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PRATEEK: 0921160

SHEKHAR: 0921132

SANDEEP: 0921128NIKHIL: 0921121

HARSHIT : 0921114

ABANISH: 0921101

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` The legislature, having rightly envisaged the impracticability of listing outall the admissible expenses in the computation of taxable business income,

enacted sub-sec.(1) of Sec.37. so as to accommodate all deductable

expenses other than those specifically covered by other provisions. The

provisions of Sec-37 (1) reads as follows:

` Any expenditure,

Not being expenditure of the nature described in Sec.30 to 36; and

Not being in the nature of capital expenditure; or

Not being in the nature of personal expenditure of the assessee; and

Laid out or expended wholly or 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 of profession.

` In order to claim a deduction U/S 37(1), assessee should have incurred

expenditure during the year or relating to the year. If no expenditure is

incurred, deduction cant be allowed.

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Whether any asset is acquired bythe assessee

YES

NOT Deductible u/s37(1) eg.

Purchase of Machinery

NO

Whether there is a benefitof enduring nature

YES

NO

Is such a benefit

in the capital FieldDeductible u/s 37

eg.Salary to staff

YES

Fixed Assets gets improved. Not

deductible u/s 37(1)

eg. Extension of existing building

The benefit is in the revenue

field as fixed assets are left

untouched. Deductible u/s

37(1).

NO

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The benefit is in the revenue field as fixed

assets are left untouched

Deductible u/s 37(1). Is it deductible in one

year or to be spread over?

NO

If there is continuing obligationbetween the parties and benefit

there from accrues during a

specified period, deduction to

be spread over such specified

period, deduction to be spread

over such specified number ofyears.

Eg. Discount or premium on

redeemable debenture/bonds

In other cases, deductiblein one year.

Eg. Advertisment

Expenses

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` In case of issue of bonus shares, there is no fresh in-

flows of funds or increase in the capital employed.

` The reserves of the entity gets converted into share

capital of the company.` The total funds available with the entity remains the

same, both before and after the issue of bonus shares.

Accordingly, any expenditure incurred in connection

with issue of bonus shares was held as revenueexpenditure.

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` The expenses incurred on raising finance, through

borrowings either by issues of debentures or otherwiseis deductable as revenue expenditure.

` On the other hand issue of right shares enhances the

capital base of the company and there by the companygets the benefit of enduring nature in the capital field.

Therefore, expenditure incurred towards issue of rights

share is not eligible for deduction U/S 37(1).

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` In pursuance of a collaboration agreement if amount ispaid for a technical know-how to facilitate of runningof existing business, its allowable as revenueexpenditure.

` Agreement allowing retention of technical data, design& documentation by assessee does not alter thetreatment.

` If the assessee obtains a mere license for a limited

period to use the technical knowledge, there is noacquisition of any asset in the nature of know-how.Therefore its revenue expenditure.

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1.

If compensation is paid to laborers uponclosure of entire business it is capital

expenditure.

2.

If it is paid for closing down any one division or

until or an undertaking while the remaining businessdivision/unit or undertaking is continuedcompensation paid shall be regarded as revenue innature.

3.

It may be relevant to state here that payment ofcompensation to induce on the ground ofcommercial expediency. If the amount paid is acompensation under VRS, the same is deductible u/s35 DDA over a period of 5 years.

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1.

Assessee intending to setup manufacturing

unit in Malaysia incurred travelling expensesin connection with the project. Since themanufacturing unit in Malaysia was not partof assessees existing business incurred ontravel in capital in nature.

2.

Expenses incurred for travel abroad toexplore the possibility of expansion ofexisting business is revenue expenditure.

Even if the expansion did not take place, thecharacter as a revenue expenditure does notchange/

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3.

The travelling expenses of spouse were held to beadmissible in as much as the business visit involvedsocial aspects and the spouse accompanied the husbandon grounds of commercial expediency and for businessconsiderations. Since it was not proved that wife

accompanied the husband for business considerations.It was for taking care for the health of the husband.

4.

