Deductions & Disallowances

Deductions & Disallowances — the law in short

Every authority in this library on deductions & disallowances, with what each one decided.

• Sanand Properties P Ltd v Jt CIT Supreme CourtHelps department
  My company is a member of an AOP and takes 35% of the AOP's gross sale proceeds under the AOP deed. We showed it as an exempt share of the AOP's profit. After a survey the AO reopened two years and now says it is revenue. Can he reopen, and is the money taxable in my hands?
  No on the reopening challenge and no on the exemption. Where the assessment order shows the Assessing Officer never applied his mind to the character of the receipt at all, there is no opinion to change, and material coming out of a s.133A survey that reveals the true nature of the receipt is tangible material for s.147. On the merits the Court read Clause 7 of the AOP deed itself and held that a member's entitlement to 35% of gross sale proceeds, taken upfront and untouched by the AOP's expenses, is not a share of profit but a diversion of the AOP's receipts by overriding title, taxable in the member's hands as a business receipt. Two Revenue appeals were allowed and the assessee's appeal dismissed.
• L.K. Trust v CIT Supreme CourtHelps taxpayer
  I borrowed from a bank to buy shares, but the money passed through a group company before the shares were bought. The department says the borrowing was not for my business. Can it disallow my interest under s.36(1)(iii)?
  No, not on the reasoning the High Court gave. The Supreme Court set aside a Karnataka High Court order that had disallowed interest because the borrowed money was ultimately used for the benefit of the assessee's subsidiary rather than for the assessee's own business, and held that the borrowed funds must be looked at from the point of view of commercial expediency. It declared the assessee entitled to deduct the interest paid on the capital of Rs 3,80,00,000 borrowed from the Corporation Bank, and agreed with the Tribunal's interpretation of s.36(1)(iii).
• Sharp Business System v CIT-III Supreme CourtHelps taxpayerNo later treatment found
  Is a lump sum non-compete fee paid to keep a former partner out of the market capital expenditure, or is it deductible as revenue expenditure under s.37(1)?
  On these facts it was revenue expenditure and deductible under s.37(1). Because the payment was held to be on revenue account, the alternative claim for depreciation on a non-compete right as an intangible asset did not arise and was left undecided.
• DIT (IT)-I, Mumbai v American Express Bank Ltd Supreme CourtHelps department
  Does the section 44C ceiling bite only on head office expenditure shared with other branches, or also on expenditure the head office incurred exclusively for the Indian branch?
  It bites on both. The Explanation to s.44C defines head office expenditure by two things only: that it is incurred outside India, and that it is executive and general administrative expenditure of the kind listed. Nothing in it says the expenditure must be common or shared. The Bombay High Court's contrary view in Emirates Commercial Bank was held to be wrong.
• National Cooperative Development Corporation v ACIT Supreme CourtHelps departmentNo later treatment found
  Is dividend income, interest on short-term bank deposits and monitoring service charges part of the profits 'derived from' the business of providing long-term finance for s.36(1)(viii)?
  No. 'Derived from' requires a direct and proximate connection — a first-degree nexus — between the receipt and the business of providing long-term finance. Income that is incidental or ancillary to that business, however closely connected in a commercial sense, does not qualify. Section 36(1)(viii) is a ring-fenced deduction, not a general exemption for the whole of a finance corporation's income.
• Pride Foramer S.A. v CIT Supreme CourtHelps taxpayerNo later treatment found
  A non-resident had no contract in India for several years but kept trying for one. Had its business ceased, so that expenditure and unabsorbed depreciation fall away?
  No. A business going through a lean period which could be revived if circumstances permitted is a lull in business, not a cessation. The test is the assessee's conduct judged as a prudent businessman would judge it, not whether a contract was actually obtained. Expenditure of the lull years remained deductible and could be set off, and unabsorbed depreciation carried forward.
• Sarla Holdings P Ltd v PCIT Supreme CourtHelps department
  I did not tick s.115BAA in the return and filed Form 10-IC late. Can I still get the concessional rate?
  No, if the return itself did not opt. Section 115BAA(5) requires the option to be exercised in the prescribed manner on or before the s.139(1) due date, and Circular 6/2022 condones only a late Form 10-IC where the option was in fact exercised in the return. A company that marked 'None of the above' cannot claim the benefit later, and s.115JB applies.
