“Section 40(1)(b)”
The decision most relied on for Section 40(1)(b) is CIT v. Dalmia Cement (Bharat) Ltd. (254 ITR 377), cited in 417 judgments on BharatTax.
Leading authorities on Section 40(1)(b)
When there is a nexus between an expenditure and the purpose of business, incurred on grounds of commercial expediency, the Revenue cannot question its reasonableness or assume the role of the businessman to compel profit maximization. This principle applies even if the business is not that of the assessee itself.
Interest expenditure incurred for acquiring capital assets, even if capitalized in the books, is deductible if for the purpose of business. Section 36(1)(iii) is a self-contained code regarding such deductions.
Payments for the use of equipment or copyrighted articles constitute royalty income under section 9(1)(vi) of the Income-tax Act, necessitating TDS deduction under section 195 and attracting disallowance under section 40(a)(i) for non-compliance.
Incentive provisions in the Income-tax Act, particularly those granting deductions for new industrial undertakings, must be construed liberally to achieve their legislative purpose. This principle guides the interpretation of conditions such as what constitutes a 'new undertaking' versus a 'splitting up or reconstruction' of an existing business for claiming deductions.
Pure reimbursement of expenditure does not constitute income in the nature of royalty or fees for technical services, therefore eliminating the obligation to deduct tax at source.
Interest expenditure cannot be disallowed under Section 36(1)(iii) for interest-free advances made to subsidiaries or group companies if the advances are from owned funds or are justified by commercial expediency.
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'.
Interest paid on borrowed capital is only deductible if the loans were utilized for the assessee's business during the accounting year. Any portion of interest related to non-business purposes is not allowable as an expenditure.
