Section 37 General Deductions Allowed for Business & Profession

Which Expenditures are not Allowed as Deduction u/s 37(1)?

Explanation 1 of Section 37(1), states that any expenditure that is an offense or prohibited by law shall not be considered as sustained for business or profession, and no deduction shall be allowed for such expenditure. For instance, if you pay any bribe, penalty, protection money, freebies, or donations that are illegal or against public policy, you cannot claim them as business expenses under section 37(1).

Explanation 2 of Section 37(1), states that any expenditure incurred on corporate social responsibility activities as per section 135 of the Companies Act 2013 shall not be deemed as sustained for business or profession, and no deduction shall be allowed for such expenditure. Therefore, you should be careful while claiming any expenditure under section 37(1) and ensure that it meets all the conditions and does not fall under any of the exclusions.

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What are the Conditions for allowance under section 37(1)?

• The expenditure should not be covered by any specific section from 30 to 36 of the Act.
• The expenditure should not be of a capital or personal nature.
• The expenditure should be incurred wholly and purposefully for the business or profession.
• The expenditure should be accrued or paid during the previous year.
• The expenditure should not be for any purpose which is an offense or prohibited by law.

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Which type of expenditure is allowable as a deduction u/s 37(1)?

• Advertisement expenses: The cost of advertising products or services in any media for the business and profession. However, expenditure on advertisements a political party publishes is not allowed.
• Legal expenses: Fees paid to lawyers, solicitors, advocates, etc., for obtaining legal advice or services related to your business or profession. However, any expenditure that is an offense or prohibited by law is not allowed as a deduction u/s 37(1).
• Interest on borrowed capital: Interest paid on loans taken for the purpose of your business or profession as a deduction from your income. However, the loan must be used for business purposes only and not for personal or capital expenditure.
• Remuneration to employees: Salary paid to taxpayer employees is deductible according to section 37 of the income tax act, but salary paid to the business proprietor is not deductible. In case compensation paid to the employee of the business for termination from his duty or end of employment is allowed to be deducted. Salary paid to the firm's partner by the firm is also deductible limited to some conditions as per section 37 of the income tax act.
• Payment of penalty: Payment of penalty/damages is a type of expenditure that may or may not be allowed as a deduction U/S 37(1) of the Income Tax Act. Section 37(1) allows any expenditure that is not capital in nature and is incurred purposefully for the business or profession. However, the penalty paid to the legal authorities for violating the law is not allowed as a deduction. On the other hand, if the expenditure is compensatory in nature and arises due to contractual liability, it may be allowed as a deduction.
• Expenditure on raising loans: If expenses incurred for raising loans for the business or profession are allowed as a deduction. Any legal expenses incurred for raising loans, such as brokerage, stamp, and registration charges, are also allowed under section 37.

Some other examples of expenses allowed under section 37:

• Expenses incurred during Diwali puja/ Mahurat and other festivals
• Expenses for the telephone connection
• Gifts and bonuses are awarded to employees but should not be a part of the perquisites.
• Expenses for employees' welfare
• Expenses incurred for fees being paid to the registrar of the companies for legal obligation.

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Which are the Expenditures disallowance as a deduction under section 37(1)?

Section 37 Disallowance of Income Tax Act:

• Fees paid to the Registrar of Companies for changing a company's Memorandum and Articles of Association. This is a capital expenditure as it alters the constitution and rights of the company.
• Fee paid to the Registrar of Companies for increasing the authorized capital of a company. This is also a capital expenditure as it enhances the company's borrowing capacity and financial status.
• Expenditure incurred by an assessee for getting vacant possession of the land he owns. This is not a revenue expenditure as it does not relate to the normal operations of the business or profession.
• Bank guarantee commission paid for securing a loan for acquiring a fixed asset. This is a capital expenditure as it is incidental to acquiring an asset.
• Payment made for obtaining tenancy rights over a property. This is a capital expenditure as it confers a right to use and occupy the property for a long period.
• Penalty paid for violating or infringing any law or regulation. This is not an allowable expenditure as it is against public policy and morality.
• Expenditure incurred by a company for shifting its registered office from one place to another. This is not an allowable expenditure as it is not for the business or profession but for administrative convenience.
• Expenditure incurred for demolishing a building to construct a hotel on the same site. This is a capital expenditure as it results in the creation of a new asset.
• Interest paid for non-payment, less payment, delayed payment, or deferment of advance tax. This is not an allowable expenditure as it is neither a business expenditure nor an income tax.
• Sales tax paid on the sale or purchase of goods. This is an allowable expenditure as it is a turnover tax, not on profits. However, taxes such as income tax, surcharge, etc., are not allowable expenditures as they are paid after earning profits and are not for the business or profession.

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