Examples of General Deductions for Business Expenditure

Introduction

No complete list can be drawn in respect of residuary business expenses. However, the judiciary over a period of time settled down the law with respect to the allowability of various important expenses under Section 34(1).

1. Illustrative list

1.1. Advertisement

Expenditure on advertisements in print media/electronic media is allowable as revenue expenditure. However, any expenditure on advertisement in any souvenir, brochure tract, pamphlet or the like published by a political party is not deductible.

Capital expenditure on advertisement is not deductible. However, capital expenditure on neon-sign board may be amortized by way of depreciation as the sign board would be covered by the definition of plant.

1.2. Annual Day Celebrations

The expenditure incurred in connection with the annual day celebrations is allowable as a business expenditure

1.3. Expenses for New Projects

Expenses on launching new project or initiating new line of business are capital in nature

1.4. Valuation fee

Expenditure on valuation of business is deductible

1.5. Additions/alterations to Business Assets

Expenditure on decoration of reception/dining halls in hotels is revenue expenditure

1.6. Modernization of Business Assets

Expenditure on renovating/replacing parts of machinery necessitated by modernization, is revenue expenditure

1.7. Car Expenses of Personal Use of Directors

Where the directors of the assessee–company are entitled to use the vehicles of the assessee for their personal use as per the terms and conditions of their appointment, the expenditure incurred by the assessee, attributable to such personal use in question is not to be disallowed. Such expenditure would fall within the meaning of “remuneration” as defined in the Explanation to Sec. 198 of the Companies Act.

1.8. Compensation

Compensation paid for breach of contract qua purchase of machinery is capital expenditure

1.9. Contribution for Construction of Bridge

Where, in respect of a bridge constructed by government, the assessee made a contribution, so that the bridge would facilitate the movement of its workmen to gain access to the assessee’s factory and to return home, and also for the movement of goods over the bridge, the contribution made was allowable as revenue expenditure, as the assessee did not acquire any right of ownership over the bridge in the short-term or in the long-run by reason of the contribution

1.10. Payment for Consultancy Fees

Consultancy fee paid, for the benefit of increasing the manufacturing efficiency and formulating incentive schemes would be allowable as revenue expenditure

1.11. Dust Extraction Plant

Where the assessee installed a dust extraction plant in its factory in order to protect the health of its workmen who would otherwise be injuriously affected by the dust arising from the operation of the carding machine, the expenditure incurred on such installation was allowable as revenue expenditure

1.12. Fines

Fines paid for traffic offences are not deductible—Fines and penalties paid for traffic offences by the assessee–company’s truck drivers being penalty for infringement of law, could not be allowed as deduction

“Compounding fine” paid for permission to compound offences is not permissible—Where the competent authority of the Town Planning on a request made by the assessee, permitted it to compound offences under the relevant Municipal Corporation Act on payment of compounding fine, the claim for deduction made by the assessee had to be considered in light of Explanation to Sec. 34(1) and not with reference to provisions in the Municipal Corporation Act and, therefore, the assessee was not entitled to claim deduction under Sec. 34(1)

1.13. Penalties

Penalty paid for infraction of law, not deductible—If an assessee is penalised under one Act, he cannot claim that amount to set-off against his income under another Act, because that will frustrate the entire object of imposition of penalty.

One exception to this rule which has been recognized by the courts is where the entire business of the assessee is illegal and that income is sought to be taxed by the ITO; then the expenditure incurred in the illegal activities will also have to be allowed as deduction. But if the business is otherwise lawful and the assessee resorts to unlawful means to augment his profits or reduce his loss, then the expenditure incurred for these unlawful activities cannot be allowed to be deducted

Penalty for non-payment of sales tax is not deductible

An amount paid by way of penalty in lieu of confiscation of goods by the customs authorities cannot be allowed as a deduction under Sec. 34(1) since infraction of law cannot be treated as a normal incident of business

Penalty or fine paid under any law would not always be in the nature of punishment for breach of law. It may be of the nature of compensatory liability irrespective of the nomenclature used. In the instant case, the Court allowed deduction of payment of fine paid to Excise Department for belated payment of excise duty instalment

Amount paid as penalty on account of late delivery, short delivery, short margin, etc., to National Stock Exchange Ltd. is allowed as revenue expenditure as these expenses are not for infraction of law.

