Income-tax Act,1961
Act No : 43
Section :
General2
1 37. General2 (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36, 3[* * *] 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 ---------------------------------------------------------------------- 3 The words 'and section 80VV" omitted by the Finance Act, 1985 w.e.f. 1-4-1986. Earlier, they were inserted by the Finance Act, 1985, w.e.f. 1-4-1986. ----------------------------------------------------------------------- 1.226 shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". 1[(2) 'Notwithstanding anything contained in sub-section (1), any ---------------------------------------------------------------------- 1 Substituted for sub-sections (2) and (2A) by the Finance Act, 1992, w.e.f. 1-4-1993. Prior to the substitution, sub-section (2), as originally enacted and amended by the Finance (No. 2) Act, 1962, w.e.f. 1-4-1962 and Finance Act, 1965, w.e.f. 1-4-1965, read as under: "(2) Notwithstanding anything contained in sub-section (1), no expenditure in the nature of entertainment expenditure shall be allowed in the case of a company, which exceeds the aggregate amount computed as hereunder:- (i) on the first Rs. 10,00,000 of the profits at the rate 1 per- and gains of the business (computed before cent or Rs. 5,0000, making any allowance under section 33 or whichever is higher; section 33A or in respect of entertainment expenditure) (ii) on the next Rs. 40,00,000 of the profits at the rate of 1/2 and gains of the business (computed in the per cent; manner aforesaid) (iii) on the next Rs. 1,20,00,000 of the pro- at the rate 1/4 fits and gains of the business (computed in per cent; the manner aforesaid) (iv) on the balance of the profits and gains nil." of the business (computed in the manner aforesaid). Sub-section 2(A), as inserted by the Taxation Laws (Amendment) Act, 1967, w.e.f. 1-10-1967 and amended by the Finance Act, 1968, w.e.f. 1-4-1968; Finance Act, 1970, w.e.f. 1-4-1970; Finance Act, 1976, w.e.f. 1-4-1976/1-4-1977 and Finance Act, 1983, w.r.e.f. 1-4- 1976/w.e.f. 1-4-1984, read as under: "(2A) Notwithstanding anything contained in sub-section (1) or sub-section (2), no allowance shall be made in respect of so much of the expenditure in the nature of entertainment expenditure incurred by any assessee during any previous year which expires after the 30th day of September, 1967, as is in excess of the aggregate amount computed as hereunder:- (i) on the first Rs. 10,00,000 of the at the rate of 1/2 per profits and gains of the business or cent or Rs. 5,000, profession (computed before making any whichever is higher. allowance under section 32A or section 33 or section 33A or in respect of entertainment expenditure) (ii) on the next Rs. 40,00,000 of the at the rate of 1/4 per profits and gains of the business or cent; profession (computed in the manner aforesaid) (iii) on the balance of the profits and at the rate of 1/8 per gains of the business or profession cent. (computed in the manner aforesaid) so, however, that the allowance shall in no case exceed Rs. 50,000: Provided that where the previous year of any assessee falls partly before and partly after the 30th day of September, 1967, the allowance in respect of such expenditure incurred during the previous year shall not exceed- (a) in the case of a company- (i) in respect of such expenditure incurred before the 1st day of October, 1967, the sum which bears to the aggregate amount computed at the rate or rates specified in sub-section (2), the same proportion as the number of days comprised in the period commencing on the 1st day of such previous year and ending with the 30th day of September, 1967, bears to the total number of days in the previous year; (ii) in respect of such expenditure incurred after the 30th day of September, 1967, the sum which bears to the aggregate amount computed at the rate or rates specified in this sub-section, the same proportion as the number of days comprised in the period commencing on the 1st day of October, 1967, and ending with the last day of the previous year bears to ---------------------------------------------------------------------- 1.227 expenditure in the nature of entertainment expenditure incurred by any assessee during any previous year commencing on 1[or after] the 1st day of April, 1992 shall be allowed as follows:- (a) where the amount of such expenditure does not exceed ten thousand rupees, the whole of such amount; (b) in any other case, ten thousand rupees as increased by a sum equal to fifty per cent of such expenditure in excess of ten thousand rupees. Explanation.