• Shital Fibers Ltd v CIT Supreme CourtHelps taxpayer
  Where a deduction has been allowed under s.80-IA, does s.80-IA(9) require the other Chapter VI-A deduction, such as s.80-HHC, to be computed on a reduced profit?
  No. Section 80-IA(9) operates at the stage of allowance, not computation. The s.80-HHC deduction is still computed on the profits of the business without first reducing them by the s.80-IA deduction; what s.80-IA(9) prevents is the aggregate of the deductions under heading C exceeding the profits of the eligible business. A three-Judge Bench answered a reference to this effect, approving the Bombay High Court's view in Associated Capsules.
• CIT v Jindal Steel & Power Ltd Supreme CourtHelps taxpayer
  Our captive power plant supplies electricity to our own factory. The officer values that power at the low rate the Electricity Board pays us for surplus, not the tariff the Board charges us. Which is 'market value' under s.80-IA(8)?
  The tariff the Board charges its industrial consumers. The Supreme Court held that the rate at which a generator sells surplus power to a State Electricity Board is a rate fixed by contract under a statutory monopoly and is not a price fetched in the open market. The tariff at which the Board supplies industrial consumers is the price at which power is actually available to a buyer, and that is the market value for an inter-unit transfer under s.80-IA(8). Here that meant Rs 3.72 per unit, not Rs 2.32.
• CIT v Bharti Hexacom Ltd Supreme CourtHelps departmentJudgment not reachable
  I run a telecom company and I have been claiming the annual revenue-share licence fee paid to the Department of Telecommunications as a business expense. The assessing officer says the Supreme Court has held it is capital and must go through section 35ABB. What did the Court actually decide?
  It decided that the licence fee has one character throughout, and that the character is capital. The licensees had migrated from the telecom policy of 1994, under which the fee was fixed, to the policy of 1999, under which a one-time entry fee was payable, calculated as the licence fee dues up to 31 July 1999, and the fee thereafter was a share of gross revenue. The Delhi High Court had split the payment on that date, treating the fee up to 31 July 1999 as capital, qualifying for deduction under section 35ABB, and the revenue-share fee after 1 August 1999 as revenue. The Supreme Court framed the question as whether the variable annual licence fee paid to the Department of Telecommunications under the policy of 1999 is revenue in nature and deductible under section 37, or capital and accordingly required to be amortised under section 35ABB. It answered that the later payment is a continuation of the earlier one in an altered format, that the change of format does not take away the essence of the payment, that it is a mandatory payment traceable to the licence agreement and non-payment would put the licensee out of the trade, and that such a payment has to be treated or characterised as capital only. The date of 31 July 1999 therefore marks a change in how the fee is measured, not a change in what it is.
• KSCARDB v Assessing Officer Supreme CourtHelps taxpayer
  We are a state-level co-operative agricultural and rural development bank. Does 80P(4) block our deduction?
  No. The appellant is an apex co-operative society providing credit to its member societies, not a 'co-operative bank' within s.80P(4) read with the Banking Regulation Act, 1949, so the deduction under s.80P(2)(a)(i) is available.
• Checkmate Services P Ltd v CIT Supreme CourtHelps department
  You deposited employees' PF late but before filing the return. Is the deduction saved?
  No. Employees' contributions are held in trust and are deemed income; the deduction depends on depositing them by the due date under the PF or ESI Act. Section 43B, which governs the employer's own liabilities, does not rescue them.
• PCIT v Wipro Ltd Supreme CourtHelps department
  A declaration was required by the due date and you filed it late. Is that fatal?
  Yes. Both limbs — furnishing the declaration, and doing so before the due date for the original return — are mandatory, not directory. A claim made only in a belated revised return does not qualify.
• Apex Laboratories P Ltd v DCIT Supreme CourtHelps departmentNo later treatment found
  Can a pharmaceutical company deduct the cost of gifts given to doctors?
  No. Acceptance of such gifts is prohibited for the doctor, and a prohibition on the recipient is equally a prohibition on the giver. The expenditure falls within Explanation 1 to s.37(1) as being for a purpose prohibited by law.
• South Indian Bank Ltd v CIT Supreme CourtHelps taxpayer
  Your own funds exceed the tax-free investments. Can interest still be disallowed proportionately?
  No. Where interest-free own funds exceed the investment in tax-free securities, a presumption arises that the investment came from those funds, and the officer cannot substitute an estimated proportionate figure.
• M.M. Aqua Technologies Ltd v CIT Supreme CourtHelps taxpayerSuperseded by amendment
  I cleared accrued interest by issuing debentures to the lender. Does that count as payment under s.43B?