Directors of the company were allowed to use the

vehicles belonging to the company for their personaluse as per the terms and conditions of service.Expenditure incurred on maintenance of vehicles shallnot be disallowed in the hands of company.

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BUSINESS EXPENDITURE

` Expenditure related to the shifting of the machinery

while shifting the whole factory is a capital

expenditure.

` Expenditure related to transportation of raw-

materials, employees are revenues expenditure.

` Expenditure related to shifting of administrative

office is revenue expenditure, since such shifting

enables mere improvement in convenience &

efficiency and not in enduring advantage.` Contribution to public welfare fund is revenue

expenditure

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` Expenditures in renovation & repairs of furniture shall

be regarded as revenue expenditure.

` Only that portion of total expenditure would be

considered as Revenue Expenditure, which is solely

used for business purpose.

` Where an assessee incurs expenditure on expansion of

business by creating a separate cell or unit will be

allowed as revenue expenditure.

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` Where a business liability has arisen in the accounting

year but it may have to be quantified and discharged at

a future date.

` i.e. The existence of liability is known for sure, but theactual amount & date of payment is not certain.

` In this case deduction is allowed.

` But there should be a capability to estimate the amount

with reasonable amount of certainty.

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` The assessee who incurs expenditure for any purpose

which is an offence or which is prohibited by law is not

entitled for deduction. Such an expenditure shall not

be deemed to have been incurred for the purpose of business or profession and no deduction shall be

allowed. Where a person violates the law or the

regulations/rules made by the Corporation or the

Municipal authorities, the amount paid as compoundingfee which is in the nature of a penalty is not deductible

u/s 37.

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` Deposit made under the ON your telephone scheme. Thecentral board of direct taxes have issued instructions to theeffect that deduction will be allowed in the year of paymentand in case the telephone is not installed and money is paidback, it will be charged to tax U/S 41(1).

` Security deposit for telex connection: the Central Beard ofDirect Taxes have clarified in CircularNo. 420 dated 4.6.85that the amount paid towards security deposit may betreated as a revenue expenditure and allowable as a

deduction when telex is installed. However, when telexconnection is finally closed, the deposits so refunded shallbe treated as income of the year in which its received.

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` Tatkal telephone deposit scheme: By Circular No. 671

dated 27.10.93. The CBDT has clarified that the deposit

maid under the scheme shall be allowed as deduction

and when the amount is refunded, it shall be taxed asincome.

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The Case 1 Business Loss` The Supreme court had an occasion in the case of Dr. T A

Quereshi vs. CIT (2006) 287 ITR 547. To distinguish betweenthe business expenditure allowable U/S 37(1) and thedeductibility of business loss suffered in the normal course of

business. In the given case, assessee was a medical practitionerand was illegally manufacturing and selling heroin. The heroinheld as stock-in-trade was seized by CBI and the assessee hadclaimed such seizure as business loss while computing histaxable income. It may be noted that, Explanation to section37(1) provides for disallowance of any expenditure incurred byan assessee for any purpose which is an offence or which is

prohibited by law. Such expenditure is deemed not to be incurredfor the purpose of business or profession carried on by theassessee.

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JUDGEMENT:

` The Honorable Supreme Court has held that business losscant be compared with that of expenditure contemplatedU/S 37(1). The business loss suffered shall be allowed onordinary commercial principles in computing the profitsand gains of business . Once it was found that the stock-in-trade was seized, it tantamount to business loss andaccordingly, value of stock seized shall be allowed asbusiness loss. Such loss will not fall with in the ambit ofSec 37(1) and accordingly, the Explanation to Sec 37(1)shall not be maid applicable to such business loss. Further,

the Supreme Court has held that even though the assessee iscommitting a highly immoral act illegal, the case had to bedecided on legal principles and not on ones own moralviews.

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CASE 2:

` Bombay HC had the case of Sri. Nirmal Commercial

Ltd vs. CIT(1991 193 ITR 694) where in the assessee

company took on lease a land from the Govt. and

constructed building. The floor space was allotted to

the share holders in exchange of none-refundable

deposits. In addition, the share holders are required to

pay compensation periodically at such rates as

determined by the directors from time to time. The

residuary right in the property retained by the company

is not capable of being let out.