-For the purposes of this sub-section, "entertainment expenditure" includes- (i) the amount of any allowance in the nature of entertainment allowance paid by the assessee to any employee or other person; (ii) the amount of any expenditure in the nature of entertainment expenditure [not being expenditure incurred out of an allowance of the nature referred to in clause (i)] incurred for the purposes of the business or profession of the assessee by any employee or other person; (iii) expenditure on provision of hospitality of every kind by the assessee to any person, whether by way of provision of food or beverages or in any other manner whatsoever and whether or not such provision is made by reason of any express or implied contract or custom or usage of trade, but does not include ----------------------------------------------------------------------- -> -> the total number of days in the previous year; (b) in any other case- (i)in respect of such expenditure incurred before the 1st day of October, 1967, the amount admissible under sub-section (1); (ii)in respect of such expenditure incur-red after the 30th day of September, 1967, the sum which bears to the aggregate amount computed at the rate or rates specified in this sub-section, the same proportion as the number of days comprised in the period commencing on the 1st day of October, 1967, and ending with the last day of the previous year bears to the total number of days in the previous year. Explanation I.-For the purposes of this sub-section, 'entertainment expenditure' includes- (i) the amount of any allowance in the nature of entertainment allowance paid by the assessee to any employee or other person after the 29th day of February, 1968; (ii) the amount of any expenditure in the nature of entertainment expenditure (not being expenditure incur-red out of an allowance of the nature referred to in clause (i)] incurred after the 29th day of February, 1968, for the purposes of the business or profession of the assessee by any employee or other person. Explanation 2.-For the removal of doubts, it is hereby declared that for the purposes of this sub-section and sub-section (2B), as it stood before the 1st day of April, 1977, 'entertainment expenditure' includes- expenditure on provision of hospitality of every kind by the assessee to any person, whether by way of provision of food or beverages or in any other manner whatsoever and whether or not such provision is made by reason of any express or implied contract or custom or usage of trade, but does not include expenditure on food or beverages provided by the assessee to his employees in office, factory or other place of their work.' 1 Inserted by the Finance Act, 1994, w.r.e.f. 1-4-1993. ---------------------------------------------------------------------- 1.228 expenditure on food or beverages provided by the assessee to his employees in office, factory or other place of their work.] 1[(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.] 2[(3) 3Notwithstanding anything contained in sub-section (1), any expenditure incurred by an assessee after the 31st day of March, 1964, on advertisement or on maintenance of any residential accommodation including any accommodation in the nature of a guest-house or in connection with travelling by an employee or any other person (including hotel expenses or allowances paid in connection with such travelling) shall be allowed only to the extent, and subject to such conditions, if any, as may be prescribed.] 4[(3A) Omitted by the Finance Act, 1985, w.e.f 1-4-1986.] 5[(3B) Omitted by the Finance Act, 1985, w.e.f 1-4-1986.1 ---------------------------------------------------------------------- 1 Inserted by the Taxation Laws (Amendment) Act, 1978, w.e.f. 1-4- 1979. Earlier, the original sub-section (2B) was inserted by the Finance Act, 1970, w.e.f. 1-4-1970 and omitted by the Finance Act, 1976, w.e.f. 1-4-1977. 2 Inserted by the Finance Act, 1964, w.e.f. 1-4-1964. 4 Prior to the omission, sub-section (3A), as inserted by the Finance Act, 1983, w.e.f. 1-4-1984, read as under: "(3A) Notwithstanding anything contained in sub-section (1), where the expenditure or, as the case may be, the aggregate expenditure incurred by an assessee on any one or more of the items specified in sub-section (3B) exceeds one hundred thousand rupees, twenty per cent of such excess shall not be allowed as deduction in computing the income chargeable under the head 'Profits and gains of business or profession'.' Earlier, sub-section (3A) was inserted by the Finance Act, 1978, w.e.f. 1-4-1979 and omitted by the Finance (No. 2) Act, 1980, w.e.f. 1-4-1981. 5 Prior to the omission, sub-section (3B), as inserted by the Finance Act, 1983, w.e.f. 1-4-1984, read as under: "(3B) The expenditure, referred to in sub-section (3A) is that incurred on- (i) advertisement, publicity and sales promotion; or (ii) running and maintenance of aircraft and motor cars; or (iii)payments made to hotels. Explanation.