  Yes, on these facts and for the years before the law was changed. Issuing debentures that extinguished the liability to pay interest is actual payment, and Explanation 3C — a removal-of-doubts provision — only catches interest that stays unpaid and is merely converted into a fresh loan or borrowing.
• CIT v Reliance Energy Ltd Supreme CourtHelps taxpayer
  My section 80-IA deduction is larger than my business income. Can I set it against my other income too, or only against business income?
  Against gross total income, subject to the Chapter VI-A ceiling. The Supreme Court held that section 80AB deals only with computing the deduction on net income and cannot be read as curtailing the width of section 80-IA. Section 80-IA(5) is confined to determining the quantum of the deduction by treating the eligible business as the only source of income; it cannot be pressed into service to read a limitation confining the deduction under sub-section (1) to business income. Section 80A(1) allows the Chapter VI-A deductions from gross total income and section 80A(2) caps the aggregate at gross total income. The Revenue's appeals were dismissed on this issue.
• Mavilayi Service Co-operative Bank Ltd v CIT Supreme CourtHelps taxpayer
  My society lends to non-members too. Does that wipe out its 80P(2)(a)(i) deduction?
  No. The deduction stands: the society need not lend only for agricultural purposes, and lending to non-members does not disentitle it — only the profits from non-member loans fall outside the deduction. Section 80P(4) shuts out only co-operative banks licensed to carry on banking business.
• Shree Choudhary Transport Co. v Income Tax Officer Supreme CourtHelps department
  I am a transport contractor who hires trucks from individual owners and pays them freight. Does section 194C apply, and can section 40(a)(ia) disallow amounts I have already paid rather than merely owe?
  Yes to both. The Supreme Court held that section 194C applied to the payments the firm made to truck owners it engaged to carry the cement it had contracted to transport, so it was bound to deduct tax at source; that disallowance under section 40(a)(ia) is not confined to amounts outstanding at the year end but applies equally to expenses already incurred and paid; that the provision as introduced by the Finance (No. 2) Act, 2004 with effect from 1 April 2005 governed assessment year 2005-06; and that the amendment of 2014 reducing the disallowance to thirty per cent gave the firm no benefit. Splitting a single freight payment into two vouchers below Rs 20,000 did not escape section 194C.
• Union of India v Exide Industries Ltd Supreme CourtHelps departmentNo later treatment found
  Can I deduct my provision for leave encashment in the year I make it, or only when I pay?
  Only when paid. Section 43B(f) is constitutionally valid: it does not touch your choice of accounting method or take away the deduction, it adds a condition of actual payment for that head and defers the benefit to the year of payment.
• Maruti Suzuki India Ltd v CIT Supreme CourtHelps departmentNo later treatment found
  Can I claim a deduction for unutilised MODVAT credit sitting in my books at the year end?
  No. Unutilised credit is not a sum payable by you by way of tax, duty, cess or fee, so s.43B(a) has nothing to operate on. The duty on the inputs was payable by the supplier; what passed to you was the incidence, not the liability.
• Snowtex Investment Ltd v PCIT Supreme CourtHelps department
  Can I set my share trading loss off against my F&O profits?
  No, for years up to AY 2014-15. Where a company's principal business is dealing in shares, the Explanation to s.73 deems that loss to be speculative, while derivatives profits on a recognised exchange are non-speculative under s.43(5)(d) — so the two cannot be set off. The 2014 amendment to the Explanation is prospective and does not help earlier years.
• CIT v Tasgaon Taluka S.S.K. Ltd Supreme CourtCuts both ways
  The Assessing Officer has disallowed the whole difference between the statutory minimum cane price and the State advised price my sugar co-operative paid its members. Can he?
  No — not the whole difference. The Supreme Court held that only that component of the final or additional cane price fixed under Clause 5A of the Sugarcane (Control) Order 1966 which represents profit is an appropriation of profit; the rest is deductible expenditure. The Assessing Officer must actually do the exercise of identifying the profit component from the accounts and the material supplied to the State Government, and all the orders below were set aside and the matters remitted for that purpose.
• Vijay Industries v CIT Supreme CourtHelps taxpayer
  Is my section 80HH deduction 20 per cent of the undertaking's gross profits and gains, or of the income left after depreciation?