Compensation payable for breach of contract to purchase capital assets is a capital expenditure

Expenditure on issue of bonus shares is revenue expenditure.

Payment made by assessee to merchant banker for placement of preference shares is capital expenditure.

1.14. Extortion money/illegal expenses

Any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law cannot be deemed to have been incurred for the purpose of business or profession. No deduction can be allowed in respect of such expenditure. Thus, extortion money paid is not deductible in computing taxable profits of business profession.

1.15. Foreign tour/travel expenses

Foreign travel expenses, connected with exploratory missions and finalization of collaboration agreements, are revenue expenditure

Tour expenses connected with survey of new methods or for purchase of machinery are capital expenditure

1.16. Foundation ceremonies

Expenditure on foundation-laying of factory is revenue expenditure

1.17. Puja expenses

Expenditure incurred on customary Ganesh Puja at the time of opening books of account, is primarily in the nature of advertisement for the assessee’s business and hence is a permissible deduction

1.18. Diwali and mahurat expenses

Expenses incurred on the occasion of Diwali and Muhurat are in nature of business expenditure. Such expenses are deductible if the Assessing Officer is satisfied that they are not of a personal, social or religious nature (Circular Letter No.131A/20/68 ITCA-JI dated)/October 1968.

1.19. Interest payments

Interest for late filing of returns is not deductible

1.20. Listing fees

Listing fee paid to stock exchange is revenue expenditure

1.21. Litigation/legal expenses

No distinction between civil and criminal litigation. All that has to be seen is whether the legal expenses were incurred by the assessee in his character as a trader, that is, whether the transaction in respect of which proceedings are taken arose out of and was incidental to the assessee’s business

Litigation expenses connected with creating, curing or completing title to assets are capital expenditure

1.22. Shifting of Plant/Machinery

Expenses incurred on shifting plant and machinery from one premises to another are capital expenditure

1.23. Pollution control

Plantation in the factory is necessary to avoid pollution of environment and create congenial atmosphere. The expenditure does not result into any gain to the assessee and does not enhance the value of establishment. The expenditure is intended to make the atmosphere pollution-free. The amount is expended wholly and exclusively for the purposes of business. It is deductible

1.24. Power connections

Contribution paid to Government/Electricity Board for laying cables and transmission lines is deductible

1.25. Raw material

Payments made for finding means of procuring raw material are revenue expenditure

The purchase price of raw material or trading stock is deductible in computing taxable profits of a business. But, where it is found that a higher purchase price has been paid because of extra commercial consideration such excess price cannot be deducted.

1.26. Remuneration

Even if payment of remuneration is under agreement, ITO has powers to examine its deductibility

1.27. Retirement benefits

Expenditure incurred in connection with payment of pension, gratuities and other voluntary payments to employees are deductible, provided it is established that the payments were made for sound commercial purposes and with the object of facilitating the carrying on of the business.

Pension paid to the widows of ex-directors on humanitarian grounds is not an allowable expenditure

1.28. Staff incentives

Lump sum paid to employee for barring him from private practice is deductible

1.29. Staff welfare expenses

The expenditure incurred by the assessee for levelling land to be used as a playground by its workers and staff members was held to be admissible as revenue expenditure

Donations for setting up schools for benefit of employees’ children are deductible

Payment to hospital for providing facilities to employees is deductible

Maintenance expenses on temple, meant for employees’ benefit, are deductible

1.30. Compensation for termination of employment  

A payment to get rid of the servant in the interest of business is properly deductible. It is not for the department to determine the quantum of compensation. If the assessee has acted as a man of ordinary skill and on the principle of commercial expediency, the deduction is allowable.

