Section 35D of the Income Tax Act
The decision most relied on for Section 35D is CIT v. Dalmia Cement (Bharat) Ltd. (254 ITR 377), cited in 417 of the 82 judgments on BharatTax that turn on this section.
Leading authorities on Section 35D
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.
A taxpayer can legitimately arrange their commercial affairs to reduce tax liability, as permissible tax planning differs from tax evasion. Only real income is subject to tax, not hypothetical or notional income imputed by the Assessing Officer.
An expense related to a prior year's transaction becomes a deductible liability only when it is determined and crystallised, not merely because the underlying transaction occurred in an earlier year.
Expenditure that provides a commercial advantage of an enduring nature may still be classified as revenue expenditure if its purpose is to facilitate existing trading operations, improve business efficiency, or upgrade existing products, depending on the specific context and objective.
Expenditure incurred for increasing a company's share capital or expanding its capital base, such as expenses related to the issue of shares, constitutes capital expenditure. Such expenses are not deductible as revenue expenditure under Section 37(1) of the Income-tax Act, 1961, even if they incidentally benefit the business.
If unabsorbed depreciation or losses from years prior to the initial assessment year for Section 80-IA claim have already been set off against other income, they cannot be notionally carried forward again to reduce the profits of the eligible unit for computing deduction under Section 80-IA. The notional carry forward provision under Section 80-IA(5) applies only to unabsorbed depreciation or losses that have not yet been absorbed.
Expenditure incurred for increasing a company's share capital, such as expenses related to issuing shares or an initial public offering (IPO), is capital expenditure. Such expenses are not allowable as a revenue deduction under Section 37, even if they incidentally benefit the business, because they result in an increase in capital.
Excise duty and sales tax must be excluded from 'total turnover' when calculating deductions under Chapter VI-A, such as Section 80HHC or 80IA, to ensure that the export turnover and total turnover are on a comparable basis.
The Income Tax Appellate Tribunal is not required to repeat its reasons when it fully agrees with the conclusions of the lower appellate authority and has no further grounds to add, even as the final fact-finding body.
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.
Judgments on Section 35D
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