-For the purposes of sub-sections (3A) and (3B)- (a) the expenditure specified in clause (i) to clause (iii) of sub-section (3B) shall be the aggregate amount of expenditure incurred by the assessee as reduced by so much of such expenditure as is not allowed under any other provision of this Act; (b) expenditure on advertisement, publicity and sales promotion shall not include remuneration paid to employees of the assessee engaged in one or more of the said activities; (c) expenditure on running and maintenance of aircraft and motor cars shall include,- (i) expenditure incurred on chartering any air-craft and expenditure on hire charges for engaging cars plied for hire; (ii)conveyance allowance paid to employees and, where the assessee is a company, conveyance allowance paid to its directors also.' Earlier, sub-section (3B) was inserted by the Finance Act, 1978, w.e.f. 1-4-1979 and omitted by the Finance (No. 2) Act, 1980, w.e.f. 1-4-1981. ---------------------------------------------------------------------- 1.229 1[(3C) Omitted by the Finance Act, 1985, w.e.f 1-4-1986.] 2[(3D) Omitted by the Finance Act, 1985, w.e.f 1-4-1986.] 3[(4) Notwithstanding anything contained in sub-section (1) or subsection (3),- (i) no allowance shall be made in respect of any expenditure incurred by the assessee after the 28th day of February, 1970, on the maintenance of any residential accommodation in the nature of a guest-house (such residential accommodation being hereafter in this sub-section refer-red to as "guest-house'); (ii) in relation to the assessment year commencing on the 1st day of April, 1971, or any subsequent assessment year, no allowance shall be made in respect of depreciation of any building used as a guesthouse or depreciation of any assets in a guest-house: Provided that the aggregate of the expenditure referred to in clause (i) and the amount of any depreciation referred to in clause (ii) shall, for the purposes of this sub-section, be reduced by the amount, if any, received from persons using the guest-house: Provided further that nothing in this sub-section shall apply in relation to any guest-house maintained as a holiday home if such guesthouse- (a) is maintained by an assessee who has throughout the previous year employed not less than one hundred whole-time employees in a business or profession carried on by him; and (b) is intended for the exclusive use of such employees while on leave. Explanation.-For the purposes of this sub-section,- ----------------------------------------------------------------------- 1 Prior to the omission, sub-section (3C), as inserted by the Finance Act, 1983, w.e.f. 1-4-1984, read as under: "(3C) Nothing contained in sub-section (3A) shall apply in respect of expenditure incurred by an assessee, being a domestic company as defined in clause (2) of section 80B, or a person (other than a company) who is resident in India in respect of expenditure incurred wholly and exclusively on- (i) advertisement, publicity and sales promotion outside India in respect of the goods, services or facilities Which the assessee deals in or provides in the course of his business; (ii) running and maintenance of motor cars in any branch, office or agency maintained outside India, for the promotion of the sale outside India of such goods, services or facilities.' Earlier, it was inserted by the Finance Act, 1978, w.e.f. 1-4-1979 and omitted by the Finance (No. 2) Act, 1980, w.e.f. 1-4-1981. 2 Prior to the omission, sub-section (3D), as inserted by the Finance Act, 1983, w.e.f. 1-4-1984, read as under: "(3D) No disallowance under sub-section (3A) shall be made- (i) in the case of an assessee engaged in the business of operation of aircraft, in respect of expenditure incurred on running and maintenance of such aircraft; (ii) in the case of an assessee engaged in the business of running motor cars on hire, in respect of expenditure incurred in running and maintenance of such motor cars.' Earlier, sub-section (3D) was inserted by the Finance Act, 1978, w.e.f. 1-4-1979 and was omitted by the Finance (No. 2) Act, 1980, w.e.f. 1-4-1981. 3 Inserted by the Finance Act, 1970, w.e.f. 1-4-1970. ------------------------------------------------------------------------ 1.230 (i) residential accommodation in the nature of a guest-house shall include accommodation hired or reserved by the assessee in a hotel for a period exceeding one hundred and eighty-two days during the previous year; and (ii) the expenditure incurred on the maintenance of a guest-house shall, in a case where the residential accommodation has been hired by the assessee, include also the rent paid in respect of such accommodation.] 