At the same time, the compensation paid to an employee for termination of service on winding up of the business cannot be deducted as the compensation is not paid in carrying on the business or furtherance of business

1.31. Roads

Contribution paid for construction of a new road to serve assessee’s factory is capital expenditure

Obligatory contribution for construction of road, to facilitate supply of raw material, is revenue expenditure

1.32. Route permits

Expenses on obtaining new route permits are not deductible

1.33. Sales tax

Sales tax is an admissible deduction

1.34. Seminar expenses

Expenses on seminar for business promotion are allowable

1.35. Expense in respect of share capital/debenture

Fee paid to Registrar of Companies for enhancement of capital is a capital expenditure since the expenditure is directly related to the expansion of the capital base of the company

Stamp duty/registration/legal fees incurred for issue of debentures are revenue expenditure

1.36. Discount on issue of debentures

Where a company issues debentures on a discount, it incurs a liability to pay larger amount than what it has borrowed. The liability to pay the discount amount over and above the amount received for the debenture is a liability which has been incurred by the company for the purposes of business in order to generate funds for its activities. This would, therefore, be an “expenditure”. Proportionate discount may be deducted over the period of redemption of debentures [Madras Industrial Investment Corporation Ltd. v. CIT (1997) 225 ITR 802 (SC)].

Similarly, premium payable on redemption of convertible secured debentures issued during the year has to be spread over the period of debentures—Universal Cables Ltd. v. CIT [2000] 111 Taxman 9/243 ITR 371 (Cal.), National Engg. Industries Ltd. v. CIT [1999] 106 Taxman 443 (Cal.).

1.37. Sports tournaments

Expenditure incurred by the assessee in organizing tournament is an allowable deduction on account of commercial expediency. By holding the tournaments, the assessee gets publicity, the headlines to the reports in the newspapers about the tournaments go a long way to make the assessee a household word. Further, the opportunities are provided thereby to the employees of the concern to participate in and witness such tournaments which an amenity is, necessary in modern times. The holding of the tournament is thus very helpful to business

1.38. Tax proceedings

Expenditure on tax proceedings is deductible

1.39. Technical know-how

Where under an agreement for supply of technical know-how, foreign company had not sold any information, process or invention to assessee Indian company and no advantage of enduring nature had been obtained by Indian company, amount paid by Indian company under collaboration agreement was revenue expenditure

Where the assessee did not, under the agreement, become entitled exclusively, even for the period of the agreement, to the patents and trademarks of the company but had mere access to the technical knowledge/ experience which the foreign company commanded, the payments to foreign company were deductible

1.40. Tenancy rights

Payment made by the assessee for the purpose of acquiring tenancy rights in a shop is an expenditure of a capital nature

1.41. Trademark

Expenditure on registration of trademark is not capital expenditure

1.42. Tubewells

Construction of tubewell is capital expenditure even though tubewell became useless as water obtained therefrom was not found suitable

1.43. Damages

Damages paid for a breach of warranty, or for failure to perform a trading contract, or payment made to procure extension of time for performance of such contract are allowable deductions. But liability for damages occasioned by deliberate and dishonest breach of a contract is not allowable deduction.

Damages paid for late payment of provident fund balance (under Sec. 14B of the Employees & Miscellaneous Provisions Act 1952) are penal in nature. No deduction can be allowed for such damages under Sec. 37

1.44. Provision for Warranty

An automobile manufacturing company, made a provision of Rs 10 lakh towards warranty claims and free service charges in respect of cars sold by it during the year 2007–2008. The provision was based upon the number of cars sold and actual disbursement under these two heads in earlier 3 years. The company claimed the said provision as deduction from its income. The Assessing Officer did not allow the claim. It was held that the liability in respect of warranty claims and free service charges is embedded and recovered along with the sale price of cars. The liability is based on the basis of average of preceding three years under these heads. Provision for discharge of actual liability constitutes an expenditure for tax purposes. The well-known accounting principle of matching cost and revenue also permits deduction in respect of such provision [Investments Ltd. v. CIT (1970) 77 ITR 533 (SC)].

1.45. Demurrage

The payment of demurrage to railways for not lifting consignment on time is not in the nature of penalty. It is merely a charge made by the railway administration to compensate itself for keeping the goods of the assessee beyond a particular time. The payment of demurrage is incidental to a business. It is an allowable deduction

1.46. Tatkal telephone deposit scheme

A subscriber is required to deposit Rs 30,000 under the scheme. It is a non-interest-bearing deposit. The amount of deposit is not refundable in full. Entire deposit may be treated as revenue expenditure and be allowed as deduction. However, as and when any part of the amount is refunded to the assessee on surrender of the telephone or otherwise, the refunded amount is taxable in the year of receipt

1.47. Security deposit for telex connection

A subscriber is required to pay Rs 10,000 towards security deposit with postal authorities for telex connection. The security deposit may be allowed as a deduction if the assessee makes such a claim. However, when the amount is returned by the postal authorities at the closure of the telex connection, the refund of Rs 10,000 will be treated as an income of the tax year in which the amount is refunded.

