxo Smithkline Asia (P) Ltd. where the Court did not interfere as the entire exercise was revenue neutral.