Section 142(2A) of the Income Tax Act
The decision most relied on for Section 142(2A) is Godhra Electricity Co. Ltd. v. CIT (225 ITR 746), cited in 511 of the 243 judgments on BharatTax that turn on this section.
Leading authorities on Section 142(2A)
The principle of real income dictates that only actual income, and not hypothetical or notional income, is subject to taxation under the Income-tax Act. Income that has not genuinely accrued or been received cannot be brought to tax merely on an assumption.
Disallowance under Section 14A of the Income-tax Act cannot exceed the exempt income earned during the relevant period. If no exempt income is earned by the assessee in the relevant year, no disallowance under Section 14A is warranted.
The necessity and reasonableness of business expenditure, including the utilization of borrowed funds, must be judged from the perspective of a businessman based on commercial expediency, and cannot be dictated by revenue authorities. The onus is on the assessee to demonstrate the business purpose and commercial expediency.
The requirement of statutory prior approval by a high-ranking authority, even if administrative, serves as an in-built protection against arbitrary exercise of power by the Assessing Officer. While such approval need not record elaborate reasoning, the approving authority has a heavy duty to ensure it is not an empty ritual, fulfilling its purpose of supervisory control.
Unclaimed deposits received in the course of trading transactions and sundry credit balances written back are taxable as business income under Section 41(1) of the Income-tax Act, 1961, as they constitute a cessation of trading liability.
The provisions of Section 2(22)(e) are not applicable to a concern receiving a payment from a closely held company, even if a shareholder of the company holds a substantial interest in that concern, unless the concern itself is the registered shareholder of the company.
For a limited company, expenses cannot be disallowed merely on the grounds of presumed personal use of assets by directors or by treating the expenditure as a non-business purpose. Percentage disallowances of expenses in such cases are not sustainable.
Statutory approvals required under the Income Tax Act, particularly for assessments, must reflect a genuine application of mind by the approving authority and cannot be mechanical or granted without due consideration.
The onus lies on the assessee to demonstrate that interest-bearing funds were advanced or utilized for genuine business purposes and commercial expediency to claim interest expenditure as a deduction.
The necessity and reasonableness of business expenditure must be judged from a prudent businessman's perspective, not by the Revenue. The assessee bears the initial onus to prove that interest-bearing funds were used for business purposes and commercial expediency.
Judgments on Section 142(2A)
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