  Of gross profits and gains, for the years before section 80AB applied. A three judge bench of the Supreme Court held that section 80HH allows a deduction of 20 per cent of profits and gains, and that profits and gains is conceptually different from income; read with section 80A the deduction is of gross profits and gains, before computing income under sections 30 to 43D, so depreciation and investment allowance are not first deducted. Motilal Pesticides, which had equated the language of section 80HH with that of section 80M, was held erroneous and overruled. Section 80AB is prospective from 1 April 1981 and did not apply to assessment years 1979-80 and 1980-81.
• CIT v Gujarat Cypromet Ltd Supreme CourtHelps department
  The bank sanctioned a fresh loan and the outstanding interest was squared off against it. My books show no interest outstanding. Is that actual payment under section 43B?
  No. Where the accrued interest is not paid back but is adjusted against a further loan from the same institution, Explanation 3C to section 43B applies and there is no actual payment. The Supreme Court allowed the Revenue's appeal and restored the Assessing Officer's disallowance.
• Principal CIT v Aarham Softronics Supreme CourtHelps taxpayer
  My Himachal unit took the 100 per cent deduction under section 80-IC for five years and then I put in substantial expansion. Do I drop to 25 per cent, or can I go back to 100 per cent?
  You go back to 100 per cent. A three-judge bench of the Supreme Court held that the definition of initial assessment year in section 80-IC(8)(v) includes the year in which substantial expansion is completed, so there can be more than one initial assessment year within the ten year window. From the year of substantial expansion the unit is entitled to 100 per cent deduction again under section 80-IC(3)(ii). The ceiling in sub-section (6) is on the number of years, not on quantum. The Court held that its own earlier judgment in Classic Binding Industries, which had said otherwise, does not lay down the correct law.
• Ravi Agrawal v Union of India Supreme CourtHelps departmentSuperseded by amendment
  My client took a Jeevan Aadhar policy for his disabled child and claimed s.80DD, but the policy pays nothing while he is alive. Is that condition open to challenge?
  The Supreme Court held it is not. Section 80DD(2)(a), which allowed the deduction only where the scheme provided for payment of the annuity or lump sum on the death of the subscriber, was held to rest on a reasonable classification with a rational objective and could not be struck down under Article 14; the Court said it cannot direct Parliament to amend a provision in a specified manner. It disposed of the writ petition by urging the Union to have a relook and explore suitable amendments — and Parliament then did amend the section.
• CIT v Calcutta Export Co Supreme CourtHelps taxpayer
  I deducted TDS during the year but paid it after 31 March, though before I filed my return — can the expense still be disallowed under section 40(a)(ia)?
  No. The Supreme Court held on 24 April 2018 that the amendment to section 40(a)(ia) by the Finance Act 2010 is curative and operates retrospectively from 1 April 2005, when the clause was first inserted. So for any year from assessment year 2005-06 onwards, tax deducted at any time in the previous year and paid on or before the due date for filing the return under section 139(1) attracts no disallowance. The memorandum to the Finance Bill 2010 had said the amendment would apply from assessment year 2010-11; the Court held that a proviso supplying an obvious omission must be read back into the section.
• CIT v HCL Technologies Ltd Supreme CourtHelps taxpayer
  The AO knocked freight and telecom charges out of my export turnover but left them in total turnover. Can he do that?
  No. What is excluded from export turnover must also come out of total turnover, because export turnover is a component of total turnover. Reading the exclusion into the numerator alone would make the s.10A formula produce an absurd result. The Court declined to construe the section in a way that would work an injustice on the assessee.
• CIT v Mahindra and Mahindra Ltd Supreme CourtHelps taxpayer
  The lender wrote off the principal of a loan I used to buy machinery. Is that taxable?
  No. Section 28(iv) reaches only a benefit in a form other than money, and a waiver puts cash in the debtor's hands. Section 41(1) needs an earlier allowance or deduction in respect of a trading liability; here only depreciation on the assets had been claimed, never a deduction for the loan.
• Maxopp Investment Ltd v CIT Supreme CourtCuts both ways
  Shares held for control, or as stock-in-trade. Does s.14A still bite?
  Yes. The dominant purpose for which shares were acquired is irrelevant — s.14A rests on apportionment. But only expenditure relating to exempt income can be disallowed, and the officer must record satisfaction before rejecting your own computation.
• CIT v Essar Teleholdings Ltd Supreme CourtHelps taxpayer
  The Assessing Officer has applied Rule 8D to an assessment year before 2008-09. Can he?
