Kalpesh Classes

The expression ‘for the purpose of business’ in section 37(1) is wider in scope than the expression ‘for the purpose of earning profits’. Its range is wide; it may take in not only the day-to-day running of the business but also the rationalisation of its​​ administration and modernisation of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation or coercive process;​​ it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. The expression for the purpose of business and profession is wide it may take in not only the day to​​ day running of a business but also the rationalisation of its administration and modernisation of its machinery; it may include measure for the preservation of the business and for the protection of its assets and property from expropriation, coercive process of assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for the carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business.  ​​​​ The​​ only limitation is that the purpose should be for the purpose of the business, that is to say, the expenditure incurred should be for the carrying on of business and the assessee should incur it in his capacity as a person carrying on the business. It cannot include sums spent for purposes unconnected with the business.​​ 

Whether an item of expenditure falls within the description ‘for the purpose of business’ has of necessity to be determined having regard to the nature of the expenditure and the relation​​ between the business and the expenditure - Travancore Titanium Product Ltd. V/s. CIT [1966] 60 ITR 277 (SC)

If an assessee carries on several distinct and independent businesses and one of such businesses is closed before the previous year, he cannot claim​​ allowance under section 37 of an outgoing attributable to the business which is closed against the income of his other businesses in that year - L.M.Chhabda & Sons V/s. CIT [1967] 65 ITR 638 (SC).

Personal expenses​​ 

Personal expenses include only expenses on the person of the assessee or to satisfy his personal needs such as clothes, food, etc. or for purposes not related to the business. Every expenses to discharge a personal obligation does not become a personal expense - State of Madras V/s. G.J. Coelho [1964]54 ITR 186 (SC).

It is not correct to take the view that for an expenditure to be deductible under section 37(1) the primary motive in incurring the expenditure must be directly to earn income thereby - Shree Meenakshi Mills Ltd. V/s. CIT [1967] 63​​ ITR 207 (SC).

Wholly and exclusively laid out for the purpose of business - meaning​​ of​​ 

The expression ‘wholly and exclusively laid out for the purpose of business’ emphasises the nexus between the trade and the expenditure. The first adverb ‘wholly’ refers to quantum of expenditure and gives jurisdiction to the taxing authorities to examine these matters. The true test is that the expenditure is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it​​ pay and not in any other capacity than that of the trader.​​ 

The expression ‘wholly and exclusively’ used in section 37(1) does not mean ‘necessarily’. Ordinarily it is for the assessee to decide whether any expenditure should be incurred in the course of​​ his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under section 37(1) even though there was no compelling necessity to incur such expenditure - Sasson J. David & Co. (P) Ltd. V/s. CIT [1979] 118 ITR 261 (SC).

Disputed liability

Disputed liabilities cannot be avoided in a running business. Various claims are made for supplies which are not accepted or for​​ additional amount for services rendered or supplies made. It sometimes results in court cases with damages being paid. Mere claim against the assessee may be treated as contingent unless admitted. Disputed liability is not ordinarily provided in the accounts but may well be eligible for deduction where there is a certain degree of certainty about it, though not contingent. It is only the ascertained liability which needs to be provided and allowed.​​  ​​​​ There can be a legal liability; but such liability may be​​ questioned by way of a writ petition before the High Court pending disposal as at the end of the year. Where such writ petition is dismissed, the year in which the deduction should be allowed can be a matter of controversy.​​ But a statutory liability is allowed as a deduction unless it falls under section 43B which permits such deduction on payment only.​​ 

Character in recipient’s hands​​ 

It is not a universally true proposition that what may be a capital receipt in the hands of the payee must necessarily be​​ capital expenditure in relation to the payer.​​ The fact that a certain payment constitutes income or capital receipt in the hands of the recipient is not material in determining whether the payment is revenue or capital disbursement qua the payer - Empire​​ Jute Co. Ltd. V/s. CIT [1980] 124 ITR 1 (SC).​​ 

Benefit enuring to third party​​ 

The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under section​​ 37(1), if it otherwise satisfies the tests laid down by law - Sassoon J. David & Co. (P) Ltd. V/s. CIT [1979] 118 ITR 261 (SC).

Relevance of book entries​​ 

If an assessee under some misapprehension or mistake fails to make an entry in the books of account​​ and if under the law a deduction must be allowed by the ITO, the assessee will not lose the right of claiming or will not be debarred from being allowed that deduction. Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter - Kedarnath Jute Mfg. Co. Ltd. V/s. CIT [1971] 82 ITR 363 (SC).

To determine whether a particular expenditure falls within the four corners of section 37(1), the question whether the expenditure was within or outside the powers of the company is of little consequence - Kishan Prasad & Co. Ltd. V/s. CIT [1955] 27 ITR 49 (SC).

Preservation of goodwill or customer relations​​ 

Where an assessee makes concessions in the interest of his business instead of taking a stand strictly on his legal obligations, any loss incurred will be expenditure laid out wholly and exclusively for the purpose of business.​​ Thus, where jewellery and cash deposited by customers with the bank were stolen and the bank, instead of taking a strictly legal stand, reimbursed the loss to the customers in order to maintain its business connections and goodwill, the resulting loss was allowable as business expenditure - CIT V/s. Nainital Bank Ltd. [1966] 62 ITR 638 (SC).

