Section - 37

79. See rules 9A and 9B for computation of deduction in respect of expenditure on production of feature films/expenditure on acquisition of distribution rights of film.

80. See also Letter [F.No. 27(30)-IT/59], dated 6-7-1959, Letter [F.No. 9/54/64-IT(A-I), dated 2-9-1964 and Letter [F.No. 9/56/66-IT(A-I)], dated 17-1-1967, Letter [F.No. 9/23/67-IT(A-I)], dated 6-7-1967, Circular No. 5-P(XIV-I), dated 28-9-1963, Letter [F.No. 10/67/65-IT (A-I)], dated 26-8-1965, Circular No. 16, dated 18-9-1969, Circular No. 64(XI-2), dated 27-1-1951, Circular No. 117, dated 22-8-1973, Letter [F.No. 10/25/63-IT(A-I)], dated 18-6-1964, Letter [F.No. 204/42/77-IT(A-II)], dated 28-9-1977, Circular No. 1-D(IV-53), dated 20-1-1966, Circular No. 2, dated 8-3-1946, Letter [F.No. 35/5/65-IT(A-I)], dated 1-7-1965, Circular No. 69 (XIX-3), dated 27-11-1951, Circular No. 4, dated 19-6-1950, Letter [F.No. 10/80/64-IT(A-I)], dated 26-2-1965, Letter [F.No. 10/92/64-IT(A-I)], dated 13-9-1965, Circular No. 3, dated 26-3-1946, Circular No. 22, dated 23-6-1943, Letter [F.No. 10/16/63-IT(A-I)], dated 14-5-1963, Letter [F.No. 10/8/63-IT(A-I)], dated 14-10-1963, Letter [F. No. 27(24)-IT/59], dated 19-5-1959, Letter [F.No. 7/33/62-IT(A-I)], dated 28-8-1963, Circular No. 2P(XI-6), dated 23-8-1965, Letter [F.No. 13A/20/68-IT(A-II)], dated 3-10-1968, Letter [F.No. 32/6/62-IT(A-I)], dated 16-1-1963, Extracts from the minutes of the 16th meeting of CDTAC held on 2-2-1972, Instruction No. 943 [F.No. 204/15/76-IT(A-II)], dated 2-4-1976, Circular No. 420, dated 4-6-1985, Circular No. 2(40)/66-EAC, dated 16/17-1-1967, issued by the Ministry of Commerce, Circular No. 42 [C. No. 19(7)-IT/42], dated 22-8-1942, Circular No. 36 [R. Disc. No. 54(13)-IT/43], dated 24-11-1943, Circular No. 48 [C. No. 19(22)-IT/42], dated 16-10-1942, Circular No. 192, dated 10-3-1976, Circular No. 316, dated 30-9-1981, Board’s Circular Letter No. 10/22/65-ITA(A-I), dated 24-5-1965, Circular No. 651, dated 11-6-1993, and Circular No. 671, dated 27-10-1993.

For details, see Taxmann’s Master Guide to Income-tax Act.

82. "and section 80VV", which was inserted by the Taxation Laws (Amendment) Act, 1975, w.e.f. 1-4-1976, omitted by the Finance Act, 1985, w.e.f. 1-4-1986.

83. Substituted for existing sub-sections (2) and (2A) by the Finance Act, 1992, w.e.f 1-4-1993. Prior to substitution, sub-sections (2) and (2A), as amended by the Finance (No. 2) Act, 1962, w.e.f. 1-4-1962, the Finance Act, 1965, w.e.f. 1-4-1965, the Taxation Laws (Amendment) Act, 1967, w.e.f. 1-10-1967, the Finance Act, 1968, w.e.f. 1-4-1968, the Finance Act, 1970, w.e.f. 1-4-1970, the Finance Act, 1976, w.e.f. 1-4-1977 and the Finance Act, 1983, w.e.f. 1-4-1976/1-4-1984, 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 and gains of the business (computed before making any allowance under section 33 or section 33A or in respect of entertainment expenditure)	at the rate of 1 per cent or Rs. 5,000, whichever is higher;
(ii )on the next Rs. 40,00,000 of the profits and gains of the business (computed in the manner aforesaid)	at the rate of ½ per cent;
(iii )on the next Rs. 1,20,00,000 of the profits and gains of the business (computed in the manner aforesaid)	at the rate of ¼ per cent;
(iv )on the balance of the profits and gains of the business(computed in the manner aforesaid)	nil

(2A) Notwithstanding anything contained in sub-section (1) or sub-section (2), no allowance shall be made in respect of so such 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 profits and gains of the business or profession (computed before making any allowance under section 32A or section 33 or section 33A or in respect of entertainment expenditure)	at the rate of ½ per cent or Rs. 5,000, whichever is higher;
(ii )on the next Rs. 40,00,000 of the profits and gains of the business or profession (computed in the manner aforesaid)	as the rate of ¼ per cent;
(iii )on the balance of the profits and gains of the business or profession (computed in the manner aforesaid)	at the rate of 1/8 per cent,

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 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 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 the total number of days in the previous year.

Explanation. 1.—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 incurred 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 provisions 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.’

84. See Circular No. 644, dated 15-3-1993. For details, see Taxmann’s Master Guide to Income-tax Act.

For relevant case laws, see Taxmann’s Master Guide to Income-tax Act.

85. Substituted for "any previous year commencing on the 1st day of April, 1992" by the Finance Act, 1994, w.r.e.f. 1-4-1993.

