S. 37 Allowability of Business Expenditure & case laws

Manish Kumar Agarwal, FCA

 Understanding Allowability of Business Expenditure under section 37 of the Income Tax Act, 1961 with latest case laws

Section 37 of the Income tax Act, 1961 is a residuary section for allowability of business expenditure and the same is given below:

  “37. (1)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 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.

Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of sub-section (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.

(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”

Condition for allowance under section 37

• Such expenditure should not be covered under the specific section i.e. sections 30 to 36.
• Expenditure should not be of capital nature
• The expenditure should be incurred during the previous year.
• The expenditure should not be of personal nature.
•  The expenditure should have been incurred wholly or exclusively for the purpose of the business or profession.
• The business should be commenced.

Now we shall be discussing some case laws which were decided by various courts & tribunals of the country.

• Regulation fees paid to Municipal Authority: In this case High court of Karnataka decided that any regulation fees paid to municipal authority for compounding of offence is not available for deduction under section 37 as the same was in the nature of penalty. Refer Millennia Developers (P) Limited v DCIT 37 DTR 19 (2010).

•  Payment of Protection Money to Rowdies & Police:  In the another landmark judgment decided by Karnataka High Court that any payment to police or rowdies for getting protection from them is illegal and should not be allowed. Refer CIT v Neelavathi & Others 322 ITR 643 (2010).

• Refundable Deposit:  Mumbai ITAT decided that any refundable deposit with stock exchange is not allowed as deduction for expenditure. Refer DCIT v Khandelwala Finance Limited 122 ITD 111 (2010).

• Penalty paid to NSE: Mumbai ITAT in another landmark case decided that fine or penalty imposed by NSE to its members is regulated by their in house laws and could not be termed as violation of statutory laws and hence cannot be disallowed. Refer Gold Crest Capital Markets Limited v ITO 36 ITR 177  (2010). Again, Penalty paid by assessee a share broker, for excess utilization limits comparable to it for doing trade of its clients at a particular time was allowable u/s. 37(1) of the Income-tax Act.  Refer VRM Share Broking (P) Ltd. 27 SOT 469

•    Foreign Tour Expenditure of Wife:  In this case, the High court has disallowed 50% of Foreign Tour expenses as director of the company accompanied by his wife who is not an employee of the company. Refer CIT v Porrits and Spencer (Asia) Limited 324 ITR 257 (2010)

• Expenses covered under section 30 to 36:     If any expense is covered under section 30 to section 36 of the Income tax Act, 1961 and could not be allowed due to non satisfying condition laid down under section, same cannot be allowed under this residuary section.  Refer Laxman Sejram v CIT 54 ITR 763(1964) Gujarat.

• Product development expenses:  If product development expenses were not claimed under section 35D of the Income tax Act, 1961, same can be claimed under this residuary section.  Refer CIT v Harig Crank Shafts Limited 325 ITR 304.

•  Convertible Debenture expenses:     Karnataka High Court decided that expenditure incurred on issue of convertible debentures is to be allowed as revenue expenditure.   Refer CIT v ITC Hotels Limited 190 Taxman 430 (2010). Further, expenses incurred on issue of right shares were held as capital expenditure.  Refer CIT v CWS (India) Ltd. 242 ITR 429 (2000). Similarly, Expenditure incurred on issue of debentures, whether convertible or non convertible is allowable as revenue expenditure. Refer, Secure Meters Ltd. 221 CTR 405. Assessee is entitled to the proportionate deduction, of premium on redemption of non-convertible debenture. Refer, CIT vs. Indian Rayon & Industries Ltd. 38 DTR 313
• Betterment Charges:  Supreme Court decided that payment of betterment charges for improvement of land where such payment had no direct nexus with the day to day running of the business.  Refer Arvind Mills Limited v CIT  197 ITR 422 (1992 & Refer CIT v Rohit Mills Limited 104 ITR 132 (1976)).

• Borewell : In the another case decided by Allahabad High Court, it has been decided that expenditure on boring of a new tube well which was proved to be unsuccessful to the assessee should not be allowed.  Refer CIT v Bazpur Co-operative Sugar Factory Limited 142 ITR 1 (1983).

•  Fees paid to ROC :   It has been decided by the Rajasthan High Court that fees paid to the registrar of Companies for bringing about change in the memorandum and Articles should not be allowed.  Refer CIT v Aditya Mills 181 ITR 195 (1990). Further, fees paid for increasing authorized capital is a capital expenditure. Refer CIT v Tungabhadra Industries Limited 207 ITR 553 (1994), CIT v Hindustan Insecticides Limited 250 ITR 228 (2001) & PSIDC v CIT 225 ITR 792 (1997).Such expenditure also not eligible for deduction under section 35D of the act.

•   Bank Guarantee :     Gujrat High Court decided that any payment of bank charges related towards bank guarantee required for purchase of machinery should not be allowed as revenue expenditure.  Refer  CIT v Bharat Suryodaya Mills Co Limited  202 ITR 942 (1993).