1.48. Payment opposed to public policy

Payments made by the assessee in contravention of public policy cannot be deducted [under Sec. 34(1)] because such payment is not different from paying bribes.

1.49. Training expenses

Expenditure incurred by an employer on training apprentices covered under the Apprentices Act, 1961 is an allowable deduction

1.50. Payment to the State Electricity Board

The payment to the State Electricity Board towards the cost of additional installation for obtaining large quantity of electricity is revenue expenditure because it is made on account of commercial expediency to augment the productivity of the profit-making structure. Expenditure incurred for getting better electric supply or for shifting from direct current to alternate current for obtaining better output from machines is allowed to be deducted.

1.51. Expenditure on civil defense

Reasonable expenditure on specified civil defense measures is deductible even when there is no emergency.

1.52. Software expenses

Payment for application software even though having enduring benefit, does not result in acquisition of any capital asset and it merely enhances the productivity or efficiency so that it has to be treated as revenue expenditure.

1.53. ESOPs

Difference between market value and issue price is revenue expenditure (since assessee has to follow SEBI direction and by following such direction it claims ascertained amount as liability for deduction).

1.54. Forex loss on repayment of foreign currency loan

Foreign exchange fluctuation (loss) on repayment of foreign currency loans taken by a company to purchase capital equipment for its leasing/hire purchase business is deductible under Section 37. Section 43A has no application here.

References

CIT v. Mehsana Distt. Cooperative Milk Producers Union Ltd. [1994] 207 ITR 140 (Guj.)

Indian Oxygen Ltd. v. CIT (1987) 164 ITR 466 (Cal.)

CIT v. Commonwealth Trust Ltd. (1979) 120 ITR 491 (Ker.)

CIT v. Dasaprakash (1978) 114 ITR 210 (Mad.)

Modi Spg. & Wvg. Mills Co. Ltd. v. CIT (1993) 200 ITR 544 (Del.)

CIT v. Sree Bhagavathi Textiles Ltd. (1994) 207 ITR 826 (Ker.)

Swadeshi Cotton Mills Co. Ltd. v. CIT (No. 2) (1967) 63 ITR 65 (SC)/Dalmia Dadri Cement Ltd. v. CIT (1973) 90 ITR 297 (P&H)]

CIT v. Coats Viyella India Ltd. (2002) 253 ITR 667 (Mad.)

CIT v. Praga Tools Ltd. (1986) 157 ITR 282 (AP)

CIT v. Sakthi Textiles Ltd. (2002) 120 Taxman 268 (Mad.)

CIT v. Jaipur Golden Transport (1997) 226 ITR 399 (Del.)

CIT v. Mamta Enterprises (2004) 135 Taxman 393 (Kar.)

Muddi Venkatraman & Co. (P) Ltd. v. CIT (1998) 229 ITR 534 (SC)

Malwa Vanaspati & Chemical Co. v. CIT (1997) 225 ITR 383(SC)

Free Wheels India Ltd. v. CIT (2001) 252 ITR 877 (Del.)

CIT v. Hoshiari Lal Kewal Krishan [2007] 160 Taxman 96

Arch Finance Ltd. v. CIT [2007] 165 Taxman 188 (Delhi) (Mag.).

Swadeshi Cotton Mills Co. Ltd. v. CIT [1967] 63 ITR 65 (SC).

CIT v. General Insurance Corpn. [2006] 156 Taxman 96 (SC).

Amtek Auto Ltd. v. CIT [2008] 19 SOT 625 (Delhi).

Antifriction Bearings Corporation Ltd. v. CIT (1978) 114 ITR 335 (Bom.)

Ambica Mills Ltd. v. CIT (1964) 54 ITR 167 (Guj.)

CIT v. Merck Sharp & Dohme of India Ltd. (1983) 140 ITR 332 (Bom.)

Brijraman Das & Sons v. CIT (1983) 142 ITR 509 (All.)

Bharat Commerce & Industries Ltd. v. CIT (1998) 230 ITR 733

CIT v. Ashoka Mills Ltd. (1996) 218 ITR 526 (Guj.)

