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Assessee donates money and property to Trusts, Societies, Religious cum Charitable Societies/ Trusts and NGO’s which were formed with the objects of (i) Religious (ii) Relief of poor (iii) Education (iv) Medical relief (v) Yoga (vi) Preservation of Environment (including watersheds, forests and wildlife) (vii) Preservation of Monuments or Places or Objects of Artistic or Historic interest (viii) Advancement of any other objects of general public utility.

But  all the Donations are not eligible for Expenditure, The income-tax law does not allow as expenses all the deductions.

So, in order to claim Donations as expenditure The expenditure must be incidental to the business and must be necessitated or justified by the “commercial expediency”. It must be directly and intimately connected with the business and there must be as directed and intimated connection between the business and the expenditure.

Meaning of Commercial Expediency :

The expression “commercial expediency” refers to those transactions/ expenditures which are not required to be incurred under any provisions of the law. But it refers to such expenditure, a prudent businessman incurs for the purpose of business. Such expenditures might not have been incurred under any legal obligation, but the same are allowable as a business expenditure if it was incurred on grounds of commercial expediency.

The “commercial expediency” depends upon the wisdom of the businessman and the Revenue has no role to play to decide as to what is “commercial expediency”.

The Revenue cannot occupy the position of the assessee and assume the role to decide whether a particular expenditure is required to be incurred, having regard to the facts and circumstances of the case. There cannot be any compulsion on the assessee to maximize his profit.

The provisions of section 37(1) of the Act does not curtail or prevent an assessee from incurring an expenditure which he feels and wants to incur for the purpose of business. Expenditure incurred may be direct or may even indirectly benefit the business in form of increased turnover, better profit, growth, Goodwill etc.

Various courts have held that as long as the expenditure incurred is “wholly and exclusively” for the purpose of business, the Assessing Officer cannot by applying of his own mind, disallow whole or a part of the expenditure.

The Assessing Officer cannot question the reasonableness by putting himself in the arm-chair of the businessman and assume status or character of the assessee and that it is for the assessee to decide whether the expenses should be incurred in the course of his business or profession or not.

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Author Bio

I am a Chartered Accountant practicing in Khammam, Telangana. My areas of expertise include Direct Taxation, Statutory Audits, Audit of Trusts and Non-Governmental Organizations (NGOs), Foreign Contribution Regulation Act (FCRA), and Micro, Small and Medium Enterprises (MSME). With a strong focus View Full Profile

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Income Tax: Cash in hand, with limits to understand- Part 1 Quick Reference for Standards on Auditing- SA 500 Audit Evidence Quick Reference for Standards on Auditing- SA 570 Going Concern Quick Reference for SA 710 Comparative Information, Corresponding Figures & Comparative Financial Statements Quick Reference for Standards on Auditing- SA 200 View More Published Posts

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April 2024