• Replacement of Machinery:   Expenditure on replacement of old machines is in the nature of accumulated repairs and not current repairs. Therefore , the High court allowed such deduction under section 37 in place of section 31. Refer CIT v Gitanjali Mills Limited  265 ITR 681 (2004). Further, where parts of larger machines are purchased by the assessee, expenditure on such parts is allowable as revenue expenditure. (A. Y. 2001-02 to 2004-05). Refer CIT Mod Industries Limited 197 Taxmann76. Again Replacement of moulds did not result in creation of new capital asset or benefit of enduring nature, mere fact that moulds were used in production process could not be conclusive as to the nature of expenditure, hence, expenditure on replacement of moulds was revenue expenditure. Refer CIT vs. Malerkotla Steels & Alloys (P.) Ltd 237 CTR 201 / 49 DTR 1. The assessee company was engaged in printing and publication of various periodicals. It got repaired an empty derelict hall which was converted into a recreation room and was used by assessee’s staff. The aforesaid deduction was allowed to the assessee as the repairs did not constitute a capital expenditure and hence were allowable under section 37(1) of the Act. Refer ACIT vs. MM Publication Ltd 43 SOT 59. Again Expenditure on up gradation or improvement of an existing product , through which all in all a new product is not made, is allowable as revenue expenditure. Refer Matrix Telecom (P) Limited v ACIT 8 taxmann.com 26. Again assessee is entitled to deduction of expenditure  incurred on repairs to roof of a building commensurate with area is occupied by assessee for the purpose of his business. Refer Danesh A Irani v CIT 7 taxmann.com 62. Similarly, Assessee is a cardiologist purchased the second hand machines for use as spare parts to existing equipments is allowable as revenue expenditure. Refer Aswanth N.Rao v ACIT 326 ITR 188. Repair expenses incurred by the assessee on the rented premises is allowable u/s. 37(1) of the Act. Refer Alkem Laboratories (P) Ltd. 28 DTR 11. Replacement of machinery in a textile mill neither amounts to a current repairs nor revenue expenditure as each separate machine is an independent entity which brings an enduring benefit to the assessee.. Refer Sri Mangayarkarshi Mills (P) Ltd. 26 DTR 58.  Expenditure incurred in acquiring new technology to replace existing technology is allowable as  revenue expenditure. Refer,  Unidyne Energy Env System Pvt. Ltd.  ITA No. 4007/Mum /2005, Bench – G, A.Y. 2001-02, dt. 10-9-2008  BCAJ p. 796, Vol. 40-B, Part 6, March 2009.  Again, Expenditure on replacement of parts of machinery is allowable revenue expenditure. Refer, Comsat Max Ltd. 124 TTJ 86.

Expenditure incurred for restoring roof to original condition is not a capital expenditure. Expenditure on removal of defect in design of car, relates to stock in trade of assessee is not a capital expenditure. Refer Honda Siel Cars India Ltd. 1 ITR 497.  Again, Change of sound system does not increase revenue  hence not capital exp. Refer, CIT v Sagar Talkies 325 ITR 133. Similarly,  Spares parts purchased to be treated as revenue expenditure. Refer, Dr. Ashwath N Rao V ACIT 5 taxmamm.com 63.  Again, where assessee following cash system of accounting, the expenditure incurred for purchase of second hand machinery for using its spare parts is revenue expenditure and the same is deductible in the year in which the sale consideration was paid even though the machinery was received in India after the end of relevant year.  Refer, Aswath N. Rao (Dr) vs. ACIT 38 DTR 205.  Again, Amount paid to foreign Company, for improving performance of its existing utility vehicles, and for purpose of development of concept of clay model for its utility vehicles, since the expenditure was incurred for improving performance of existing product, same was allowable under section 37(1). Refer, Mahindra & Mahindra Ltd. 36 SOT 348

• Lease on permanent basis: Amount paid in installments for obtaining a lease on permanent basis is a capital expenditure. Refer CIT v Project Automobiles 167 ITR 781 (1987). Further, lease rent paid on land not acquired by the assessee is also deductible . Refer DCIT v SUN Pharmaceuticals Limited 329 ITR 479. Similarly As long as an expenditure is incurred bona fide in pursuit of business and not by way of diversions of funds, it has to be allowed as a deduction. Entire lease rent paid by the assessee for hiring the dozers for using them in its business was allowable as a business expenditure even though assessee did not actually use 3 out of the hired dozers. Refer CIT vs. Salitho Ores Ltd. 236 CTR 53 / 46 DTR 377.  Similarly, Royalty paid for getting non-assignable license, right and privilege to manufacture on the licensed mark, and distribute the licensed product in India and use expression “Benetton”, without becoming owner or acquiring any right in licensed trade mark, was held to be a revenue expenditure. Refer, DCM Benetton India Ltd. 178 Taxman 52.  Again, Assessee acquiring land on lease for a period of 99 years, making payment of advance rent in the sum of Rs. 48 crores, and paying monthly rent of Rs. 40 per month, Advance Lease Rent paid was allowable revenue expenditure. Refer Sun Pharmaceutical Ind. Ltd. 227 CTR 206  Editorial – see Joint CIT v Mukund Ltd. (2007) 291 ITR (AT) 249 (Mumbai)(SB). Lump sum paid as premium for securing lease hold right held as capital expenditure.  Expenditure incurred on stamp duty and registration charges at the time of execution of lease agreement for taking on lease the fruit processing plant was allowable as revenue expenditure. Refer, Gopal Associates 222 CTR 307.  Payment of royalty at rate calculated, per piece of production is revenue expenditure. Refer, Sharada Motor Industries Ltd. 319 ITR 109. However, Assessee firm acquired a premises on lease from PHPL. It paid certain amount to PHPL towards renovation and alterations carried out in premises on its behalf. The expenditure being capital in nature not allowable. The PHPL has offered the said amount as income is immaterial consideration for the assessee. Refer, ITO vs. Pritam Juice 124 ITD 237.

