Landmark Cases on Business Income and Deductions

The weighted deduction for scientific research expenditure under Section 35(2AB) is allowable, clarifying that the requirement for the prescribed authority to approve or quantify the expenditure from year to year became effective only from April 1, 2016, through amendments to Rule 6(7A)(b).

When an assessee has both borrowed funds and sufficient interest-free own funds, and makes interest-free advances, it is presumed that the advances were made from the own funds, and no interest disallowance is made under Section 36(1)(iii) on the borrowed funds.

The question of whether an amount claimed as an expenditure was laid out wholly and exclusively for business purposes must be decided based on the facts and circumstances of each case. The Income-tax Officer retains the discretion to determine the deductibility of an expense, and the mere existence of an agreement or actual payment does not bind the officer to allow the deduction under Section 37.

Furnishing a bank guarantee does not constitute "actual payment" for the purpose of claiming deductions for expenditure under Section 43B of the Income Tax Act, as the provision mandates actual payment, not deemed payment.

Compensation paid for a restrictive covenant not to carry on a similar business for a specified period (e.g., up to five years) is treated as a separate transaction from the transfer of business assets and goodwill. Such payments are an allowable expense if the restrictive period is not of an enduring capital nature.

Employee contributions to specified funds (like PF/ESI) are deductible under section 36(1)(va) even if paid beyond the statutory due dates, provided they are remitted before the due date for filing the income-tax return.

This case establishes that merely having sufficient interest-free own funds does not automatically prevent interest disallowance on interest-free advances; the assessee must affirmatively prove the business or commercial expediency of such advances.

Compensation received for a non-compete covenant or for not carrying on a specific business activity is a capital receipt and not liable to tax as business income.

The Assessing Officer must record explicit dissatisfaction with the assessee's claim or calculation of expenses related to exempt income before applying Rule 8D for disallowance under Section 14A. This principle also extends to the requirement of adequate inquiry before allowing or disallowing Chapter VI-A deductions like Section 80P.

A joint venture formed solely to secure a contract, with each partner having a distinctly outlined scope of work and individual responsibility, is not considered an 'Association of Persons' for income tax purposes.

Payments for the use of technical know-how or intellectual property, which grant a right to use rather than an outright transfer of ownership, are deductible revenue expenditures as they do not create an enduring benefit, especially in fields with rapid technological obsolescence.

Contributions made by a sugar mill to the Cane Development Council for constructing roads that remained government property, but facilitated the assessee's business operations, are revenue expenditure. Such expenditure, incurred for the better carrying on of the business, is an admissible deduction in computing business profits, even if it provides an enduring benefit, provided no capital asset is acquired by the assessee.

Once a deduction under Section 80IA is granted in an earlier assessment year for a project, based on the nature of the agreement and the assessee being treated as the developer, the same deduction cannot be denied in subsequent years for the continuing project unless there is a material change in facts or conditions.

Interest earned by an assessee on temporary deposits of surplus funds, which are received as advances in a business activity and are inextricably linked to that business, is assessable as 'Profits and Gains from Business or Profession' rather than 'Income from Other Sources'.

Section 35(2AB), an incentive provision, allows weighted deduction for expenditure 'on in-house research or development facility' even if related activities like clinical trials are conducted externally, provided they are for the in-house research. This requires a liberal interpretation of the provision.

The definition of 'business' is of wide import, encompassing any trade, commerce, manufacture, or adventure in the nature of trade. Even a single and isolated transaction can constitute an 'adventure in the nature of trade' if it bears the clear indicia of trade, and no fixed formula can be evolved to determine the character of such isolated transactions.

When the valuation of closing stock is adjusted to include CENVAT or Modvat credit under Section 145A, a corresponding adjustment must also be made to the opening stock.

Disallowance under Section 40A(3) of the Income-tax Act, 1961, is not justified for cash payments if they are genuine, made out of business expediency, and the assessee's bona fides are not disputed, even after the 2009 amendments to the section.

No disallowance of interest expenditure can be made under Section 36(1)(iii) merely on the presumption of diversion of borrowed funds, if the assessee possesses sufficient interest-free own funds to cover interest-free advances.

When payments are made for distinct and different subject matters or purposes, their nature and tax treatment, including whether they constitute capital or revenue expenditure, must be determined separately based on each underlying purpose, rather than treating them as part of a single, indivisible transaction.

An employer can claim deduction for employee contributions to provident fund or ESI under Section 36(1)(va) if these sums are deposited on or before the due date for filing the income tax return under Section 139, extending the benefit of Section 43B to such payments.

No disallowance under Section 14A of the Income-tax Act is warranted when the assessee's own interest-free funds are sufficient to cover the tax-free investments made.

For claiming deductions under Section 80IB, the audit report in Form 10CCB can be filed any time before the assessment is completed, even if not submitted along with the original return of income.

