Section 37 of Income-Tax Act, 1961

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Section 37 of Income-Tax Act, 1961 deals with General Deductions.

Contents

From the Act

(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36, 3[* * *] and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession".

[Explanation.—For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.]

(2) [* * *]

[(2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.]

(3) [* * *]

(3A) [* * *]

(3B) [* * *]

(3C) [* * *]

(3D) [* * *]

(4) [* * *]

(5) [* * *]

Notes

  • Section 37(1): Allowability of Business expenditure

Related Cases / Recent Cases / Case Laws

  • CIT v Groz Beckert Asia Ltd, (2013) 351 ITR 196 (P&H)(FB): High Court held that subscribing to the membership of a club for a limited period (of 6 years in this case), no capital asset is created or comes into existence and consequently, the corporate membership fees cannot be treated as capital in nature
  • January 2012: Where Tribunal after deleting penalty vis-a-vis claim for expenses remanded matter back to Assessing Officer to decide assessee's claim for deduction under section 37(1) - [2012] 17 LNIN 166 (Delhi)
  • August 23, 2011: High Court (MP-Jabalpur): Commissioner of Income-tax vs Khemchand Motilal Jain
    • Question: Whether when the Director of the company is on business tour and is kidnapped by dacoits; ransom money paid to get him releases is to be treated as incidental to business as per Sec 37(1) and whether the payment made towards ransom for saving the life of the Director of the assessee-company is prohibited by law and thus, not allowable expenditure
    • High Court said that ransom money paid to kidnappers for release of a whole time Director was an allowable deduction.
  • June 2011: Cochin - ITAT: Service charges paid by a Government company under an order of State Government is an allowable business expenditure under section 37(1) - [2011] 11-233
  • ITAT said: Character of an expenditure shall not change merely because it was spent out of a subsidy amount received from State Government
    • Expenditure incurred out of capital subsidy sanctioned in favor of assessee by Govt, of A.P on rectification and improvement of power lines damaged due to cyclone is allowable as a revenue expenditure, source of fund being quite immaterial, shall not change nature of expenditure incurred by assessee. 10-152 (Hyd. - ITAT)(TM)
  • Malwa Vanaspati & Chemical Co. Ltd. v. CIT [1985] 154 ITR 655 (MP): It should be established that none of the other provisions apply - Section 37(1) being a residual provision, it cannot be taken aid of, unless and until it is established that none of the provisions of sections 30 to 36 are applicable to a given case
  • Khimji Visram & Sons (Gujarat) (P.) Ltd. v. CIT [1994] 209 ITR 993 (Guj.): Expenses not deductible under sections 30 to 36 should alone be considered - If the expenses are deductible under sections 30 to 36, then section 37 is not to be resorted to
  • Narsingdas Surajmal Properties (P.) Ltd. v. CIT [1981] 127 ITR 221 (Gauhati): Whether transaction was prudent/judicious/indispensable/necessary, is not relevant - In the absence of fraud, the question whether a transaction had the effect of reducing the assessee’s taxable income or whether it was prudent or judicious or whether it was indispensable or necessary for the assessee to enter into the transaction, are all irrelevant in determining whether the expenditure relating to the transaction should be allowed under section 37.
  • CIT v. Puran Das Ranchhoddas & Sons [1988] 169 ITR 480 (AP): Legal character cannot be ignored and substituted by substance of the transaction - The legal character of the transaction which is the source of the receipt in question cannot be ignored and substituted by what the taxing authorities considered as the substance of the matter
  • CIT v. Indian Molasses Co. (P.) Ltd. [1970] 78 ITR 474 (SC)/J.K. Cotton Mfrs. Ltd. v. CIT [1975] 101 ITR 221 (SC)/Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261 (SC): Conditions precedent: The main requisites - To be an allowable expenditure under section 37(1), the money paid out or away must be (a) paid out wholly and exclusively for the purpose of the business or profession; and further (b) must not be; (i) capital expenditure; (ii) personal expense; or (iii) an allowance of the character described in sections 30 to 36 and section 80VV
  • Jamshedpur Motor Accessories Stores v. CIT [1974] 95 Taxman 664 (Pat.): Quantum of expenditure cannot be reduced, unless provided so under law - Unless there is a limitation put by the law on the amount of expenditure, a lesser amount than the amount expended cannot be allowed merely because the assessing authority thinks that the assessee could have managed by paying a lesser amount as a prudent businessman
  • Jaipur Electro (P.) Ltd. v. CIT [1996] 134 CTR (Raj.) 237: Assessing Officer has the right and duty to enquire into purpose of expenditure - The doctrine that the businessman is the best judge of business expediency does not affect the right, any duty, of the assessing authorities to know whether it was incurred for business purposes and not for other extraneous considerations
  • CIT v. Dhanrajgirji Raja Narasingirji [1973] 91 ITR 544 (SC): Department cannot dictate the circumstances in which expenditure is to be incurred - It is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows his interest best