• Compensation to Tenant: Amount paid by the assessee, who purchased the plot of land, to the tenant occupying the structure erected by the tenant on such land for getting vacant possession is a capital expenditure. Refer CIT v Lucky Bharat Garage 174 ITR 526 (1998) & Chloride India Limited v CIT 130 ITR 61 (1981). However, assessee entered into an agreement for purchase of property for infrastructural facilities for business, assessee terminated the agreement and paid compensation, payment to be treated as capital in nature and not allowable as revenue expenditure. Refer Sap Labs India Pvt. Ltd. vs. ACIT 6 ITR 81.

• New Project Report : Expenditure incurred on project report for setting up a new unit is a capital expenditure. Refer CIT v J.K. Chemicals Limited 207 ITR 985 (1994)., However, Consultation charges paid by the assessee in connection with the expansion of assessee’s existing project were held to be allowable as revenue expenditure. Refer, Jyoti Ltd. 24 DTR 177. Similarly, Travelling and incidental expenditure in finalization of project for existing business allowable as revenue expenditure. Refer, Jt. CIT vs. Rallies India Ltd. 3 ITR 1 (Mum.) (Trib.)  When no new asset created , then revenue expenditure  Refer, CIT v DLF Commercial Developers Limited 323 ITR 321.

• Expenses on Issue of Shares: Expenditure incurred by a company in connection with issue of shares with a view to increase its share capital is directly related to the expansion of the capital base of the company, and is capital expenditure , even though, it may incidentally help in the business of the company and in profit making. Refer Brook Bond India Limited 225 ITR 798 (1997) & Kodak India Limited 229 ITR 445 (2002).

•   Training: Expenditure by a turf club on running a school for training jockeys. Refer CIT v Royal Calcutta Turf club 41 ITR 414(1961). Further, expenditure incurred for training the personnel of the assessee was allowable as revenue expenditure. Refer CIT vs. Munjal Show Ltd 46 DTR 1.

• Drawing :  Drawing and designs which needed to be changed from time to time to manufacture the shock absorbers but not for acquiring technology itself hence the expenditure is revenue expenditure. Refer CIT vs. Munjal Show Ltd 46 DTR 1.

• Abandoned Project : The assessee had incurred expenditure on engaging services of  consultants for improving operational efficiencies inextricably linked to the existing business. The project was abandoned, with no new asset to be created. The expenditure held to be revenue expenditure. ( Asst year 2000-2001).  Refer Indo Rama Synthetics India Ltd v. CIT 333 ITR 18( 2011). Similarly, Payment of severance pay on closure of manufacturing business and expenditure incurred on market research is allowable as business expenditure. Refer KJS India Pvt Ltd v DCIT ITA no 2422 /Del/2009 dt 30-7-2010.Bench “D”. Again, ssessee engaged in the business of exploration and production of oil is entitled to deduction of  expenditure pertaining to abandoned project. Refer ONGC Videsh Ltd. 33 DTR 22.

• Improvement of power line  from Government Subsidy : Expenditure incurred by assessee on rectification and improvement of power line was a revenue expenditure, even if ,it was spent out of subsidy amount received from Government.( Asst year 1987-88). Refer Dy CIT v A.P.State Electricity Board 130 ITD 1.

• Logo Fees : Payment made by the assessee for non exclusive user of logo based on turnover and not lump sum payment is allowable as revenue expenditure. ( Asst year 2006-07). Refer Asst CIT v Shriram Transport Finance Co Ltd 9 ITR ( Trib) 543

• Provision for Warranty : The actual expenditure incurred in future for warranty was exceeding the actual provision  made, hence allowable as expenditure. Refer Himalaya Machinery (P) Limited v DCIT 334 ITR 64. Further, Provision for warranty claim made by the assessee based on a scientific method and worked on the average of earlier year’s warranty settlement claims was held to be allowable business expenditure. (A. Y. 1999-2000, 2000-01, 2001-02, 2002-03, 2003-04, 2004-05) Refer CIT vs. Luk India P. Ltd. 52 DTR 117.  Similarly, Provision for warranty is allowable expenditure and such provision is not contingent nature. Refer, Siemens Public communication Networks Limited v CIT.  Again, The Supreme Court held that warranty is an integral part of the sale price and if the warranty expenses are properly ascertainable and discounted on accrual basis deduction is allowable u/s. 37 of the Act. Refer, Rotork Controls India P. Ltd. (2009) 314 ITR 62 (SC).

• Heart Surgery : In this case, the assessee, a lawyer, claimed that his professional work had led to a heart attack and that the expenditure incurred by him on a heart operation was deductible u/s 31 on the ground that the heart was “plant” and the expenditure was incurred on “current repairs”. It was also claimed that as his professional receipts increased substantially after the operation, the expenditure was “wholly & exclusively” for profession and deductible u/s 37(1). The AO, CIT(A) & Tribunal rejected the assessee’s claim. On appeal to the High Court, HELD dismissing the appeal Refer Shanti Bhushan vs. CIT Delhi ITAT.

