Section 4 of the Income Tax Act
The decision most relied on for Section 4 is Smt. Tarulata Shyam v. CIT (108 ITR 345), cited in 209 of the 202 judgments on BharatTax that turn on this section.
Leading authorities on Section 4
Taxing statutes must be interpreted strictly, assuming that the law-making authority does not commit a mistake or make an omission. There is no room for purposive interpretation under direct tax laws.
Expenditure incurred by an assessee operating a composite business that generates both taxable and non-taxable income is fully allowable without apportionment. This position led to the subsequent insertion of Section 14A, which disallowed expenditure related to earning exempt income.
Disallowance under Section 14A of the Income Tax Act, 1961, cannot exceed the actual tax-exempt income earned by the assessee during the relevant year. If no tax-exempt income is earned, no disallowance under Section 14A is warranted.
Disallowance under Section 14A applies only when exempt income is actually received or receivable during the relevant previous year. The provision does not trigger merely upon incurring expenditure if no exempt income materialized in that year.
Interest earned from the temporary parking of borrowed funds specifically intended for project development, prior to the commencement of business, constitutes a capital receipt inextricably linked to the project and is not taxable as 'income from other sources'.
Expenditure incurred by an assessee carrying on a composite business giving rise to both taxable and non-taxable income is allowable in its entirety without apportionment. This principle led to the subsequent introduction of Section 14A of the Income-tax Act.
Income taxability depends on the real nature of the receipt and actual or constructive receipt of income, not merely on book entries. An amount is only "deemed to be received" if explicitly provided by the Income Tax Act, not by an assessee's unilateral intention.
Tax must be deducted at source under Section 194A only on interest that ultimately partakes the character of income for the recipient. If interest does not qualify as income or falls outside the scope of Section 2(28A), there is no obligation to deduct TDS.
Disallowance under Section 14A read with Rule 8D cannot be made if no exempt income is earned in the relevant assessment year. Consequently, such disallowance should not be added back while computing book profits under Section 115JB.
Merely being designated a 'contractor' in an agreement does not automatically disqualify an assessee from claiming deductions for infrastructure development under Chapter VI-A, such as section 80-IA, if the substance of the activity qualifies.
Judgments on Section 4
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