Payments made to meet any portion of the actual cost, as contemplated under Explanation 10 to Section 43(1) of the Income Tax Act, are eligible for consideration.

An expenditure is deductible under Section 37(1) if incurred out of commercial expediency for the assessee's business, even if it does not directly yield profit or benefit the assessee alone. The 'for the purpose of business' test focuses on the nature of the expense and its business nexus, rather than immediate profitability.

If the revenue does not dispute the quantitative details of stock and fails to inquire into the assessee's explanation regarding a difference in the value of closing stock, a mere difference in valuation may not warrant an adjustment. The burden is on the revenue to investigate the assessee's explanation concerning stock inclusion.

For claiming a deduction of interest paid on borrowed capital under Section 36(1)(iii), an assessee must show that the capital was used for business purposes; the nature of the asset acquired (revenue or capital) with such capital is irrelevant.

Bank investments are treated as stock-in-trade and must be valued at the lower of cost or market value, making the resultant depreciation an allowable deduction. This treatment applies when accounts are maintained as per Reserve Bank of India Regulations and CBDT/RBI instructions.

Corporate club membership fees, including admission and subscription fees, incurred wholly and exclusively for business purposes to improve business relations and prospects, are allowable as revenue expenditure. This principle applies when there is a proximate nexus between the expenditure and the business.

A Special Bench decision of the Income Tax Appellate Tribunal concerning Section 80IA deduction for infrastructure facility developers can be recalled if it fails to consider a binding jurisdictional High Court judgment.

Advertisement, Marketing, and Promotion (AMP) expenses are not to be disallowed in the hands of the assessee if specific conditions are satisfied.

Notional income, such as notional interest on interest-free loans, cannot be brought to tax without a specific statutory provision in the Income Tax Act. Only real income that has accrued or been received by the assessee is subject to income tax.

If an assessee claims no expenditure was incurred for earning exempt income, disallowance under Section 14A is not automatic, and the revenue must establish such expenditure for a valid disallowance.

For the purpose of claiming deduction under Section 10B, the term "manufacture" includes "process" as per the Explanation to the section, allowing activities like processing gherkins into pickles to qualify.

The deduction under Section 10A/10B is a deduction, not an exemption, and must be given effect to at the stage of computing the profits and gains of business. For this purpose, commercial profits mean profits without adjustment of depreciation as per the Income Tax Act.

Where purchases are supported by bills, reflected in books of account, and payments are made through account payee cheques, such purchases cannot be treated as bogus in the absence of specific contrary evidence from the Assessing Officer.

A claim for deduction under Section 36(1)(viia) for bad and doubtful debts is restricted to the actual amount of provision made by the assessee, as the statutory language is clear and unambiguous.

Interest income from non-performing assets (NPAs) is not assessable as income, even for assessees following the mercantile system of accounting, in the context of Section 145 of the Income-tax Act.

Disallowance under Section 14A is not applicable if investments yielding exempt income are made from the assessee's own interest-free funds, and any such disallowance cannot exceed the actual exempt income earned during the year.

Amounts claimed on account of employees' contributions to Provident Fund (PF) and Employees' State Insurance (ESI), if deposited on or before the due date for filing the income-tax return, cannot be disallowed under Section 43B or Section 36(1)(va) of the Income Tax Act.

Ad-hoc disallowances of employee per diem allowances are not permissible solely due to non-collation of bills if the expenditure is actually incurred.

Disallowance under Section 14A towards interest expenditure is permissible when there is no direct nexus established between the borrowed funds and tax-exempt investments, particularly if tax-free investments have decreased.

Rule 5(a) of the First Schedule to the Income Tax Act applies to add back an amount only if it is an expenditure or allowance contemplated in sections 30 to 43A and is specifically disallowed. Without such a specific prohibition, amounts like provisions for preference share redemption or amortization cannot be added back to an insurance company's profits.

For an expenditure to be deductible under Section 37(1), its object or motive must be solely for promoting the business. Donations made for the smooth functioning or commercial expediency of the business can also be allowable.

For Section 80IA and 80IB deductions, the profits of an eligible industrial undertaking or unit must be computed independently based on its actual profitability and market-rate inter-unit transactions, rather than applying a global profit margin of all the assessee's units.

Expenses incurred for obtaining a project report, legal opinion, or conducting due diligence to explore the feasibility of expanding an existing business or setting up a new factory in the same line are considered revenue expenditures, not capital.

Payments under an agreement, such as license fees, are characterized for tax purposes based on each payment's specific subject matter. The enduring benefit test applies to individual, divisible rights.

Employee contributions to welfare funds are deductible if paid by the Income Tax Return due date, regardless of the due date prescribed under the specific fund Acts.

Expenditure incurred in respect of abandoned cell towers is an allowable business expenditure under Section 37(1) of the Income-tax Act, 1961, especially when no new business was being set up by the assessee.