Section - 37

General

General.

⁴⁰ 37. ⁴¹(1) ⁴²Any expenditure (not being expenditure of the nature described in sections 30 to 36 ⁴³ [***] 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".

^43a [Explanation.—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.]

(2) ⁴⁴[* * *]

⁴⁵ [ ⁴⁶(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.]

(3) ⁴⁷ [* * *]

(3A) ⁴⁸ [* * *]

(3B) ⁴⁹ [* * *]

(3C) ⁵⁰ [* * *]

(3D) ⁵¹ [* * *]

(4) ⁵² [* * *]

(5) ⁵³ [* * *]

40. 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.

41. 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. 2-P(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 IT(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.

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

43. "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.

43a. Inserted by the Finance (No. 2) Act, 1998, w.r.e.f. 1-4-1962.

44. Omitted by the Finance Act, 1997, w.e.f. 1-4-1998. Omitted sub-section (2) was substituted for sub-sections (2) and (2A) by the Finance Act, 1992, w.e.f. 1-4-1993. Erstwhile sub-sections (2) and (2A) were 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. Prior to its omission, sub-section (2), as substituted by the Finance Act, 1992, w.e.f. 1-4-1993, and later on amended by the Finance Act, 1994, w.r.e.f. 1-4-1993, read as under :

‘†(2) Notwithstanding anything contained in sub-section (1), any expenditure in the nature of entertainment expenditure incurred by any assessee during any previous year commencing on 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 expenditure on food or beverages provided by the assessee to his employees in office, factory or other place of their work.’

†See also Circular No. 644, dated 15-3-1993, Circular No. 708, dated 18-7-1995 and Circular No. 727, dated 27-10-1995. For details, see Taxmann’s Master Guide to Income-tax Act.

45. Inserted by the Taxation Laws (Amendment) Act, 1978, w.e.f. 1-4-1979. Originally, the sub-section was inserted by the Finance Act, 1970, w.e.f. 1-4-1970 which was later on omitted by the Finance Act, 1976, w.e.f. 1-4-1977.

46. 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.

47. Omitted by the Finance Act, 1997, w.e.f. 1-4-1998. Prior to its omission, sub-section (3), as inserted by the Finance Act, 1964, w.e.f. 1-4-1964, read as under :

"†(3) ††Notwithstanding 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."

†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.

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

ADVERTISEMENT EXPENSES - The admissible quantum of deduction for advertisement expenditure was as under :

In respect of articles intended for presentation, the quantum of deduction was as under :

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 was not to exceed the amount covered by the foreign exchange granted to, or permitted to be acquired by, the assessee for this purpose under the law relating to foreign exchange for the time being in force.

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

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

( b) where the payment was made to a person who carried on business or profession as a publicity or advertisement agent and the assessee or his relative had substantial interest in that business or profession.

Where payment exceeded Rs. 10,000, deduction was to be allowed only if such payment was made by a crossed cheque drawn on a bank or by a crossed demand draft. Even if an item of expenditure in excess of Rs. 10,000 was 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 was to be withdrawn by the assessing authority.

Rule 6D prescribed following limits for deductibility of travelling expenses/allowances TRAVEL IN INDIA : The quantum of deduction was to be worked out as under :

( 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 calculated at the following rates for the period spent outside such headquarters:

Where the amount of such expenditure did 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 was worked out on the following lines :

Step 1- Note down the amount covered by foreign exchange granted or permitted to be acquired for purposes 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 was the actual total expenditure incurred by the assessee on the travel, or Rs. Y, whichever was less.

48. 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.

49. Omitted by the Finance Act, 1985, w.e.f. 1-4-1986. Omitted 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.

50. 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.

51. 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, 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.

52. Omitted by the Finance Act, 1997, w.e.f. 1-4-1998. Prior to its omission, sub-section (4), as inserted by the Finance Act, 1970, w.e.f. 1-4-1970, read as under :

‘(4) Notwithstanding anything contained in sub-section (1) or sub-section (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 referred 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 guest-house 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 guest-house—

( 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,—

( 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.’

53. Omitted by the Finance Act, 1997, w.e.f. 1-4-1998. Prior to its omission, sub-section (5), as inserted by the Finance Act, 1983, w.r.e.f. 1-4-1979, read as under :

"(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 guest-house within the meaning of sub-section (4)."

Section 37

General

Footnotes