Purchase of running concern or acquisition of business​​ 

A purchaser may buy a running concern and fix a certain price and the​​ price may be payable in a lump sum or may be payable by instalments. But the mere fact that the capital sum is payable by instalments spread over a certain length of time will not convert the nature of that payment from capital expenditure into a revenue expenditure - Travancore Sugars & Chemicals Ltd. V/s. CIT [1966] 62 ITR 566 (SC).

If the purchaser of a business undertakes to the vendor as one of the terms of the purchase that he will pay a sum annually to a third party, irrespective of whether the business yields any profits or not, it would be difficult to say that the annual payments were made solely for the purpose of earning the profits of the business. It would seen to make no difference that the annual sum was made payable out of a particular receipt of the business, irrespective of the earning of any profit from the business as a whole - Tata Hydro-Electric Agencies Ltd. V/s. CIT [1937] 5 ITR 202 (PC).

Acquisition of rights​​ 

Where the assessee acquired the right of sole selling agency held by another company under an agreement which envisaged payment of 75 per cent of its profits to that company, the expenditure by way of payment of profits was made for in the initial outlay on the acquisition of a capital asset, and was hence capital in nature - CIT V/s. Jalan Trading Co. (P) Ltd. [1985] 155 ITR 536 (SC).

Acquisition of goodwill​​ 

Acquisition of the goodwill of a business is acquisition of a capital asset​​ . Therefore, its purchase price would be capital expenditure. It would not make any difference​​ whether it is paid in a lump sum at one time or in instalments distributed over a definite period. Where, however, the transaction is not one for the acquisition of goodwill but for the right to use it, the expenditure would be revenue expenditure - Devidas Vithaldas & Co. V/s. CIT [1972] 84 ITR 277 (SC).

Technical know-how​​ 

Where the assessee entered into an agreement with a foreign company for the supply of technical know-how and under the relevant agreement the assessee was a mere licensee for a limited period and was merely allowed the right to draw upon the technical knowledge of the foreign company for the purpose of carrying on its business, the royalty paid by the assessee to the foreign company was deductible under section 37(1) - CIT V/s. Ciba of​​ India Ltd. [1968] 69 ITR 692 (SC).​​ 

‘Once and for all’ payment​​ 

Where an assessee, engaged in the manufacture of penicillin, made a ‘once and for all’ payment to a foreign firm for the supply of technical know-how relating to increasing the yield of penicillin for a period of two years on the condition that the assessee should keep the technical information confidential, the payment so made was allowable as revenue expenditure - Alembic Chemical Works Co. Ltd. V/s. CIT [1989] 177 ITR 377 (SC).

Repairs​​ 

Expenditure incurred on repairs to buildings/plant/machinery which does not fall under section 30 or section 31 on the ground that they are not ‘current repairs’ can be considered for deduction under section 37(1) - CIT V/s. Kalyanji Mavji & Co. [1980] 122​​ ITR 49 (SC).​​ 

Interest paid under income-tax act​​ 

Interest paid for non-payment or for payment of lesser amount or delayed payment of income-tax is not in respect of the business which is carried on, and therefore cannot stand on the same footing as delayed payment of other taxes like purchase tax and sales tax. Hence, interest paid under section 215/216/217/220(2) is not allowable as revenue expenditure.​​ 

Expenditure on tax proceedings​​ 

The expenditure which the assessee incurs in persuading the tax authorities in making a reasonable and legitimate assessment is an expenditure laid out wholly and exclusively for the purpose of business- Binodiram Balchand V/s. CIT [1963]48 ITR 548 (MP).

Donations to political parties​​ 

Contributions made by assessee to a​​ political party on the ground that with the changing pattern of the economic structure of the society it was in the interest of the assessee to keep that party in power, were not deductible, when the facts found did not indicate any nexus between the contributions and the business of the assessee - J.K. Cotton Spg. & Wvg. Mills Co. Ltd. V/s. CIT [1966] 62 ITR 813 (All.).

Where assessee-company paid certain professional charges to solicitors in connection with effecting amalgamation of certain company with​​ it, and Tribunal’s finding was that amalgamation of said company with assessee-company was necessary for smooth and efficient conduct of assessee’s business, expenditure incurred by assessee towards professional charges of solicitors was deductible as a revenue expenditure - CIT V/s. Bombay Dyeing & Manufacturing Co. Ltd. [1996] 85 Taxman 369 (SC).

Payments to outgoing partners​​ 

Where the dissolution deed made it clear that the amounts received by outgoing partners was a consideration for relinquishing their share of right in toto, not only in the stock-in-trade, licences, trade marks, shops, branches, etc., but also in the goodwill, the amounts paid would constitute capital expenditure - CIT V/s. Puran Das Ranchoddas & Sons [1988] 169 ITR 480 (AP).

Accrued liabilities​​ 

If a liability has accrued during the accounting year but was to be discharged at a future date, the amount to be expended in the discharge of that liability would have to be estimated in order that under the mercantile system of accounting​​ the amount could be debited before it was actually disbursed. The difficulty in the estimation thereof would not convert an accrued liability into a conditional one - Calcutta Co. Ltd. V/s. CIT [1959] 37 ITR 1 (SC).