  No. Rule 8D is prospective and cannot be applied to any assessment year prior to AY 2008-09. For earlier years the officer must work out a reasonable disallowance under s.14A(1) on the material before him, not by the prescribed formula.
• Citizen Co-operative Society Ltd v ACIT Supreme CourtHelps departmentPartly overruled — read this first
  The AO cites Citizen Co-operative Society to deny my 80P claim. How far does it go?
  Only as far as mutuality. The society there lost because its 'nominal members' were not members in law, the contributors to the surplus and the participants in it were not the same body, and it was in substance running a finance business outside the statute under which it was registered.
• Godrej & Boyce Manufacturing Co Ltd v DCIT Supreme CourtCuts both ways
  The Assessing Officer has disallowed interest under section 14A against my dividend income, though I have more than enough of my own funds — can he do that without showing a link?
  No, not on this record. The Supreme Court held on 8 May 2017 that section 14A does apply to dividend on which the company has paid tax under section 115-O, because such dividend is not includible in the shareholder's total income. But section 14A(1) still requires proof that the expenditure sought to be disallowed was actually incurred in earning that dividend. Here the Assessing Officer recorded no reasons, showed no nexus, and departed from findings for earlier years without any new fact. With interest-free funds of about Rs.280 crore against investments of Rs.125 crore, no diversion of borrowings was proved. The assessee got the full exemption.
• Palam Gas Service v CIT Supreme CourtHelps department
  I already paid my sub-contractors during the year and nothing was outstanding at 31 March — can section 40(a)(ia) still disallow the expense for not deducting TDS?
  Yes. The Supreme Court held on 3 May 2017 that the word "payable" in section 40(a)(ia) covers amounts actually paid as well as amounts still outstanding. Sections 194C and 200 require deduction at the time of credit or of payment, whichever is earlier, and payment over to the Government within the prescribed time; a person who ignores that obligation must bear the consequences the Act lays down, of which disallowance under section 40(a)(ia) is one. The view of the Punjab and Haryana, Madras and Calcutta High Courts was approved, and the Allahabad High Court's decision in CIT v. Vector Shipping Services (P) Ltd. was overruled.
• Berger Paints India Ltd v CIT Supreme CourtHelps department
  My s.35D claim is capped at 5% of capital employed. Does the share premium I collected count as capital employed?
  No. Capital employed in the business of the company for s.35D(3)(b) is the aggregate of three things only — issued share capital, debentures and long-term borrowings. Share premium is none of them, and the Supreme Court held that if Parliament had meant to include it, it would have said so in the Explanation. The ceiling is therefore computed on the face value subscribed, not on what the subscribers actually paid.
• CIT v Yokogawa India Ltd Supreme CourtHelps taxpayer
  Must my 10A unit's profits be reduced by other units' losses before the deduction?
  No. After the Finance Act 2000 the relief is a deduction rather than an exemption, but it is worked out while computing the profits of the eligible undertaking, before the setting off and aggregation that produces total income. Losses of other units and brought-forward losses therefore do not eat into it.
• CIT v Kotak Securities Ltd Supreme CourtHelps taxpayer
  We paid stock exchange transaction charges without TDS. Are those fees for technical services under 194J?
  No. The exchange's trading platform is a standard facility available to every member on identical terms, with no customisation for the payer, so the transaction charges are not fees for technical services under s.194J — and the s.40(a)(ia) disallowance built on that premise falls away.
• CIT v Meghalaya Steels Ltd Supreme CourtHelps taxpayer
  My unit gets transport, power and interest subsidies from the State — does that money count as profit derived from the undertaking for section 80-IB or 80-IC?
  Yes. The Supreme Court held on 9 March 2016 that subsidies reimbursing elements of the cost of manufacturing or selling the undertaking's products have a direct nexus with its profits and qualify for deduction under sections 80-IB and 80-IC. Profits and gains in those sections mean net profit, arrived at after deducting the costs of making and selling the goods; if the State refunds part of those costs, the resulting profit is derived from the business. That the immediate source of the money is the Government makes no difference. Liberty India, which concerned an export incentive available only after manufacture, was distinguished, and the contrary Himachal Pradesh view was held wrongly decided.
• Hero Cycles (P) Ltd v CIT Supreme CourtHelps taxpayer
  The AO says my borrowings funded advances to a sister concern and my directors. Can he disallow the interest?