• Expenses of Closed branch: The assessee had incurred expenditure for opening branches, the cost of which were to be amortized by spreading it over 10 years in equal installments. One branch was closed, the assessee claimed the unabsorbed expenditure of the closed branch. The High Court held that the business of the assessee continue after the closure of the branch, and the deduction of amortized expenditure need not wait after the closure of the branch. (A. Y. 2003-04). Refer Victoria Gold Gallery vs. CIT 330 ITR 330.  Similarly,  Expenses pertaining to closed units on account of retrenchment compensation paid to employees and  interest on monies borrowed for payment of retrenchment compensation, provident fund and legal expenses are allowable expenses as the assessee continued the business in other three units. Refer D.C.M. Ltd. 320 ITR 307

• Feasibility Report : Feasibility studies conducted by the assessee for the existing business with a common administration and common fund and the studies were abandoned without creating any new asset, therefore, expenses were of revenue expenditure. Refer CIT vs. Priya Village Road Shows Ltd. 332 ITR 594. Further, Consultancy charges paid for obtaining study reports in Bitumen is revenue expenditure. Refer CIT vs. Shell Bitumen India (P) Ltd.  221 Taxation 44. Also in the case of KJS India (P) Ltd. vs. Dy. CIT 134 TTJ 697 it was held that assessee a manufacturer of a soft drink having conducted a market research by using the services of a professional agency to determine its brand performance with price, gauge the consumer demand at the current price or a lower price and to know whether its brand can adopt a different pricing between the base flavors and the new flavors, the expenses were incurred for exploring the circumstances as to how assessee can carry on its business more potentially and not exploring the market of a new product and therefore, same is allowable as revenue expenditure. / Assessee having suspended only its manufacturing activity and not closed down its trading activity, it is not a case of closure of business and therefore, expenses incurred by it towards severance cost of employees is allowable as revenue expenditure. Again, Expenditure for restructuring and viability study and preparation of restructuring proposal is a revenue expenditure. Refer, CIT v JCT Electronics Ltd 188 Taxman 191.

• Penalty : Compounding fees paid to RTO by a transporter for transporting over dimensional consignments is an allowable business expenditure u/s 37. Refer DCIT v Bharat C Gandhi  10 Taxmann.com 256. However, Compounding fees being in nature of penalty & fine in terms of section 483 of Karnataka Municipal Corporation Act, 1976 is not allowable. Refer CIT vs. CB. K. R. Enterprises 219 Taxation 1. In the case of Desiccant Rotors International (P) Ltd. vs. Dy. CIT47 DTR 193 it was decided that Payment made by the assessee on settlement of dispute with a company of USA being neither a fine or a penalty for a proved offence nor an amount of Compensation of an offence but is merely  a sum in settlement of an action charging the assessee was denied and not proved the same cannot be rendered to be inadmissible deduction while determining the assessee’s income from business. Again Payments made towards luxury tax and not penalty is allowable as deduction. Refer RDB Industries Ltd. 120 TTJ 107.  Penalty, fines, etc paid by the assessee to State Electricity Board for violating power regulation (drawing extra load in peak hours) was allowable deduction u/s. 37(1) of the Act. The Court further observed that if penalty is not for deliberate violation of law the same should be allowed as deduction. Refer Hero Cycles Ltd. 17 DTR 281. Again, Payment, made under SEBI Regulation scheme, 2002 for failure to make disclosure as required under SEBI (Substantial Acquisition of shares and Takeovers) Regulations 1997 could not be treated as penalty as it is a payment for regularizing the default committed hence such payment can not be disallowed by invoking explanation to s. 37(1). Refer, Kaira Can Company Ltd. 32 DTR 485

• Club Membership : When membership of a club is taken in the name of director, it is for the assessee-company to prove that membership was obtained solely for the purpose of business. Refer New India Extrusions (P) Limited v ACIT 10 Taxmann.com 165. Further Entrance fees paid towards corporate membership of the club is an expenditure incurred wholly and exclusively for the purpose of business and not towards capital account as it only facilitates smooth and efficient running of a business enterprise and does not add to the profit earning apparatus of a business enterprises and accordingly CIT (A) was justified in deleting the disallowances of entrances fee made by the Assessing Officer. Refer Dy. CIT vs. Bank of America Securities (India) (P) Ltd. 136 TTJ 441. Again, Corporate membership fees payable to club is revenue exp. Refer CIT v Samtel Colour Limited 326 ITR 425

• Commercial Expediency : An expenditure may not be incurred under any legal obligation but yet it is allowable as business expenditure if it is incurred on ground of commercial expediency. Refer Addidas India Marketing (P) Limited v AO 10  Taxmann.com 18.  Again, Expenses incurred which was based on commercial consideration and business expediency, no interference is warranted. Refer, Udaipur Distillery Co. Ltd. 224 CTR 32 (SC).  Similarly, The issue was of deduction of certain expenditure “issue management expenses” and the assessee succeeded only on the ground of consistency. Without going into the merits, the Supreme Court remitted back the matter to the High Court holding that the High Court should have examined the nature of the said expenditure. Refer, Oswal Agro Mills Ltd. 313 ITR 24.

• License fee : License fee paid by the assessee–company to its parent company under technical assistance agreement is allowable business expenditure. Refer Dy. CIT vs. Nestle India Ltd. 7 ITR 758. Further Payment made by the assessee for obtaining license for providing telecommunication services though for a period of 10 years, the license fee was payable on early basis with right to licensor to terminate the license and the license is non-exclusive, non-transferrable and it is open to the Government of India to grant similar licenses to other persons as well and therefore, the benefit of license fee paid during the year endures only till the end of relevant financial year and does not extend to the subsequent year and hence, the license fee is not in the nature of capital expenditure falling under section 35ABB, but the same is revenue in nature allowable under section 37(1). Refer Bharati Airtel Ltd. vs. ACIT 48 DTR 416. Similarly, The Hon’ble Court held the expenditure as revenue on following reasons (i) under agreement assessee had acquired only ‘access’ to technical information, that is, know-how related to process of manufacture, which was not related to any secret process or patent rights or even right to use a  trademark or trade name  under agreement; (ii) there was no transfer of ownership with respect to process and know-how in favour of assessee; and (iii) under aIn agreement the licenser was obliged  to give advice only for a period of 7 years, payment made by assessee to it would be treated as revenue expenditure. Refer J.K. Synthetics Ltd. 309 ITR 371.  Fees paid by assessee Telecom Company to department of telecommunication for use of licence was to be allowed as revenue expenditure. Refer, ACIT vs. Vodafone Essar Gujarat Ltd. 38 SOT 51