  • Amarjothi Pictures v. CIT [1968] 69 ITR 755 (Mad.)/CIT v. Gobald Motor Service (P.) Ltd. [1975] 100 ITR 240 (Mad.): Department cannot consider expediency factor, but must confine its examination to the reality aspect - The expediency of the expenditure is not for the revenue to consider. That is a matter entirely left to the judgment of the assessee concerned. In allowing or disallowing a deduction the revenue has, of course, to have regard to the requisites of section 10(2)(xv) of the 1922 Act [corresponding to section 37 (1) of 1961 Act]. The jurisdiction of the revenue under that section is, however, confined to deciding the reality of the expenditure, namely, whether the amount claimed as deduction was factually expended or laid out and whether it was wholly and exclusively for the purpose of the business.
  • Ramanand Sagar v. Dy. CIT [2002] 255 ITR 134 (Bom.): The Assessing Officer can only decide whether the expenditure is real, whether it relates to the business and is wholly spent for that purpose
  • Hemraj Nebhomal Sons v. CIT [2005] 146 Taxman 345/278 ITR 345 (MP): Legitimacy or necessity for expenditure cannot be probed into - Once the conditions laid down in section 37(1) are found satis­fied, it is not proper on the part of the taxing authorities to probe into the question as to whether the expenditure is legiti­mate or necessary etc. This type of inquiry is neither contem­plated nor called for. It is only when the Assessing Officer finds that the claim made is bogus or false or not incurred as a fact, it can be disallowed, otherwise not
  • Ravi Marketing (P.) Ltd. v. CID [2006] 280 ITR 519 (Cal.): The scope for the authorities under the Act or the court is confined only to examining the purpose and the genuine­ness of the expenditure, neither the expedience nor the quantum
  • CIT v. Chandulal Keshavlal & Co. [1960] 38 ITR 601 (SC)/Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261 (SC): Benefit enuring to third party is not relevant factor - If the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may enure to the benefit of a third party. Another test is whether the transaction is properly entered into as part of the assessee’s legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby
  • CIT v. Chandulal Keshavlal & Co. [1960] 38 ITR 601 (SC): Purpose should not be to foster business of somebody else, or for some improper or oblique purpose outside the course of business - If the expense is incurred for fostering the business of another only or is made by way of distribution of profits or is wholly gratuitous or for some improper or oblique purpose outside the course of business, then the expense is not deductible
  • Indian Molasses Co. (P.) Ltd. v. CIT [1959] 37 ITR 66 (SC): ‘Expenditure’ means something which is gone irretrievably - ‘Expenditure’ is what is ‘paid out or away’ and is something which is gone irretrievably.
  • CIT v. Nainital Bank Ltd. [1966] 62 ITR 638 (SC): ‘Expenditure’ need not involve actual parting with money or property - A mere liability to satisfy an obligation by an assessee is undoubtedly not ‘expenditure’; it is only when he satisfies the obligation by delivery of cash or property or by settlement of accounts that there is expenditure. But expenditure does not necessarily involve actual delivery of or parting with money or property. A mere forbearance to realise a claim is not expenditure
  • CIT, Delhi v. Woodward Governor India (P.) Ltd. [2009] 179 Taxman 326/312 ITR 254 (SC): Loss v. Expenditure - Expression ‘expenditure’ as used in section 37 may, in circumstances of a particular case, cover an amount which is really a ‘loss’, even though said amount has not gone out from pocket of assessee.
  • CIT v. Electric Lamp Mfrs. (India) (P.) Ltd. [1987] 165 ITR 115 (Cal.): Provision for actuarial valued liabilities is allowable - If an amount is set apart for discharge of a liability on actuarial valuation that has to be allowed as deduction
  • Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 91 Taxman 340/225 ITR 802 (SC): Liabilities can be spread over a period of years, where found necessary - The facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. Issuing debentures at a discount is one such instance, where although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures.
  • Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC): Difficulty in estimation of value cannot convert accrued liability into conditional one - The difficulty in the estimation of value would not convert an accrued liability into a conditional one

Related Sections from the Act

  • Section 31: Repairs and insurance of machinery, plant and furniture
  • Section 32: Depreciation
  • Section 32A: Investment allowance
  • Section 32AB: Investment deposit account
  • Section 33: Development rebate
  • Section 33A: Development allowance
  • Section 33AB: Tea development account, coffee development account and rubber development account
  • Section 33ABA: Site Restoration Fund
  • Section 33AC: Reserves for shipping business
  • Section 33B: Rehabilitation allowance
  • Section 34: Conditions for depreciation allowance and development rebate
  • Section 34A: Restriction on unabsorbed depreciation and unabsorbed investment allowance for limited period in case of certain domestic companies
  • Section 35: Expenditure on scientific research
  • Section 35A: Expenditure on acquisition of patent rights or copyrights
  • Section 35AB: Expenditure on know-how
  • Section 35ABB: Expenditure for obtaining licence to operate telecommunication services
  • Section 35AC: Expenditure on eligible projects or schemes
  • Section 35AD: Deduction in respect of expenditure on specified business

Other Sections from the Act


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