According to Section 37 of the Income Tax Act, 1961, any expenditure not being the expenditure allowed under Sections 30 to 36 and not of capital or personal nature and which are expended exclusively for the purposes of the business or profession are allowed while computing the income from business or profession.

Conditions laid out in Section 37 for General Deduction:

  • Expenditures covered under Section 30 to 36 aren’t allowed- As per this Section if expenditure is covered under Section 30 to 36 of the Income Tax Act, the same isn’t allowed to be claimed under Section 37.
  • Expenditure of capital nature isn’t allowed – For the purpose of this section, capital expenditure refers to the expenses incurred in acquiring, improving, or extending the life of a fixed asset and revenue expenditure refers to expenses incurred in a normal course of business.
  • Expenditure of a personal nature isn’t allowed – This Section specifically prohibits the deduction of any personal expenses. Here, personal expenses refer to any expense which satisfies personal needs and which aren’t related to the profession or business.
  • Such expenditure should have been paid or accrued in the previous year – In order to claim the deduction, such expense should have been expended in the previous year and the assessee must be in a position to establish that such expenditure was incurred in the previous year or something happened which created a liability for the assessee in the previous year.
  • Expenditure should be incurred wholly or exclusively for Business or Profession – The main prerequisite for claiming deduction under the provision of Section 37 is that expenditure should be wholly and exclusively for business or profession. Expenditure could be incurred by the assessee voluntarily without any necessity; however, the same should be for the purpose of his business or profession.
  • Expenditure should be for the business or profession carried on by the assessee – For claiming deduction under this Section, expenditure must be incurred for the business or professional purpose carried on by the assessee in the previous year.
  • Expenditure of illegal nature are not allowed- Expenditure that is incurred by an assessee for purposes which are of offensive nature or prohibited by any law isn’t considered to have been incurred for business or profession and aren’t allowed as a deduction under Section 37.

Allowability of certain expenditure for business or profession under Section 37

  • Corporate Social Responsibility (CSR) – Expenditure on the activities relating to CSR as referred to in the Companies Act, 2013 aren’t deemed to have been incurred for business or profession and no deductions are allowed under Section 37.
  • Taxes, duty, cess, or fee – Taxes, duties, cess, or fees paid by an assessee under any law for the purpose of carrying on his business or profession are allowed as a deduction under this Section. However, such deduction is allowed only in the year in which they are paid. Examples of taxes, duties, etc. which are allowed include sales tax, export duty, import duty, motor vehicle tax, property tax, license fee, municipal taxes, cess, professional tax.
  • Damages – In case the damages relate to a contract entered into in a normal course of business, the claim for deduction is allowable unless it could be proved that such damages were the result of dishonesty by the assessee or damages due to infringement of law or for committing an unlawful act
  • Penalties and fines – Penalties and fines that are paid in the normal course of business or profession are allowed.

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March 2021