CIT v. Alembic Chemical Works Co. Ltd. (1993) 201 ITR 250 (Guj.)

CIT v. Dhanrajgirji Raja Narasingirji (1973) 91 ITR 544 (SC)

Dalmia Jain & Co. Ltd. v. CIT (1971) 81 ITR 754 (SC)

CIT v. Otis Elevator Co. (I.) Ltd. (1990) 51 Taxman 443 (Bom.)

Hindustan Electro Graphites Ltd. v. CIT (1996) 218 ITR 688 (MP)

CIT v. Gujarat Mineral Development Corpn. (1981) 132 ITR 377 (Guj.)/Mafatlal Fine Spg. & Mfg. Co. Ltd. v. CIT (1994) 206 ITR 578 (Bom.)

CIT v. Dalmia Dadri Cement Ltd. (1970) 77 ITR 410 (P&H)

Swadeshi Cotton Mills Co. Ltd. v. CIT (1967) 63 ITR 57 (SC)

Bengal Enamel Works Ltd. v. CIT [1970] 77 ITR 119 (SC)

ITAT v. B. Hill & Co. (P.) Ltd. (1983) 142 ITR 185 (All.)

Champion Engg. Works Ltd. v. CIT [1971] 81 ITR 273 (Bom.)

Teksons (P.) Ltd. v. CIT (1979) 120 ITR 745 (Bom.)

ITAT v. B. Hill & Co. (P.) Ltd. (1983) 142 ITR 185 (All.)

CIT v. Belpahar Refractories Ltd. (1977) 109 ITR 667 (Ori.)

Atlas Cycle Industries Ltd. v. CIT (1982) 134 ITR 458 (P&H)

Mysore Standard Bank Ltd. v. CIT (1962) 46 ITR 278 (Mys.)

[43] Travancore-Cochin Chemicals Ltd. v. CIT (1977) 106 ITR 900 (SC)

Lakshmiji Sugar Mills Co. (P.) Ltd. v. CIT (1971) 82 ITR 376 (SC)

L.H. Sugar Factory & Oil Mills (P.) Ltd. v. CIT (1980) 125 ITR 293 (SC)

Erode Transport (P.) Ltd. v. CIT (1969) 71 ITR 283 (Mad.)

A.V. Thomas & Co. Ltd. v. CIT (1986) 159 ITR 431 (Ker.)(FB)

CIT v. Chemcrown (India) Ltd. (2003) 262 ITR 177 (Cal.)

Punjab State Industrial Development Corpn. Ltd. v. CIT (1997) 225 ITR 792/(1997) (SC)

CIT v. Kodak India Ltd. (2001) 171 CTR (SC) 187

Premier Automobiles Ltd. v. CIT (1971) 80 ITR 415 (Bom.); Indian Cement Ltd. v. CIT 60 ITR 52 (SC)

Addl. CIT v. Delhi Cloth & General Mills Co. Ltd. (1983) 144 ITR 275 (Del.)

Addl. CIT v. India United Mills Ltd. (1983) 141 ITR 399 (Bom.)

CIT v. Indian Oxygen Ltd. (1996) 218 ITR 337 (SC)

CIT v. Ciba of India Ltd. (1968) 69 ITR 692 (SC)

CIT v. Mihir Textiles Ltd. (1994) 206 ITR 112 (Guj.)

CIT v. Finlay Mills Ltd. (1951) 20 ITR 475 (SC)/Erode Transport (P.) Ltd. v. CIT (1969) 71 ITR 283 (Mad.)

Shree Digvijay Woollen Mills Ltd. v. CIT (1993) 204 ITR 398 (Guj.)

CIT v. Kamlapat Motilal (1988) 172 ITR 438 (All.)

Mahalakshmi Sugar Mills Co. Ltd. v. CIT (1985) 157 ITR 683 (Delhi)

Circular No. 671 dated 27.10.1993

Circular No. 192, dated 10.3.1976

CIT v. Southern Roadways Ltd. [2009] 183 Taxman 234 (Mad.),

CIT v. PVP Ventures Ltd. [2012] 211 Taxman 554 (Mad.).

CIT v. Wipro Finance Ltd. [2022] 137 taxmann.com 230 (SC)

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.