• Education Expenses of Son of MD : Amount spent towards educational expenses of a student, in which the assessee is carrying on its business was allowable expenditure under section 37(1) notwithstanding the fact that the student was son of managing director. Refer CIT vs. Ras Information Technologies (P) Ltd. 238 CTR 76. However, Expenditure for education of son of director who is not working for company cannot be allowed as business expenditure. Refer Westin Hospitality Services Limited 9 taxmann.com 79. Again Expenditure on education of director’s Son – No evidence that expenditure had nexus with assessee business – exp not allowable. Refer Echay Forgings Limited v CIT / Ocean City Trading India (P) Limited 328 ITR 286.  Similarly, Unless the commercial expediency of the firm is demonstrated, expenditure incurred by the firm on foreign education of a partner cannot be treated as incurred wholly and exclusively for the purposes of the business of the firm but is to be treated as personal expenditure and not allowable under section 37(1). Refer, Kohinoor Cloth Stores vs. ACIT 40 DTR 60 (Pune) (Trib.)

• Corporate Guarantee : Giving corporate guarantee was not only one of the objects of the assessee company but the same was given for its subsidiary company and it was in the interest of the assessee company and hence, the commercially expedient decision, hence, one time settlement with bank was allowable as business loss. Refer ACIT vs. Industries (India) Ltd. 128 ITD 98.  Again, Payment made by the assessee company to discharge the guarantee obligations vis-à-vis certain companies undertaken by two subsidiaries of the assessee company which amalgamated with the latter had no direct proximity or relationship to the business of the assessee and therefore, the same was not allowable as deduction. Refer, CIT vs. United Breweries Ltd. 36 DTR 80.

• Keyman Insurance Policy : Keyman Insurance premium paid by the Company on the lives of Chief cardiac surgeon, chairman, and managing director of company was qualified as deduction under section 37(1). Consultancy fees paid for maintenance of software were to be allowed as revenue expenditure. Refer Escort Heart Institute & Research Center Ltd. vs. ACIT 128 ITD 108. Also Premium paid by firm in respect of insurance policy of partners under Keyman Insurance Policy is an allowable deduction u/s. 37(1). Refer Modi Motors 27 SOT 476.  Actual amount paid towards Statutory Insurance fund towards third party claims. Refer, CIT V Kattabomman Transport Corporation Limited. 324 ITR 71.  Again, Keyman insurance policy is not confined to a situation where there is a contract on employment. Premium on the keyman insurance policy of a partner of the firm is wholly and exclusively for the purpose of business and is allowable as business expenditure. Refer, CIT vs. B. N. Exports 37 DTR 381

• New Unit set up expenses: Expenses incurred by assessee, a sugar manufacturer, by way of salaries, wages, bonus, provident fund contribution, workmen welfare expenses, power, fuel and water, manufacture expenses rent for office building, etc. on setting up new sugar units were expenses for the purpose of manufacture of sugar in respective factories and therefore, the same are allowable as revenue expenditure. Refer CIT vs. Sakhti Sugars Ltd. 237 CTR 51. Expenses incurred for setting up new unit in expansion of an existing business are allowable as revenue expenditure. Refer CIT v Ghanhyam Steel Works Limited 6 taxmann.com 4. Expenditure incurred on launching of a new model of car is a revenue expenditure. Refer Premier Ltd. ITA No. 2091/Mum/2008, dt. 30-6-2009. Similarly Where assessee is already in business, payments made for tender fee and consultancy charges for establishing captive power plant are allowable revenue expenditure. Refer Polyplex Corporation Ltd. 176 Taxman 57

• Director’s Bonus : Bonus paid for services of working directors cannot be disallowed just because they hold a few shares in assessee company. Refer ACIT v Mandovi Motors (P) Ltd 8 Taxmann.com 255.

• Legal expenses : Deductibility of Legal Expenses will depend on Nature & purpose of legal proceeding in relation to business whose profits are under computation and cannot be affected by final outcome of that proceedings. Refer Vivek P Talwar v ACIT 8 Taxmann.com 268.However, Legal charges incurred for defending criminal proceedings which has get nothing to do with Assessee profession is definitely of personal nature and such expenditure cannot be allowed against income from business and Profession. Refer DCIT v Salman Khan 9 Taxmann.com 74. However, in the case of KNP Securities P. Ltd. I ITR 130 Assessee is barred from doing business by SEBI till further orders. Assessee contesting order. Expenses incurred in keeping business alive deductible. Again, Legal expenses incurred on obtaining advice as to feasibility of acquiring a new unit is a revenue expenditure. Refer, CIT vs. United Breweries Ltd. 36 DTR 80

• Foreign Exchange Loss : Exchange loss on refund of advance received is business exp. Refer Diamonds R US v DCIT 9 Taxmann.com 67. Again, Exchange Fluctuation loss on pending forward contracts is an “accrued” loss. Refer DCIT vs. Bank of Bahrain & Kuwait.             Again, Foreign Exchange fluctuation losses are allowable on accrual basis. Refer, Woodward Governor 21 DTR 106.  It was held that loss on account of foreign exchange rate fluctuation allowable. Refer, L.G. Electronics India P. Ltd. 309 ITR 265.  Again, Loss claimed by assessee on account of fluctuation in rate of foreign exchange as on date of balance sheet is allowable as expenditure u/s 37(1). Refer, Oil & Natural Gas Corpn Limited V CIT. Civil Appeal No. 7223 of 2008 dated 15-3-2010.