  No, not once a nexus between the expenditure and the purpose of the business is shown. The advance to the sister concern was imperative as a business expediency because of undertakings given to financial institutions about its working capital margin, and the advances to directors were covered by the company's own reserves, so nothing was left for the disallowance to bite on.
• CIT v Sarkar Builders Supreme CourtHelps taxpayer
  My housing project was sanctioned before April 2005 but finished afterwards, and the shops exceed the 5 per cent limit. Does the new clause (d) apply to me?
  No. The Supreme Court held that clause (d) of section 80-IB(10), which caps the built-up area of shops and commercial establishments and took effect on 1 April 2005, does not apply to a housing project approved before 31 March 2005, even if construction was completed and profits offered to tax afterwards. The condition is inextricably linked to the approval and construction of the project, and an assessee cannot be required to satisfy a condition that was not on the statute book when the local authority sanctioned the plans. The Revenue's appeals from several High Courts were all dismissed.
• Taparia Tools Ltd v JCIT Supreme CourtHelps taxpayer
  I paid the whole five years' interest upfront to my debenture holders but wrote it off over five years in my books — can I still claim the entire amount in the year I paid it?
  Yes. The Supreme Court held on 23 March 2015 that where revenue expenditure is incurred and paid in a year, the ordinary rule applies and the assessee is entitled to the deduction in that year; if he claims it then, the Department cannot refuse it. Spreading is an indulgence available only where the assessee himself asks for it and the matching concept is satisfied. Here the company had shown the upfront interest as deferred revenue expenditure in its books but claimed the whole of it in the returns, and that claim governed. Entries in the books are not determinative, and there is no estoppel against the statute.
• CIT v Excel Industries Ltd Supreme CourtHelps taxpayer
  The AO has taxed my advance licence and DEPB benefits in the year I exported. Is that the right year?
  No. The benefit accrues only when the imports are actually made, because until then the customs authorities are under no corresponding obligation to give anything up. Income tax is a levy on real income, and until the import happens the entitlement is at best a hypothetical income that may or may not materialise. The Court also declined to let the department reopen a position it had accepted for earlier years without any change in facts or law.
• I.C.D.S. Ltd v CIT Supreme CourtHelps taxpayer
  I am a finance company. I bought the vehicles, I lease them to my customers, and the customer is shown as the owner in the registration certificate. The assessing officer says that makes the customer the owner and refuses me depreciation. Is he right?
  No. The Supreme Court held that the lessor, not the lessee, is entitled to depreciation on vehicles leased out in the course of a leasing business. Two conditions have to be met under section 32 - ownership and use for the purposes of the business - and the Court held both were satisfied. On ownership, the lease agreement provided that the assets remain at all times the sole and exclusive property of the lessor, and the lessor kept the right to repossess, to inspect and to require the vehicles back; the entry of the lessee as owner in the registration certificate does not displace that, because section 2(30) of the Motor Vehicles Act is a deeming provision creating a fiction of ownership in favour of the lessee only for the purposes of that Act. As long as the assessee has a right to retain the legal title of the vehicle against the rest of the world, it is the owner in the eyes of law. On use, the Court held that section 32 requires the asset to be used for the purposes of business but does not require the assessee to use it himself; leasing was this assessee's business and the lease income was its business income. The Court went further and held the assessee entitled to the higher rate as well, because its main activity was leasing out or hiring the vehicles. The appeals were allowed and the High Court's judgments set aside.
• CIT v Smifs Securities Ltd Supreme CourtHelps taxpayerSuperseded by amendment
  Can I claim depreciation on the goodwill that arose when I took over another company on amalgamation?
  Not any longer. This case held that goodwill falls within 'any other business or commercial rights of similar nature' in Explanation 3(b) to s.32(1) and is eligible for depreciation, and that the excess of consideration over the value of net assets taken over is itself the goodwill, so payment had been made for it. The Finance Act 2021 has since removed goodwill from depreciation altogether with effect from assessment year 2021-22.
• Catholic Syrian Bank Ltd v CIT Supreme CourtHelps taxpayer
  My bank has a section 36(1)(viia) provision for rural advances. Does that provision cut down my deduction for urban bad debts actually written off under section 36(1)(vii)?
  No. The Supreme Court held that the deduction under section 36(1)(viia) for a provision against rural advances is distinct and independent of the deduction under section 36(1)(vii) for a bad debt actually written off. The proviso to clause (vii), which limits the write-off deduction to the excess over the credit balance in the clause (viia) account, exists only to prevent double deduction, and can operate only where that risk exists - that is, in respect of rural advances. Where the debts written off arise out of urban advances, the allowance is not affected by the proviso at all. The banks' appeals were allowed and the Revenue's dismissed.