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Judgment:

` It was held that the charge U/S 22 fails and the deposits

have to be treated as trading receipts. In the

computation of such taxable business income arising

from the deposits and the compensation, the cost of

construction was held to be deductible. Consequently

The non-refundable deposits is a trading receipt chargeable to

tax subject to deduction of cost of construction of the building.

The lump some payment received from share holders towards

the maintenance of building is assessable as business income.

The share holders can be deemed as owners U/S 27 (III) andshall be chargeable to tax on the rental income under the head

income from House-property.

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CASE 3

THE LAW:

` In order to claim a deduction U/S 37(1), assessee should have incurred

an expenditure during the year relating to the year. If no expenditure is

incurred, deduction cant be allowed

CASE:New India Mining Corporation Pvt Ltd vs. CIT, 243 ITR 640(SC)

` New India Mining Corporation Pvt. Ltd obtained mining lease from the

state govt. and the lease agreement required that the assessee shall

restore the lands to the original condition on the termination of the

lease. Assessee claimed deduction on certain expenditure on the basis

of such obligation.

JUDGEMENT:

` It has been held that during the relevant previous year, the assessee did

not incur any expenses to restore the lands to the original condition and

therefore no deduction is available.

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` The assessee, a public limited company, formulated a

scheme for providing houses to its employees. Land

belonging to C was divided into plots and allotted tothe employees. The sale deed in respect of the property

allotted to each of the employee was executed by the

employees. The sale deed in respect of the property,

namely C, in favour of each of the employees.

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` The assessee company made arrangements for laying

roads, constructing water tanks and pumps, drainage,digging wells and such other work in the lands allotted

to and purchased by them. The lands in which roads

were laid, water tanks and pumps sets constructed

drainage digging wells and such other works were donewere transformed by C to a Panchayat. The assessee

incurred expenditure on laying roads and for

construction of water tanks and claimed deduction of it.

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` It was held that the expenditure on roads, wells etc.,

was only for the benefit of the employees who

purchased properties and constructed buildings on it;

that this did not bring into existence an enduringadvantage for the assessees business and that the

expenditure being in the nature of staff welfare

expenditure was an expenditure incurred wholly and

exclusively for the purposes of the assessees businesshence deductible.

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SECTION 37

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The assessee-company or Air India Lts. reimbursed the

car hire expenses, hotel expenses and entertainment

expenses incurred by its advocates and solicitors on

foreign tour. The Assessing Officer disallowed same onthe ground that the assessee could have made the

payments directly to the advocates and solicitors

instead of bearing or reimbursing the impugned

expenditure. The Commissioner (Appeals) upheld the

disallowance

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` It is true that the payments made to hotels are hit by section 37(3A)/37(3B).

` The question, however, was as to what was the true character of the impugned

payments, i.e., whether they were in the nature of payments made to hotels or

as a part of legal charges.

` Apparently the payments had been made to the hotels.

` However, it is not the form but the substance of the transaction that helps to

determine the true character of payment. In order to examine the true

character of the payment, it was necessary to keep in mind that the assessee

had engaged the advocates and solicitors for handling its legal matters.

` The impugned expenses met by it on the tour of its advocates and solicitors

were in the nature of legal expenses.

` It was stated in the orders of the departmental authorities that if the advocates

and solicitors had themselves met that expenditure, it would not have been hit

by section 37(3A)/37(3B).

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` It would not alter the true character of the expenditure only because of the

fact that the payments had been made by the assessee for and on behalf of

the advocates and solicitors instead of being made by the advocates and

solicitors themselves.

` The expenses incurred on advocates and solicitors were essentially legal

expenses which were allowable under section 37(1) and were not hit by

section 37(3A)/(3B).

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CASES

Microsoft Office

Word Document

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QUESTIONS ?

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THANKYOU