• School : Payment made to a trust for opening a school in the assessee company’s premises will be allowable as deduction since the amount was paid with the object of providing education to the children of employees of assessee company within the company premises itself and was necessitated for business purpose. Refer Chambal Fertilisers & Chemicals Ltd. vs. ACIT Tax World. December Vol. XLIV. Part 6. P. 195. Again, Reimbursement of expenditure incurred in running the school is allowable as business expenditure. Refer,Tata International Ltd. ITAT ‘I’ Bench, Mumbai. ITAT No. 5591/M/2005 dt. 11/9/2009.

• Antivirus Software :  Expenditure incurred on purchase of anti–virus software is of revenue expenditure. Refer Chambal Fertilisers & Chemicals Ltd. vs. ACIT Tax World. December Vol. XLIV. Part 6. P. 195.

• Non Compete Fees : Non-compete fee paid by the assessee on acquisition of pharmaceutical business which constituted a new line of products for the assessee is not allowable as a revenue expenditure in one go. The out go is to be  treated as a deferred revenue expenditure and is allowable over a period of four years pro-data starting from the relevant assessment year. Refer Orchid Chemicals & Pharmaceuticals Ltd. vs. ACIT48 DTR 441.  Amounts paid by way of non-compete fees claimed as revenue expenditure, was treated as capital expenditure. Assessee’s alternate plea to treat same as an  Intangible asset u/s 32, and consequent grant of depreciation thereon was upheld. Refer, Real Image Tech (P) Ltd. 177 Taxman 80

• Business Commencement : Where the assessee had incurred expenditure towards soil testing, submission of tenders, payment of architect’s fees, etc. in construction business, it would be integral part of the business of the assessee and the CIT(A) was justified in allowing the deduction of such expenditure by holding that the assessee had commencement its business. Refer CIT vs. Mfr. Construction Ltd 48 DTR 360.

• Loan Charges: Administrative charges paid for obtaining loan are allowable as revenue expenditure in the year of  payment, notwithstanding the fact that the assessee has treated this expenditure as deferred revenue expenditure in its books of account and benefit of loan would accrue over a long period. Refer ACIT vs. Tata Housing Development Co. Ltd 48 DTR 452.   Commission paid to directors for taking guarantee of Loan is deductible. Refer, CIT v Khemchand and Motilal Jain Tobbacco Products (P) Limited 323 ITR 498.

• Onsite :  Expenses incurred onsite development of portal is revenue expenditure. Refer  ACIT vs. Jupiter Corporate Services Ltd 6 ITR 264.

• Public Utility : The contribution made by the assessee due to various business reasons ,to participate in a scheme framed by High court , as a remedy to a perpetual public hazard , i.e. social cause , hence the expenditure incurred allowable as revenue expenditure. Refer CIT v Jayendra Kumar Hiralal  327 ITR 147. Again, Expenditure incurred by the assessee on community assistance programme and the welfare measures undertaken in the vicinity of the manufacturing unit which also benefited its employees is allowable as business expenditure. Refer Madura Coats Ltd. 24 DTR 24. Similarly, Amount paid by assessee financial corporation for the development of model village in Mysore District under AG’s Mysore Zilla Panchayath was to promote the business of the assessee and therefore deduction was allowable. Refer, Karnataka Financial Corporation 33 DTR 145.  Any expenditure incurred on public body to constructed whre no ownership, then revenue expenditure , here nexus with business required. Refer, CIT v ABS Industries Limited. 323 ITR 350.  Expenditure of construction of Dam for Own use on government property is revenue expenditure. Refer, CIT V Hindustan Zinc Limited 322 ITR 478.

• Employee’s Final Settlement : Amount paid by assessee to an ex-employee at the time of leaving the service as per settlement is a allowable as deduction but not the amount which has already been claimed as deduction on account of provident fund in the year to which relates. Refer Tulip Hotels (P) lTD v Dy CIT. 132 TTJ (Mumbai) (TM). 633. Again, Provision for pay revision based on negotiations with trade unions, as per directions by State Government is allowable as deduction, as liability for pay revision arose, at that point of time though the actual quantification was after approval of MOU by Government of Kerala.   Refer, Travancore Titanium Products Ltd. 176 Taxman 124

• Advertisement : Expenditure on advertisement to create brand image, partly debited in profit and loss account and balance deferred over a period of three years, expenditure allowable as revenue expenditure, entry or absence of entry does not determine allowability of expenditure. Refer, Dy CIT v Godrej Tea Ltd. 4 ITR (Trib) 649.  Again, by incurring expenditure on advertisement and sales promotion, assessee had not acquired any fixed capital asset, but these expenditure were incurred for earning better profits and for facilitating assessee’s operation of providing cellular mobile services hence allowable as business exp. Refer Spice Communications Ltd. 35 SOT 78.