• Guffic Chem P Ltd v CIT Supreme CourtHelps taxpayer
  I was paid to stay out of the business. Is the non-compete money capital or income?
  Capital, for years before assessment year 2003-04. Compensation attributable to a negative or restrictive covenant is a capital receipt, unlike compensation for loss of agency, which is revenue. Section 28(va), which taxes non-compete receipts, is amendatory and cannot be pushed back to earlier years.
• Ajanta Pharma Ltd v CIT Supreme CourtHelps taxpayer
  When I reduce export profits from book profit under section 115JB, do I take the full section 80HHC(3) figure or only the 80 per cent the phase-out allows?
  The full figure. The Supreme Court held that clause (iv) of the Explanation to section 115JB reduces book profit by the amount of profits eligible for deduction under section 80HHC as computed under sub-section (3) or (3A), and the phased percentages in section 80HHC(1B) do not cut it down. Section 80HHC(1) governs eligibility and sub-section (3) the computation, while sub-section (1B) deals only with the extent of the deduction. Section 115JB is a self-contained code taxing deemed income and operates in a different sphere. So on export profits of Rs 100 crore the downward adjustment is Rs 100 crore, not Rs 80 crore.
• Techno Shares & Stocks Ltd v CIT Supreme CourtHelps taxpayer
  I bought a Bombay Stock Exchange membership card — can I claim depreciation on it as an intangible asset under section 32(1)(ii)?
  Yes, on these facts. The Supreme Court held on 9 September 2010 that the right of membership of the Bombay Stock Exchange, which includes the right of nomination, is a business or commercial right that gives a non-defaulting continuing member access to the Exchange and the ability to trade on its floor. Under Rule 5 membership is a personal permission from the Exchange, which is a licence, and Explanation 3 to section 32(1)(ii) declares a commercial right similar to a licence or franchise to be an intangible asset. The right vests in the Exchange only on default or demise. The Bombay High Court's contrary judgment was set aside.
• CIT v Walfort Share & Stock Brokers P Ltd Supreme CourtHelps taxpayer
  I bought mutual fund units just before the record date, took the tax-free dividend and sold them ex-dividend at a loss — can the department disallow that loss for a year before section 94(7) came in?
  No, not for a year before 1 April 2002. The Supreme Court held on 6 July 2010 that section 14A disallows expenditure incurred to earn exempt income and needs a proximate cause between the two. A pay-back or return of investment is not expenditure at all: it hits the balance sheet, not the profit and loss account, and is not a debit item allowable under sections 30 to 37. The loss on sale was genuine, there was a real sale at a real price, and using the exemption in section 10(33) is not an abuse of law. From 1 April 2002 section 94(7) applies, but it ignores the loss only to the extent of the dividend.
• Vijaya Bank v CIT Supreme CourtHelps taxpayer
  I debited the bad debt to the profit and loss account and reduced debtors in the balance sheet, but did not close each debtor's ledger account — is that an actual write-off under section 36(1)(vii)?
  Yes. The Supreme Court held on 15 April 2010 that debiting the profit and loss account and simultaneously reducing loans and advances or debtors on the asset side, so that the year-end figure is shown net of the provision, is an actual write-off. What the Explanation inserted with effect from 1 April 1989 excludes is a debit to the profit and loss account matched by a credit to current liabilities and provisions — that is a provision, not a write-off. There is no further requirement to close the individual account of each debtor. The Assessing Officer can call for those accounts if he has reason to believe the deduction is being claimed twice.
• TRF Ltd v CIT Supreme CourtCuts both ways
  The AO wants proof my debt is actually irrecoverable before allowing the bad debt write-off. Is that right?
  No. For years after 1 April 1989 you do not have to establish that the debt has in fact become irrecoverable — it is enough that it is written off as irrecoverable in your accounts. The officer can still check that the write-off was actually made in the books, which is why the matter was remitted.
• Totgars Co-operative Sale Society Ltd v ITO Supreme CourtHelps department
  My society invested surplus funds in short-term bank deposits. Is that interest covered by 80P?
  No. Interest on surplus funds not required for immediate business use is not attributable to providing credit to members or to marketing their produce. It is income from other sources under s.56 and outside s.80P(2)(a)(i).