1[(5) For the removal of doubts, it is hereby declared that any accommodation, by whatever name called, maintained, hired, reserved or otherwise arranged by the assessee for the purpose of providing lodging or boarding and lodging to any person (including any employee or, where the assessee is a company, also any director of, or the holder of any other office in, the company), on tour or visit to the place at which such accommodation is situated, is accommodation in the nature of a guesthouse within the meaning of sub-section (4). ---------------------------------------------------------------------- 1 Inserted by the Finance Act, 1983, w.r.e.f. 1-4-1979. ---------------------------------------------------------------------- 1.231 Assessing Officer is satisfied that the conditions laid down in section 37(1) are satisfied. The withdrawal of the tax concession under section 35C would not affect this position. 5. Feature film production.-The cost of production of a feature film shall be reduced by the subsidy received by the film producer under any scheme framed by, Government where such amount of subsidy has not been included in computing the total income of the assessee for any assessment year. Conversely, the amount received by producers of regional feature films which has not been charged to tax, shall be reduced from the cost of production of the film for the purposes of rule 9A. 6. Security deposit for telex.-Since the deposit for telex connection does not earn any interest when the telex machine is installed at that stage, the amount may be treated as a revenue expenditure. When the amount is returned the refund will be treated as income. 7. Civil defence expenses.-Expenditure incurred by business concerns on civil defence measures, even when there is no emergency would be allowable to the extent reasonable. 8. Payment for telephone.-The deposit paid for obtaining phone connection under the 'Own your telephone' scheme will be allowed to be deducted in the year of payment and in case the telephone is not installed and the money is refunded the same will be charged to tax. [Letter No. 204170175, dated 10th May, 1976] 9. Expenditure on training of apprentices.-In view of the statutory obligation cast on the employers under the provisions of the Apprentices Act recurring expenses incurred in imparting of the basic training to the apprentices will be allowable as a deduction. 10. Rebate on purchases.-Rebate or bonus which is in the nature of deferred discount passed on by the consumer co-operative stores to their members on the value of the purchases made by them during an year should be allowed as a deduction in computing the business income of such societies. 11. Provision for gratuity.-Provision made by an assessee in its accounts on account of the estimated service gratuity payable to the employees may be treated as admissible deduction under section 37(1) though no gratuity fund has been set up under Part C of the Fourth Schedule. 12. Professional tax.-Professional tax paid by a person carrying on a business or trade can be allowed as deduction under section 37(1). 13. Customary payment.-As expenses incurred on the occasion of Diwali and Muhurat are in the nature of business expenditure it has been decided not to lay down any monetary limits for the purpose of their allowance in the income-tax assessment, subject to the Income- tax Officer being satisfied that the expenses are admissible as a deduction under the law and are not expenses of a personal or religious nature. [Letter No. 3 13A/20168-114 II, dated 3rd October, 1968] 14. Membership fees.-Expenditure by way of membership fee to the Indian Institute of Packaging, Bombay, Indian Institute of Foreign Trade, New Delhi are allowable as deduction. [Letter Nos. 9123167, dated 6th July, 1967 and 9156166, dated 17th January, 1967] 15. Dead rent and royalty for mining.-Under the Mineral Concession Rules, 1960, royalty is payable in respect of any mineral removed by the lessee from the leased area. The amount of royalty cannot be less than the amount of dead rent which is in the nature of minimum royalty. Hence the royalty and the dead rent will have to be allowed as revenue deduction in computing the business income. 1.232 16. Interest on deferred payments.-Expenditure by way of interest payable on the unpaid purchase price of plant and machinery should be allowed as revenue deduction. [Letter No. 10/92164, dated 13th September, 1965] 17. Annual listing fee.-Annual listing fee paid to stock exchange should be considered to be expenses laid out wholly and exclusively for the purposes of business and hence admissible as revenue deduction. [Letter No. 10167165, dated 26th August, 1965] 18. Commitment charges.-Applying the principles laid down by the Supreme Court in Bombay Steam Navigation Co. v CIT 56 ITR 52, the expenditure incurred by way of payment of commitment charges paid by a borrower with regard to the amount of loan has to be taken as an expenditure laid out wholly and exclusively for the purposes of business. 19. Registrar's fees.-Reasonable remuneration paid by a company to its registrar for performing various duties under the company law, should be regarded as revenue expenditure. (Letter No. 10/25163, dated 18th June, 1965] 20. Guarantee commission.