•  Commission : Commission payable to another company based on the quantity specified products sold by assessee , for various services rendered by that company to the assessee for various services rendered by that company to the assessee to enable it to upgrade its machineries and to use better methods of production is revenue expenditure. Refer CRYSTAL Chemie (P) Ltd v Asst CIT. 42 DTR (Ahd) (Trib) 197. Again, Commission was paid by account payee cheques, independent evidence were also produced such as service tax challans, and details of parties in respect of services were rendered. Commission was held to be allowable. Refer, Mobile Communication (India) (P) Ltd v DY CIT 125 ITD 309.  Again, Commsisson not related to business allowed. Refer, CIT v Printers House (P) Limited 188 Taxmann 70

• Family Expenditure : Agreement entered into between the father and son wherein the son has agreed to reimburse the amount spent by his father towards his maintenance and education is unheard of under the provisions of the Hindu law and therefore son cannot claim for such payments. Refer, CIT v Mahesh Bhupathi 43 DTR (Kar) 163.

• Fanclub: The tribunal was justified in granting deduction to the extent of 80 percentage of the expenses claimed to have been incurred by cine actor on Rasigar Manrams (fans club/association). It is well known fact that popular cine artists promote their Rasigar Manrams for the purpose of promoting their films among the public at large and for that purpose, when it is claimed that substantial amount was spent towards dress, food etc at the time of release of the new films as well as the regular maintenance of the Rasigar Manram activities, it cannot be said that it was not part of their professional activities namely acting in cine filed. Refer, CIT v A.Vijaykant 43 DTR (Mad ) 175.

• Advace written off : Money advanced to subsidiary company cannot be allowed as deduction either under section 36(2) or under section 37(1) on writing off the same. Refer VST Industries Limited v ACIT – Hyd ITAT 6 taxmamm.com 86.

• Pooja Expenses : This expenditure not related to business and hence not deductible. Refer Hira ferro Alloys Limited v DCIT 326 ITR 261

• Premature Termination Compensation : Amount paid to landlord for premature termination of lease is an expenditure on account of commercial expediency and hence entitled for deduction u/s. 37. Refer Microsoft Corporation of India 210 Taxation 161

• Expenses Capitilised in Books : Administrative Expenses incurred in connection with the modernization and expansion of the assessees existing units is allowable as revenue expenditure even though the assessee had capitalized these expenses in its books of accounts. Refer, Triveni Engineering & Industries Ltd. 19 DTR 274.  Similarly, Expenditure on brand promotion and brand building classified in the books of account as deferred revenue expenditure was allowed as revenue expenditure. Refer, Raj Oil Mills Ltd. ITA No. 5781/M/2007, AY 2003-04, dt. 27-5- 2009

• Website Development Expenses : Expenditure on website would not change the fixed capital of an assessee, even though website might provide enduring benefit to Assessee, expenditure incurred has to be regarded as revenue expenditure. Refer Indian Visit Com. (P) Limited ) 176 Taxman 164. Similarly, Business expenses incurred for development of  website to promote business activities, and display information and products is allowable as Revenue Expenditure. Refer, Polyplex Corp. Ltd. 176 Taxman 57.

• Computer Software : Expenditure on computer software is capital expenditure. Refer, Avaya Global Connect Ltd. 122 TTJ 300.  Again, Whether the expenses made towards the development of computer software is a Revenue Expenditure – Held, yes. Any expenses made towards computer software are Revenue expenditures. Refer Varinder Agro Chemicals Ltd. 224 CTR 326.   Expenditure incurred on computer software packages though gives an enduring benefit it does not result in acquisition of any capital asset and constitutes revenue expenditure. Refer, Southern Roadways Ltd. 220 CTR 298

• Business Promotion : Where the assessee instead of distributing free sample of liquor for promoting its sale to the defence establishment used to reimburse the payment made by the defence establishment to the CSD stores for the purchase of liquor, the amount of such reimbursement was held to be a deductible expenditure as the same was neither against the public policy nor prohibited under the law. Refer Brihan Maharashtra Sugar Syndicate Ltd. 28 DTR 265. Again, Expenditure incurred by assessee on film production by way of advertisement for marketing of products manufactured by it was allowable as revenue expenditure, in as much as it was in respect of promoting ongoing products of assessee. Refer, Geoffrey Manners & Co. Ltd. 180 Taxman 87.  Again, Expenditure on the business promotion, including gifts, samples prizes, etc. to customers including officials of CSD canteens was allowable when the gifts were below Rs 340 and not expensive. Refer  CIT vs. C. B. K. R. Enterprises 37 DTR 148
  

• Foreseeable losses:  In case of an assessee following mercantile system and “percentage completion method” deduction is allowable in respect of “foreseeable losses” on incomplete projects in respect of which a major part of the work was not completed provided that the same is calculated in accordance with Accounting Standard – 7. Refer Jacobs Engineering India Pvt. Ltd. ITA Nos. 335/Mum/2007 & 336/Mum/2007, A.Ys. 2002-03 & 2003-04, dt. 26-5-2009

• Foreign Travel: It is not necessary that for claiming deduction on account of foreign travel expenses, there has to be some business activity of assessee in foreign countries. Refer, Scindia Investments (P) Limited v ACIT 40 SOT 239.  However, Disallowance of foreign tour expenses in respect of certain persons cannot be made simply for the reason that such persons are not the employees of the assessee in a case wherein assessee establishes business connection with such persons. Refer, DCIT vs.  Gems Paradise ITA No. 700/JP/2009, Bench – A, dt. 18th December, 2009 / Taxworld, Volume – XLIII – Part 3 – March, 2010 – page 80 (86).

