Running a business in India? Then, understanding Section 37 of the Income Tax Act is absolutely essential. It can help you reduce your tax liability legally by claiming deductions for many day-to-day business expenses.
Let’s break it down in simple terms, just like we explain to our clients at Fintax Point.
📘 What is Section 37 of the Income Tax Act?
Section 37 of the Income Tax Act, 1961 is a residual section under Chapter IV-D (Profits & Gains of Business or Profession). This section covers all business expenditures that aren't specifically covered under Sections 30 to 36. "
In simpler words, if you’re spending money for your business (& it’s not capital in nature or personal), you can probably deduct it, thanks to Section 37. "
✅ Conditions to Claim Deduction under Section 37
The following 3 conditions must be satisfied:
- Expenditure should not be covered under Sections 30–36 (like rent, depreciation, interest, etc.)
- It must be a revenue expenditure, not capital or personal.
- It should be incurred wholly and exclusively for business or a profession.
💡 Keyword Usage: Section 37 of the Income Tax Act allows businesses to claim deductions for specific expenses.
🧾 What Kind of Expenses Are Covered?
Here are examples of deductible expenses under Section 37:
- Audit fees
- Advertising & marketing costs
- Legal & professional charges
- Repairs (non-capital)
- Travelling for business purposes
- Consultancy charges
- Software subscriptions
- Tender application fees
This section provides for the deduction of any revenue expenditure incurred by an assessee for any purpose related to the business.
❌ Expenses Disallowed Under Section 37
Not all expenses are allowed. There are explicit disallowances, especially covered under Explanation 1 to Section 37 of the Income Tax Act:
- Illegal or prohibited expenses – Such as bribes, penalties, or fines.
- Personal expenses – Expenses unrelated to business.
- Corporate Social Responsibility (CSR) – Though beneficial, CSR expenses are not allowed under this section (they fall under Section 135 of the Companies Act, not Section 37).
- Expenses incurred in cash above limits – Disallowed under Rule 6DD and Section 40A(3).
📌 Keyword Use: disallowance under section 37 of the Income Tax Act | expenses disallowed under section 37 of the Income Tax Act
🧠 Important Clarification from Courts
Several judgments have helped clarify Section 37 further. Some notable case laws include:
- M/s McDowell & Co. Ltd. v. CTO: Held that expenses incurred for violation of law are not allowable.
- CIT v. Indian Molasses Co. (P) Ltd.: Clarified conditions on capital vs. revenue expenditure.
- CIT v. Tata Chemicals Ltd.: Allowed certain foreign exchange losses under Section 37.
So, yes, section 37 of the Income Tax Act case laws are very important for real-life interpretation.
🔎 Section 37(1) of the Income Tax Act – Sub-section Insights
Section 37(1) is the main subsection where these rules are laid out.
The expenditure incurred by an assessee for any purpose of business or profession is allowed as a deduction under this sub-section. It also applies to employer-employee insurance expenses or keyman insurance policies, which are tax-deductible provided they satisfy the test of "wholly and exclusively for the business".
💡 Use Case: section 37(1) of income tax act employer-employee insurance
💡 Use Case: section 37(1) of income tax act keyman insurance
📂 Section 37 vs Section 36 – What’s the Difference?
Many people confuse Section 36 and Section 37. Here's a simple distinction:
|
Basis |
Section 36 |
Section 37 |
|
Covers |
Specific expenses (insurance, depreciation, bad debts, etc.) |
General revenue expenses |
|
Nature |
Enumerated |
Residual |
|
Type of Expenditure |
Defined in law |
Any other business expense |
So if your expense doesn’t fit in Section 36, Section 37 might help.
✍️ Conclusion
Section 37 of the Income Tax Act is the go-to section for all those business expenses that don’t fall under any other category but are crucial to your operations. If you're an entrepreneur or business owner, understanding this section can help optimise your taxes & avoid disallowances during scrutiny.
👉 Need help identifying which of your expenses are deductible under Section 37? Visit CallMyCA.com for a personalised consultation.
