Blog > Claiming Income Tax Deductions Under Section 37(1)

Claiming Income Tax Deductions Under Section 37(1)

by Varun Advani | 11 June 2015

Running a business is tough, as one single handedly needs to exercise control and govern a number of elements involved, the most important being expenses. Controlling expenses for any small business owner/freelancers is always a nightmare, but one aspect that a freelancer can control are the tax benefits you get for incurring expenses that are related to one’s business. The most common expenses include conveyance, Internet expenses, telephone expenses, and business promotion expenses. Other expenses also include printing and stationary, electricity expenses, books and periodicals and other administrative expenses. So what are the conditions that one needs to fulfill to get a tax deduction for incurring such expenses?

 

Find out below: - 

 

Section 37(1) is a residuary section. In order to claim deduction under this section, the following condition should be satisfied:

The expenditure should not be of the nature described under section 30 to 36.

It should not be the nature of capital expenditure.

It should not be personal expenditure of the taxpayer.

It should have been incurred in the previous year.

It should be in respect of business carried on by the taxpayer.

It should have been expended wholly and exclusively for the purpose of such business.

It should not have been incurred for any purpose which is an offence or is prohibited by any law

 

EXPEDTITURE SHOULD NOT BE IN THE NATURE OF CAPITAL EXPENDITURE –Capital expenditures are not deductible under section 37 (1). As the Act does not define the terms ‘’ capital expenditure ‘‘and ‘’revenue expenditure “, one has to depend upon its natural meaning. Following cases should help you in differentiate in the nature of the two expenses

 

Capital expenditure is incurred in acquiring a fixed asset, whereas revenue expenditure is incurred in the normal course of business as routine business expenditure. Usually capital expenditure is a non –recurring outlay, whereas revenue expenditure is normally a recurring item. In order to determine whether expenditure is capital or revenue in nature, the fact that it is a lump sum payment or periodic payment is not important.

Though the dividing line between capital and revenue expenditure is real, yet sometimes it becomes difficult to draw. Therefore, the distinction depends on facts and surrounding circumstances of each case.

 

EXPENDITURE SHOULD NOT BE PERSONAL EXPENDITURE OF THE TAXPAYER

 

Section 37 (1) expressly prohibits deduction on account of personal expenses. Personal expenses mean expenses satisfying personal needs such as food, cloth shelter, etc., which are not related to the business, in other words, money expended for domestic or private purpose, as distinct from the purpose of the trade or profession, are not deductible.                                                                                                                                                                                                        

 

EXPENDITURE SHOULD BE RESPECT OF THE BUSINESS CARRIED ON BY THE TAXPAYER-For the purpose of claiming deduction under section 37(1), expenditure should be incurred for the purpose the business which is carried on by the taxpayer in the previous year and profits of which are to be computed and assessed and expenditure should be incurred after the business is set up.

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