• Southern Technologies Ltd v Joint CIT Supreme CourtHelps department
  My NBFC has to debit a provision for non-performing assets to the profit and loss account under the RBI norms. Can the officer add it back when computing my taxable income?
  Yes. The Supreme Court held that a provision for non-performing assets made by a non-banking financial company under the RBI's Prudential Norms Directions 1998 must be added back in computing total income. The Directions are prudential and disclosure norms; they govern income recognition and how the provision is presented in the balance sheet, and have nothing to do with computation of taxable income. The provision is not a write-off, so section 36(1)(vii) is not satisfied, and because the Explanation to section 36(1)(vii) expressly puts a provision for doubtful debt outside that clause, section 37(1) cannot be used instead. The constitutional challenge to sections 36(1)(viia) and 43D also failed.
• CIT v Alom Extrusions Ltd Supreme CourtHelps taxpayer
  I paid the PF contribution after year end but before the return due date. Is the deduction gone?
  No, for the employer's own contribution. The deletion of the second proviso to s.43B and the amendment of the first proviso by the Finance Act 2003 are curative and operate retrospectively from 1 April 1988, so employer's contributions to provident and other welfare funds paid before the return due date are deductible.
• CIT v Textool Co Ltd Supreme CourtHelps taxpayer
  We paid our gratuity money straight to LIC while the fund's approval was still pending. Will s.36(1)(v) be denied?
  No, on these facts. Section 36(1)(v) allows a contribution towards an approved gratuity fund, and the department read that as requiring payment into the fund itself. The Court held that the object of the condition is that the employer should have no control over the money, and where the assessee had no control over the fund LIC created and every rupee ultimately reached the gratuity fund the Commissioner later approved, the deduction stood.
• Liberty India v CIT Supreme CourtHelps department
  Can I count DEPB credits and duty drawback in the profits for my 80-IB deduction?
  No. 'Derived from' is narrower than 'attributable to' and confines eligible profits to sources not beyond the first degree. DEPB and drawback flow from Government schemes rather than from the manufacturing activity, so they are ancillary profits outside the deduction.
• CIT v Sri Mangayarkarasi Mills (P) Ltd Supreme CourtHelps department
  I replaced worn out machines in my spinning mill. Is that current repairs or at least revenue expenditure, since the mill is one integrated plant?
  Neither. The Supreme Court held that each machine in a textile mill is an independent and separate asset with its own function, notwithstanding that all of them form part of one integrated manufacturing process. Replacing an old machine with a new one therefore brings a new asset into existence rather than preserving or maintaining an existing one, so it is not current repairs under section 31. It also gives the assessee an enduring benefit of better and more efficient production, so it is capital and not deductible under section 37. The claim of Rs 61,28,150 for assessment year 1995-96 was disallowed and the Assessing Officer's order restored.
• Nectar Beverages Pvt Ltd v DCIT Supreme CourtHelps taxpayer
  I wrote off my bottles and crates at 100% under the old proviso to section 32(1)(ii). Years later I sold them as scrap - is the sale money taxable under section 41(1)?
  No, for the years when section 41(2) was off the statute book. The Supreme Court held that the balancing charge in section 41(2) cannot be read into section 41(1). Depreciation is by its nature neither a loss nor an expenditure nor a trading liability, which is all section 41(1) reaches. Section 41(2), which taxed the balancing charge, was deleted from assessment year 1988-89 when the block of assets concept came in, so between then and its restoration the profit on sale of such assets was not taxable. Items costing under Rs.5,000 bought before 31 March 1995 also stayed outside the block, so section 50 did not catch them either.
• Rotork Controls India P Ltd v CIT Supreme CourtHelps taxpayer
  We give a warranty on every unit we sell and provide a percentage of turnover for it each year — can the Assessing Officer disallow that as a contingent liability?
  Not where the provision is properly built. The Supreme Court held on 12 May 2009 that a warranty provision is deductible under section 37 where three conditions are met: a present obligation arising from a past event, the probability of an outflow of resources to settle it, and a reliable estimate of the amount. Where an enterprise sells large numbers of sophisticated goods, past experience of defects in some of them creates a present obligation on the sales already made, and the warranty is part of the sale price. The estimate must rest on a historical trend captured by a proper accounting system, reassessed each year, with unused provisions reversed.

The 60 strongest entries are summarised here. The other 406 entries are listed in full below, and each has its own page.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.