-Commission payable to banks for furnishing guarantees regarding deferred payments for import of plant and machinery is in the nature of capital expenditure and cannot be allowed as deduction. It could however, be added to the cost of the plant and depreciation allowed thereon. [Letter No. 7133162, dated 28th August, 1963] 21. Customary contributions.-Customary fee (laga) collected by business/trade associations from their members, at usual customary rate prevalent in the market is allowable as deduction in full. The Income-tax Officers must however, satisfy that such contributions made are meant to be utilised for charitable purpose within the meaning of that term under the Income-tax Act. 22. Entertainment allowance.-(1) The expenditure on provision of food or beverages by an employer to such employees as are not hit by the provisions of section 17(2)(iii) need not be treated as entertainment expenditure within the meaning of the Explanation under section 37(2) substituted with effect from April 1, 1993, if such food or beverages are provided during working hours even in places other than the place of work, provided the expenditure is genuine and reasonable. Accordingly such expenditure on the following classes of employees will get the benefit of this circular: "employees whose income under the head 'Salaries' (whether due from or paid or allowed by one or more employers), exclusive of the value of all benefits or amenities not provided for by way of monetary payment does not exceed Rs. 24,000; provided that, in the case of such employees of a company, they should be neither directors nor persons having substantial interest in the company." In respect of other high-paid employees, i.e., those mentioned in section 17(2)(iii), however, such expenditure will continue to be treated as entertainment expenditure. [Circular No. 644, dated 15th March, 1993.] (2) A distinction has to be made between an entertainment allowance paid by a company to its employee as forming part of his remuneration and an expenditure on entertainment incurred by the company itself through its employee. If the allowance does not form part of the employees remuneration but is spent by the employee on entertainment on behalf of the company direct, for the purpose of the ceiling referred to in section 37(2). Similarly where an employee is allowed to operate an expense account for the purposes of entertainment of the customers of the company the expenses through such an account should be included in the entertainment expenses of the company for the purposes of applying the limits prescribed in section 37(2). On the other hand where any entertainment allowances as such is paid as part of remunerations the amount should not be included in the entertainment expenses of the company for the purposes of section 37(2). 1.233 23. Advertisement expenses.-A businessman can advertise in more than one newspapers or magazines and also in more than one issue of the same newspaper or magazine. Expenditure on such advertisements will qualify for deduction under section 37(3). The provisions of weighted deduction under section 35B could not once again be governed by section 37(1) and hence provisions of rule 6B read with section 37(3) would not apply to expenditure which qualified for weighted deduction. 24. A payment made by an assessee doing business cannot be claimed as deduction if the payment was made by way of penalty or akin to penalty for any breach or infraction of law or any public policy which was sought to be achieved by such law. But if such payment was made by the assessee without any breach or infraction of any law or any public policy sought to be achieved by it and in fact in obedience to provisions of such law as a measure of business expediency there could be no valid reason not to allow such payment as deductible expenditure of the assessee under section 37. What was required to be done by an assessing authority under the Income-tax Act in examining the claim of an assessee that the payment made by such assessee was a deductible expenditure under section 37 although called penalty, was to see whether the law or scheme under which the amount was paid required such payment to be made as penalty or as something akin to penalty that was imposed by way of punishment for breach or infraction of the law or the Statutory Scheme. If the amount paid was found to be not a penalty or something akin to penalty due to the fact that the amount paid was in exercise of the option conferred under the very law or scheme concerned such payment should be as business expenditure of the assessee allowable under section 37 as an incident of business laid out wholly and exclusively for the purposes of the business. CIT v Ahmedabad Cotton Mfg. Co. (1994) 2 TCR Case No. 212 (SC): (1994) 205 ITR 163 (SC).
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