Unlocking Section 37(1): Understanding allowable Deduction for Business or Profession

In India, the government provides several tax deductions to companies in order to boost business growth. However, they are applicable for a specific list of expenses which are stated under Section 37 of Income Tax Act. Section 37 of Income Tax Act? Any expenditure (not being expenditure of the nature described in sections 30 to 36 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 1- For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offense 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. Explanation 2- For the removal of doubts, it is hereby declared that for the purposes of subsection (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession. Section 37(1) of Income Tax Act According to Section 37(1) of the Income Tax Act, 1961, an organisation can apply for tax exemption on the premiums paid towards the E-E insurance plan. The employer can declare the premiums paid as a business expense, thus deducting it from the profits of the company. This would reduce the tax liability of the organisation. Furthermore, as per Section 37(1), expenditures on Corporate Social Responsibility activities under Section 135 of the 2013 Company Act will not be eligible for deduction. Conditions for Allowance under Section 37 To claim deductions under Section 37 of the Income Tax Act, businesses must adhere to specific conditions outlined as follows: Expenses should be in respect the Business carried on by the Assessee Must not be personal or capital expenditure. Expenditure should not be present under Sections 30 to 36 of the Income Tax Act. Illegal Expenditure Must not be paid for activities which are offenses or prohibited by law. Should be incurred purposefully for profession or business. Must be paid or accrued in the previous financial year. List of Expenditure Allowable as a Deduction under Section 37(1) from Business Income: Advertisement expenditure incurred by an assessee for building up its brand is deductible. Harvesting and transportation expenses incurred by the Co-operative Sugar Mills for procuring sugarcane from farmers, who are members of such Co-operative Sugar Mills and who are bound under an agreement to supply the sugarcane exclusively to the concerned sugar mill. Software programme once developed by the assessee cannot be said to be of enduring benefit and expenses incurred in developing such software programme are allowable as revenue expenditure. The expenditure incurred solely for repairs and modernizing the hotel and replacing the existing components of the building, furniture and fittings, with a view to create a conductive and beautiful atmosphere for the purpose of running of the business of a hotel. Royalty paid by the assessee for user of trademark of another company Donation/contribution made by an assessee to any relief fund, such as Chief Minister’s Drought Relief Fund or a District Welfare Fund established by District Collector for the benefit of the public with a view to securing benefit to assessee’s business . Expenditure on re-routing of the pipeline in order to obtain saline free water for the factory. Expenditure in regard to contribution made by the assessee-company to State Electricity Board towards laying of additional circuit line in order to meet increased demand of the company. Expenditure on license fees for the import of capital goods and registration fees of trade mark. Expenditure on valuation of shares. Royalty payable on goods manufactured as a consideration to acquire monopoly rights to manufacture the product. Contribution given under a development scheme for construction of roads around factory buildings for facilitating the transport of sugarcane to the factory and the flow of manufactured sugar out of the factory. Expenditure incurred to secure overdraft facilities for the business purposes. Annual listing fees paid to stock exchanges. Expenditure incurred to protect capital asset income of which is accessible to tax. Substantial repair charges on plant and machinery being necessary owing to long neglect of assets. Professional tax paid by a person carrying on business or trade. Salary, bonus and traveling expenses paid by a partner-assessee to his staff to look after his interest and to earn income for partnership. Salary and perquisite to employees. The Commission paid a percentage of profits to general manager. Litigation expenses incurred in order to defend or maintain an existing title to the business asset. Expenditure incurred for the preservation or protection of the asset or for saving such asset from destruction, dissipation or wastage in the interest of and for the benefit of assessee’s business. Litigation expenses in protecting the trade or business. Interest on Business Loans Legal Fees Loan Raising Expenses Penalty Payments Telephone connection expenses. Contribution to recognised provident fund Read More: Commission Paid for Works Obtained and Sub Contracted Allowable as Business Expenditure u/s 37: ITAT List of Expenditures not allowable as Deduction under Section 37(1) from Business Income The list of expenditure disallowed under Section 37 of Income Tax Act are as follows: Sales tax payments for purchase and sale of goods. Costs incurred for demolishing a building in order to build a hotel on the same site. Costs incurred for shifting a company’s Registered Office from its present location to another. Litigation expenses for registration of shares. Compensation paid to the contracting party with the object of avoiding an unnecessary investment in capital assets. Damages and penalty paid for transgressing the terms of agreement with the State. Fees paid for increase of authorised capital. Conclusion This section provides an overview of the general deductions allowed for income tax purposes under section 37 of the Income Tax Act. General deductions are expenses incurred in the production of income and are not specifically prohibited by any provision of the Act. They include but are not restricted to, expenses such as rent, salaries, interest, repairs, and depreciation. The general rule for deducting expenses is that they must be purposefully incurred for business and profession. In addition, they must be reasonable and not of a capital nature. Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates