Cases on PGBP Income

Some Landmark Cases

Barendra Prasad Roy v ITO (1981) 129
ITR 295 (SC)
Meaning of term business

The word business is of wide import and means

activity carried out continuously or
systematically by a person by the application of
his labour or skill with a view to earn an income.
The expression does not mean trade or
manufacture only.
Krishna Menon v. CIT (1959) 35 ITR
48(SC)
Scope of the term business or profession

The term business generally includes

profession. Thus, the latter term used includes
a vocation, which need not only be restricted to
the activity indulged in for earning ones
livelihood or income. It may include ones way of
living as well (example- teaching sermons
amounts to profession). Two tests are must be
organised, and must be for profit.
CIT v. Jnan Prakash Ghosh (1994) 205
ITR 454 (Cal.)
Income from employment v. business income
The question can be decided by examining the
characteristics of employment. Relevant factors are:
1. Whether he does the work for himself or not
2. Whether there is supervision and control
3. Whether there is remuneration
4. Who provides the tools and equipment
5. Whether he has the power to delegate work
The rights and duties imposed between the parties
determines if there is a master servant relationship or
not, regardless of what the parties themselves call it.
CIT v. City Mills Distributors (P) Ltd.
(1996) 219 ITR 1 (SC)
Pre-incorporation profit as PGBP income
This case overruled several previous cases by
holding that pre-incorporation profit was not
taxable as the legal entity was not in existence
before incorporation. Even though a company
may be able to claim profits of a business from
an anterior date, but that does not mean that the
company would be liable to pay income tax on
the amount.
Nalinikant Ambalal Mody v. CIT (1966)
61 ITR 428(SC)
Effect of discontinuation
If a business is discontinued before the
commencement of the relevant accounting year,
there could be no charge of income tax and no
charge on the arrears. This is based on two
principles:
1. The provision does not operate where there is
no business in the previous year
2. There can be no receipt or expenditure after
closure
CIT v. United Breweries (2007) 292 ITR
188 (Kar)
Deductions available to sister concerns
An amount was advanced to a subsidiary as a
loan on which interest was not paid to the parent
company. Later, the subsidiary was
amalgamated with the assessee. Held that
writing off interest when the amalgamation with
the subsidiary had not taken place can be
claimed as a deduction. (Section 36)
CIT v. Madras Cements Ltd.(2002) 255
ITR 243 (Mad)
Meaning of repair claimable as a deduction
The expenditure claimed as an expenditure for
repair must be done in order to maintain an already
existing asset. The object is not to bring into
existence a new asset nor to obtain a fresh
advantage. It is only by this definition that such
expenditure can be considered as a revenue
expenditure. (Section 30)
CIT v. Elecon Engineering Co. Ltd.
(1987) 166 ITR 66 (SC)
Basis for deducting depreciation
The allowance under Section 32 is not only
confined to diminution in value of the asset by
reason of wear and tear. The allowance can be
claimed if the asset in question is shown to be
capable of diminishing in value on account of
any factor known to the prevailing commercial
or accounting practice.
In CIT v. SMIFS Securities Ltd. (2012)
13 SCC 488
Depreciation on goodwill
The difference between the consideration paid and
the net value of the assets could be considered as
depreciation on the goodwill in case of
amalgamation of a company. Thus, there can be
depreciation on the goodwill also.