Section 37 of the Income Tax Act – Business Expenditure Explained

Key Takeaways
 

• Section 37 allows deductions from a normal person’s income.
   
• It permits expenses and deductions while calculating taxes.
   
• It covers business and professional expenses not mentioned under other sections of the Income Tax Act.

Section 37 of the Income Tax Act allows businesses to claim a deduction for expenses that are neither capital in nature nor personal. These expenses must be spent wholly and exclusively for the business.

Let us understand with an example:

Mr Raj runs a marketing company. During the year, he incurred the following expenses:
 

As per Section 37, only the business-related expenses qualify. So, Mr Raj can claim the rent, salaries, and promotion expenses as deductions, but not the personal travel.

Total Deductible Amount = ₹3,00,000 + ₹5,00,000 + ₹2,00,000 = ₹10,00,000

This deduction will reduce his taxable income under the head “Profits and Gains of Business or Profession”, helping him lower his tax liability.

Importance of Section 37 of the Income Tax Act

Section 37 is an important part of the Income Tax Act as it allows deductions for genuine business expenses and promotes fair and legal financial practices. Its importance can be explained as follows:

• Encourages Legitimate Spending: Section 37 allows deductions only for expenses that are spent wholly and exclusively for business purposes. This ensures that businesses claim only actual and necessary costs.
   
• Prevents Tax Abuse: It excludes personal expenses and capital expenditure from deductions, which prevents individuals from reducing tax through unrelated claims.
   
• Disallows Unlawful Expenses: Under Section 37(1), expenses on illegal activities such as bribes, protection money, and donations that go against public policy are not allowed as deductions.
   
• Excludes CSR from Business Deductions: Even though companies must spend on Corporate Social Responsibility under the Companies Act, 2013, these expenses are not allowed as deductions under Section 37, as they are not considered business-related.
   
• Ensures Fair Taxation: By allowing only lawful and business-focused expenses, Section 37 supports fair and transparent taxation.

Section 37 ensures that only genuine, lawful, and business-related expenses are deducted, promoting fairness and integrity in the tax system.

Bonus Tip: Always keep bills, invoices, and receipts for every expense you want to claim; this makes deductions easier to justify during scrutiny.

Objectives of Section 37 of the Income Tax Act

Section 37 of the Income Tax Act is designed to ensure fairness in taxation by allowing only genuine business and professional expenses as deductions. Its objectives focus on separating personal costs from business expenses and promoting transparency in income calculation.

Section 37 ensures that taxpayers get fair relief for business-related costs while preventing misuse through personal or unlawful claims, thereby maintaining transparency and equity in the tax system.

Bonus Tip: Use a different account for business transactions to avoid mixing personal expenses, as only business-related costs are allowed.

Practical Examples

Section 37 allows businesses and professionals to deduct certain expenses from their income before paying tax. These expenses must be only for business purposes, and not personal or capital expenses.
 

Section 37 of the Income Tax Act allows taxpayers to claim deductions for genuine business and professional expenses. The following examples show how it works in practice:

• Example 1: Ramesh owns a grocery shop. He pays ₹15,000 every month for rent. This rent is a business expense, so he can deduct it under Section 37.
   
• Example 2: A software company pays ₹50,000 as salary to its developer. Since the developer works only for the company, this salary is fully allowed as a deduction.
   
• Example 3: A small factory uses electricity to run its machines. The electricity bill is for business, so the cost can be claimed.

Section 37 helps businesses and professionals reduce taxable income by allowing deductions on necessary and legitimate expenses directly linked to business operations.

Conclusion

Section 37 of the Income Tax Act allows businesses and professionals to claim tax deductions on money spent for their work. If the expense is only for business, not personal or capital in nature, it can be deducted. This helps lower the tax by reducing the total income. Section 37 supports fair taxation and encourages honest business spending.

FAQ’s

Q1. Who can claim deductions under Section 37?
Any person carrying on a business or profession can claim deductions for eligible expenses.

Q2. Are entertainment or hospitality expenses covered under Section 37?
Yes, as long as they are wholly for business purposes and not personal in nature.

Q3. Does Section 37 allow foreign travel expenses?
Yes, if the travel is strictly for business purposes, the cost can be claimed.

Q4. Are expenses on penalties or fines allowed under Section 37?
No, expenses related to penalties, fines, or unlawful activities cannot be claimed.

Q5. Can companies claim CSR (Corporate Social Responsibility) expenses under Section 37?
No, CSR expenses are specifically excluded from deductions under this section.

Apply for Loans Fast and Hassle-Free

Apply Now

About the Author

LoansJagat Team

‘Simplify Finance for Everyone.’ This is the common goal of our team, as we try to explain any topic with relatable examples. From personal to business finance, managing EMIs to becoming debt-free, we do extensive research on each and every parameter, so you don’t have to. Scroll up and have a look at what 15+ years of experience in the BFSI sector looks like.