• Prior Period Expenses : During the year the Assessee cancelled the MOU and refunded the amounts received under MOU along with interest as per the terms of the MOU. The AO disallowed the interest paid for the period covering earlier years on the ground that it was prior period expense. Held that the liability to pay interest had accrued in the year under consideration when the resolution was passed and not prior to that. The liability under consideration was contractual liability and was crystallized and ascertained only when the decision to refund the earnest money along with interest was taken and hence the deduction is allowable. Refer, Urban Improvement Co. (P) Ltd. ITA No. 3246/Mum/2006, Bench – D, A.Y. 2003–04, dt. 5-9-2008

• Employees Home : Expenditure in providing residential facility to engineers at work site is wholly for the purposes of business and allowable as business expenditure in toto. Refer Niko Resources Ltd. 123 TTJ 310.

• Provisional Expenses : Assessee was not entitled to deduction of provision for excess bill raised by the supplier which has not been accepted by the assessee, liability being contractual, it will arise only on settlement of dispute. Refer, Sicgil India (P) Ltd. 123 TTJ 462.

• Donation : Assessee, an advocate made donation to a charitable trust with the specific direction that the interest of the amount would be utilised for purchase of books and magazines and to provide other facilities to advocates practicing in Court. The Tribunal held that as there was nothing on record to establish that donation was directly connected and related to business or profession of the assessee the same is not allowable as business expenditure. Refer A.M. Mathur  117 ITD 274.

• Collaboration Agreement : Collabration agreement for 5 Years is deductible as revenue as no capital asset acquired. Refer, CIT v Essel Propack Limited 325 ITR 185.  Refer, In collaboration agreement assessee obtained only right to use technical know how. Payment of lump sum fees and royalty is allowable as revenue expenditure. Refer, Honda Siel Cars India Limited ) 40 TLR (Part 466)  1 (Delhi)(AT).  Again, Agreement for technical collabration – Payment for royalty for technical service at percentage of domestic and export sales for seven years – deductible. Refer, Climate Systems India Limited Vs CIT 113 ITR 319.

• Mobile Handsets :  The amount paid for handsets and for talktime charges were not capital in nature. Refer, Radical Marketing Pvt. Ltd. vs. ITO ITAT ‘SMC’ Bench, Mumbai, ITA No. 3868/Mum/2008, decided on 19-5-2009 (BCAJ 42-A, May 2010 pg. 171).

• Agriculture : The expenses relating to agricultural operations could not be allowed as expenditures in computing the business incomes for the simple reason that agricultural income did not form part of the total income under the Act. Refer, Kancor Flavours & Extracts Ltd. vs. Dy. CIT 123 ITD 97.
• Penalty levied by IRDA for non-compliance of Regulation is allowable: It is observed that the penalty in question was levied by IRDA for non-compliance of Regulation 34(2) of IRDA (insurance brokers) Regulations, 2002. The assessee company as a broker was required to observe certain restrictions and follow certain procedures as prescribed in regulation 34.There was however a non-compliance on the part of the assessee of the said regulation which resulted in imposition of penalty by IRDA. Tribunal held that violation of such rules and regulations could not be treated as violation of statutory law or rule. It was also held by the Tribunal that the fine paid by the assessee for such violation was only for non observation of internal regulation of Stock Exchange and the same could not be equated with violation of statutory rule or law warranting disallowance of fine. Refer – Microsec Insurance Brokers Ltd. Vs ITO Ward (ITAT Kolkata) 1345/Kol/2016
• Consultancy charges Incurred for making investment are allowable: When the assessee incurred expenses towards consultancy charges in order to make investment, the assessing officer was not justified in treating and considering the expenses incurred towards consultancy charges as capital expenditure, dis allowable under section 37 of the Act. No Disallowance under section 14A of Expenditure against exempt income if Assessee has own interest free funds. Since assessee was already having its own surplus fund, there was no question of making any dis allowance of expenditure in respect of interest and administrative expenses, and therefore, no question of any estimation of expenditure under rule 8D arose. Refer –   CIT Vs. Sintex Industries Ltd. (Gujarat High Court) Tax Appeal No. 291 of 2017
• Sales Tax Penalty not allowable as business expense to the extent it is not compensatory – In the case of Swadeshi Cotton Mills Vs. CIT Ltd. (supra) the Hon’ble Supreme Court has held that, ‘where the amount paid is partly penal and partly compensatory, the amount to the extent that it is compensatory could be allowed as deduction’. Further, Hon’ble Jurisdictional High Court in the case of CIT Vs. Bharat Steel Tubes Limited (supra) has held that ‘the penalty for delayed payment of sales tax is not a deductible expenditure. Refer – M/s. Bokaro Power Supply Co. Ltd. Vs. DCIT (ITAT Delhi) ITA No. 3405/Del/2014
• Commission paid for referring names of potential customers is allowable – It is a settled principle of law that commission paid to persons for referring names of customers is allowable u/s. 37 of the Act for introducing potential customers to the assessee falls within the ambit of service. The tribunal takes the view that the commission paid to the persons for referring the names of the customers, is allowable under Section­ 37 of the Act for the purpose of introducing potential customers to the assessee and the same would fall within the ambit of “Service”. We are in agreement with the view taken by the appellate tribunal as regards the deduction available under Section ­37 of the Act. Refer – PCIT Vs Vishal Engineering and Galvanizers (Gujarat High Court) Tax Appeal No. 822 of 2019

The above list of items are not complete, but it is not possible to  cover as the list is very vast. In case of any clarification or feedback please contact me at [email protected].

Thank You.

Republished with Amendments