Section 37(1) says that 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”.
The deductions are to be allowed in respect of those expenses which shall satisfy the following conditions :
1. The expenditure should not be of the type of expenses already covered under sections 30 to 36 of this Act.
2. Expenses should have been incurred in the relevant accounting year.
3. Expenses should be in respect of the business carried on by the assessee and the profits of which are to be computed and assessed, and should be incurred after the business is set up.
4. Expenses should not be in the nature of personal expenses of the assessee.
5. The expenses should have been incurred totally and exclusively for the purposes of the business of the assessee.
6. Expenses are not of capital nature.
7. The expenses are incidental to the business of the assessee and directly spring from the carrying on of it.
Allowable Deductions [Section-37(1)]
The followings are some of the examples of expenses allowable as deduction u/s 37
1. All expenses and payments made for purchasing of raw materials, manufacture and sale of goods.
2. All expenses in the nature of advertisement to push up sales.
3. Sales-tax and expenses incurred in relation to sales tax appeal.
4. Day-to-day expenses to carry on business.
5. Some subscription to be paid compulsorily and to protect the, business interests.
6. Reasonable expenses incurred on Diwali/Puja or other Festivals etc.
7. Reasonable expenses incurred at the time of mahurat, Dewali, etc. But no monetary ceiling has been fixed by Board.
8. Royalty paid in connection with the use of trade marks, patents, copyrights, etc.
9. Commission paid to procure orders.
10. Compensation paid to an agent in connection with the termination or modifications in the terms and conditions of his agency.
11. Installation expenses of new telephone and payment made under ‘Own Your Telephone’ (O.Y.T.) scheme.
12. Expenses incurred to oppose the threatened nationalisation of the business. [Morgan V. Tata Lyle Ltd., 35 T. C. 367 (1944) 29 1. T.R. 195].
13. Legal expenses incurred to claim damages or compensation in case of non-fulfilment of a contract.
14. Pension, gratuity and any other voluntary payment given to the employees.
15. Gifts given to the employees but such gifts should not fall in the category of perquisites.
16. Bonus paid on the basis of an industrial award.
17. Any compensation paid to an employee on the termination of his service and also compensation paid to a managing agent on the termination of his agency.
18. Insurance premium paid to get insurance of employees against injury, accident while working and also any compensation paid to employees due to such injury or accident. Payment received from insurance company, if any, shall be treated as taxable income and credited to P & L A/c.
19. Expenses incurred on employees welfare activities.
20. Embezzlement by an employee during the normal course of the business.
21. Any payment given by the assessee to business rivals agreeing not to compete with the assessee.
22. Any compensation payable in the usual course of business including compensation paid as a result of negligence of the assessee or his employees.
23. Any expenditure incurred or compensation paid in lieu of getting the termination of disadvantageous trade contract or liability.
24. Penalty payable for delay in the execution of an order and even penalty payable for delay in the payment of sales tax shall be treated as usual business expenditure.
25. Any amount spent to make necessary alterations in the memo-randum of association and articles of association.
26. Any expenditure incurred on alterations and modifications made on premises got on lease provided the expenses are necessary for the proper utilisation of the premises.
27. Interest paid or payable on delayed payment of cash. This type of payment is not considered as penalty. [Bairampur Sugar v. C.I. T. (1982) 135 ITR 227 (Cal.)].
However, in an earlier judgement it was held that this type of penal interest is not allowable. [C.I. T. v. Mahalaxmi Sugar Mills (1972) 85 ITR 320 (Del.)].
28. Amount spent or payable to the Govt. in case of short-fall in the export target. [Addl. C.I. T. v. Tarun Commercial Mills (1976) Tax (B) 48].
29. Amount spent to preserve and protect business assets, interest and reputation. [South Asia Industries v. C.I. T. (1981) 132 ITR 144 (Del.)].
30. Amount paid to the landlord under a compromise to withdraw an eviction suit. [South Asia Industries v. C.I. T. (1981) 132 ITR 144 (Del.)].
31. The reasonable expenditure towards payment of compensation to the employees whose services have been terminated would ordinarily come under the provisions of section 37(1).
The said expenditure is allowed on the ground of commercial expediency. (Sassoon David & Co. Ltd. v. C.I.T.).
32. Deposit made under Own Your Telephone (OYT) scheme is admissible as expenditure vide circular letter No. F. No. 204/70/75-ITCA 11, Dated 10th May 1976.
33. Expenditure on deposit under Tatkal Telephone Deposit Scheme. The entire amount of 30,000 paid under this scheme is allowed to be debited as Revenue expenditure. In case telephone is surrendered and some amount is refunded, such amount refunded shall be deemed as profit of the year in which refunded. [CBDT Circular No. 671 Dt. 27-10-1993]
With effect from assessment year 1998-99 section 37(2) has been deleted and as such all expenses incurred on entertainment shall be fully allowed but these shall be subject to provisions of section 37(1).
All restrictions imposed u/s 37(2A) have been removed by deleting section 37(2A) with effect from assessment year 1998-99. As such all expenses on advertisement shall be fully allowed.
Any expenditure incurred on advertisement in souvenir or magazine of a political party is not allowed to be debited.
Expenses incurred on installation of a neon or other signboard were treated as advertisement expenses. [Mohan Meakin vs. C.I. T. (1979) 118 ITR 101]
But with effect from 1-4-1998 the cost of signboard, being capital expenditure, shall qualify for depreciation @ 10% and cost of neon signboard @ 15% (being electric installation).
Expenses on Travel
Due to deletion of section 37(3) all restrictions on expenses incurred for travel in India or abroad have been removed.
Expenses on Guest Houses and Holiday Homes
With effect from assessment year 1998-99 all expenses relating to maintenance of guest houses and holiday homes are fully allowed as section 37(4) has been deleted.