Section 37 General Deduction:
As per the provision of section 37 any expenditure [other than covered u/s 30 to 36] shall be allowed as deduction if following conditions are satisfied:
- Expenses should be incurred wholly or exclusively for the purpose of Business or Profession.
- Expenses should be revenue in nature and not in capital in nature.
- Expenses should be Legal. (It should not be illegal like Hafta, Bribes, secret commission, etc.)
Explanation of illegal expenses:
Following expenses treated as illegal and not allowed as deduction,
- For any purpose which is an offence under, or which is prohibited by, any law for the time being in force, in India or outside India; or
- To provide any benefit for perquisite in whatever form, to a person, whether or not carrying on a business or exercising a profession, and acceptance of such benefit or perquisite by such person is in violation of any law or rule or regulation or guideline, as the case may be for the time being in force, governing the conduct of such person; or
- To compound an offence under any law for the time being in force, in India or outside India.
Allowability of certain expenditure for business or profession under Section 37:
- Customary expenses (Puja at the time of new year, Diwali) -Allowed
- Expenses incurred by CA’s for attending CPE seminars – Allowed.
- Gift to employee – Allowed
- Tax audit fees or litigation exp in relation income tax cases- Allowed
- Premium paid by the firm on the Keyman Insurance policy of a partner- Allowed
- Cash embezzled – the loss is incidental to the business. Hence it is allowed in the year in which embezzlement discovered.
- Prior period expenses be allowed only if liability to pay is crystalized during Previous Year. (eg. increased salary paid in PY)
- Expenditure incurred for development of roads/highways in Build-Operate- Transfer (BOT) agreement – Allowed over life of agreement.
Expenses Related to Shares and Debentures:
Particulars | Capital Expenses/Revenue Expenses | Allowed/Not Allowed |
Initial Public Offer | Capital Expenses | Not Allowed |
Follow on Public Offer | Capital Expenses | Not Allowed |
Issue of Right Shares | Capital Expenses | Not Allowed |
Buy Back of Shares | Revenue Expenses | Allowed |
Bonus Shares Issue Expenses | Revenue Expenses | Allowed |
Debentures or loan Issue Expenses | Revenue Expenses | Allowed |
Taxes, Interest on taxes and its penalties:
Particulars | Tax Amount | Interest Amount | Penalty |
Direct Taxes( Income Tax, Surcharge, Cess etc) | Not Allowed | Not Allowed | Not Allowed |
Indirect Taxes(GST etc) | Allowed | Allowed | Not Allowed |
Penalty Expenses:
Particulars | Allowed/Not Allowed |
Penalty Related to Breach of law | Not Allowed |
Penalty Related to Breach of contract | Allowed |
Corporate Social Responsibility
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.
Other Points Related Section 37:
- If donation made to PM cares fund or PM relief Fund etc. then Assessee can claim deduction u/s 80G even it’s a CSR expenses.
- If donation made to Clean Ganga Fund or Swachh Bharat Kosh then Assessee not eligible to claim deduction u/s 806 if it is CSR spends.
- Advertisement in brochure, souvenir, newspaper, pamphlet published by political party-Not allowed as deduction.
- As per sec. 182 Companies Act, 2013 Advertisement in the brochure, newspaper, pamphlet of political party is treated as Donation so Indian company claim deduction u/s 80GGB for advertisement expenses.
- Registration fees incurred on increase of authorized share capital of company Not allowed.
- In case of an abandoned film, the cost of film shall be treated as revenue expenses and allowed as deduction.
