Section 43(5) of the Income Tax Act
The decision most relied on for Section 43(5) is CIT v. Woodward Governor India Pvt. Ltd. (312 ITR 254), cited in 843 of the 92 judgments on BharatTax that turn on this section.
Leading authorities on Section 43(5)
Foreign exchange fluctuations, whether gains or losses, are inextricably linked to the underlying business transaction and must be accounted for under the mercantile system. The Supreme Court also affirmed the standard accounting principle of valuing stock at cost or net realisable value, whichever is lower.
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.
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.
Additional depreciation is allowable under section 32(1)(iia) for new machinery or plant even when put to use for less than 180 days, with the unabsorbed balance available for claim in the subsequent year.
Losses incurred from foreign exchange forward contracts or derivatives, entered into to hedge currency fluctuations in the course of regular business like exports, are treated as business losses and not as speculative transactions under Section 43(5). Such contracts, when incidental to business and cover exchange rate risks, constitute a business activity.
The Legislature abolished terminal depreciation under section 32(1)(iii) and the taxing of balancing charge under section 41(2), replacing these provisions with the requirement to reduce sale proceeds of depreciable assets from the block of assets.
Expenditure on software useful for a short period or requiring regular updates, for which subscription fees are paid, constitutes revenue expenditure, distinguishable from capitalized software purchased on a perpetual license model, based on the test of enduring benefit.
The write-back or waiver of a loan obtained for business purposes constitutes taxable business income under Section 28. This applies even if no prior deduction was claimed, thereby not attracting Section 41(1).
Losses from foreign exchange forward contracts, when incidental to an assessee's regular business and undertaken to safeguard business interests, are treated as business losses and not speculative losses under section 43(5).
Loss incurred by certain types of companies in trading derivatives is considered speculative loss under the Explanation to Section 73, as the value of stock derivatives depends on shares. Such speculative losses are ineligible for set-off or carry forward against business income.
Judgments on Section 43(5)
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