87. See Circular No. 203, dated 16-7-1976, Circular No. 200, dated 28-6-1976 and Circular No. 19, dated 13-6-1969. For details, see Taxmann’s Master Guide to Income-tax Act.

88. Inserted by the Finance Act, 1964, w.e.f. 1-4-1964.

89. See Circular No. 203, dated 16-7-1976, Circular No. 200, dated 28-6-1976 and Circular No. 19, dated 13-6-1969. For details and relevant case laws, see Taxmann’s Master Guide to Income-tax Act.

90. See rules 6AC, 6B and 6D. Limits prescribed under rule 6B for allowability of advertisement expenditure are as follows :

The admissible quantum of deduction for advertisement expenditure is as follows :

In respect of articles intended for presentation, the quantum of deduction will be as follows :

- where the amount of expenditure does not exceed Rs. 1,000 on each such article	- 100%
- In any other case	Rs. 1,000, plus 50% of expenditure in excess of Rs. 1,000 on each such article.

In respect of any advertisement outside India involving payment in foreign currency. The deduction shall not exceed the amount covered by the foreign exchange granted to, or permitted to the be acquired by, the assessee for this purpose under the law relating to foreign exchange for the time being in force.

The Assessing Officer has the power to disallow such part of the expenditure which, in his opinion, is excessive or unreasonable having regard to the legitimate business needs of the assessee and the benefit derived therefrom. However, the disallowance can be made by the Assessing Officer in the following cases only :

( a) where the payment is made to a person who has a substantial interest in the business of the assessee or to the relative of such person; and

( b) where the payment is made to a person who carries on business or profession as a publicity or advertisement agent and the assessee has substantial interest in that business or profession.

Where payment exceeds Rs. 10,000, deduction will be allowed only if such payment is made by a crossed cheque drawn on a bank or by a cross demand draft. Even if an item of expenditure in excess of Rs. 10,000 is claimed and allowed as a deduction in any year on accrual basis, the actual payment when made in a subsequent year should be made by a crossed cheque or demand draft only. Otherwise, the deduction already allowed will be withdrawn by the assessing authority.

Rule 6D prescribes following limits for deductibility of travelling expenses/allowances TRAVEL IN INDIA : The quantum of deduction will be worked out as follows :

( i) In respect of travel by rail, road, waterway or air, the expenditure actually incurred.

( ii) In respect of any other expenditure (including hotel expenses or allowances paid) in connection with such travel, an amount of calculated at the following rates for the period spent outside the such headquarters :

- Where the amount of such expenditure does not exceed Rs. 1,500 per day	100%
- In any other case	Rs. 1,500 plus 75% of such expenditure in excess of Rs. 1,500 per day

TRAVELLING OUTSIDE INDIA—The quantum of deduction will have to be worked out on the following lines:

Step 1 - Note down the amount covered by foreign exchange granted or permitted to be acquired for purpose of the travel.

Step 2 - Note down the expenditure incurred on such travel in Indian currency.

Step 3 - Aggregate the amounts under Step 1 and Step 2; say Rs. X.

Step 4 - Note down the total number of days spent by the employee or other person outside India. In arriving at this figure, the number of days required for such travel by a reasonably direct route in the mode of travel adopted by him should be excluded; say A.

Step 5 - Note down the number of days mainly devoted by such employee or other person for the purpose of the business or profession of the assessee outside India. Any intervening public holidays in the foreign country can be included, provided the person has devoted the succeeding working day mainly for the business purpose: say B.

Step 6 - Find out (X) × (B) say Rs. Y.

(A)

The deduction admissible will be the actual total expenditure incurred by the assessee on the travel, or Rs. Y, whichever is less.

For relevant case laws, see Taxmann’s Master Guide to Income-tax Act.

91. Omitted by the Finance Act, 1985, w.e.f. 1-4-1986. Omitted sub-section (3A), as inserted by the Finance Act, 1983, w.e.f. 1-4-1984, stood 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".’

Original sub-section was inserted by the Finance Act, 1978, w.e.f. 1-4-1979 and was later omitted by the Finance (No. 2), Act, 1980, w.e.f. 1-4-1981.

92. Omitted by the Finance Act, 1985, w.e.f. 1-4-1986. Omitted such sub-section (3B), as inserted by the Finance Act, 1983, w.e.f. 1-4-1984, stood 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 aircraft 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."

Original sub-section was inserted by the Finance Act, 1978, w.e.f. 1-4-1979, and was later omitted by the Finance (No. 2) Act, 1980, w.e.f. 1-4-1981.

93. Omitted by the Finance Act, 1985, w.e.f. 1-4-1986. Omitted sub-section (3C), as inserted by the Finance Act, 1983, w.e.f. 1-4-1984, stood 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."

Original sub-section was inserted by the Finance Act, 1978, w.e.f. 1-4-1979, and was later omitted by the Finance (No. 2) Act, 1980, w.e.f. 1-4-1981.

94. Omitted by the Finance Act, 1985, w.e.f. 1-4-1986. Omitted sub-section (3D), as inserted by the Finance Act, 1983, w.e.f. 1-4-1984, w.e.f. 1-4-1984, stood 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."

Original sub-section was inserted by the Finance Act, 1978, w.e.f. 1-4-1979, and was later omitted by the Finance (No. 2) Act, 1980, w.e.f. 1-4-1981.

95. Inserted by the Finance Act, 1970, w.e.f. 1-4-1970. For relevant case laws, see Taxmann’s Master Guide to Income-tax Act.

96. Inserted by the Finance Act, 1983, with retrospective effect from 1-4-1979.

Section 37

General

Footnotes