R.K. Doshi

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					                   R.K. Doshi

Business Expenditure under
      Income-tax Act

                        1. Sec. 29
The income returned to in section 28 shall be computed in accordance with
provisions of Sec. 30 to 43 D.

    a) Claiming under the wrong provision – Facts & Circumstances are
       set out, Labeled it wrongly, still eligible for claim.

    b) AO‟s Duty to allow deductions even though not claimed by –
       Assessee circular no. 14 dt. 11.4.55.

             i.  Draw attention to any refund or relief to which “A” is clearly
                 entitled but which is omitted for some reason or other.
             ii. Freely advice assessee when approached as to his right &

    c) List of allowance is not exhaustive.

                   2. Trading Loss
Loss through highway robbery or by theft.

a)   Such loss must spring directly from the “assessee” business.
b)   It is immaterial whether the theft was committed during or outside
     officers by employee or a stranger.
c)   A dealer of semiprecious stones was robbed when carrying them from
     office to his house . Held allowable. Mohamed 74 ITR 100.
d)   Cash kept in bag taken to home for safe custody at night. The bag fall
     from scooter & lost allowable – Gore & Company 143 ITR 922.
e)   Amount kept at home for making purchasing on next day which was a
     Sunday and amount was kept at Partners House and loss due to theft –
     Allowable 146 ITR 167.
f)   Mere dispossession is not a loss. It would be a loss only after recovery
     becomes impossible or the chances of recovery become very remote.
g)   Taking of proceeding against wrongdoers not essential for allowing of
     loss – employee responsible for theft was worth nothing and a civil action
     against them would result in to no benefit to “A” – not necessary to “A” to
     pursue a useless remedy and waste money in such proceeding.

h)   Acquittal of the accused no bar to allowance – also failer of criminal
     proceeding for want of evidence is no bar to allowance.
i)   When matures
     So long as there is a reasonable prospect of recovery, loss can not be
h)   Circular No. 13 Dt. 24.5.44
i)   Circular No. 35 (D) Dt. 24.11.65
     Loss by embezzlement by employee should be treated as incidental to
     business and loss should be allowed in the year in which it discovered.

     3. Exchange Fluctuation – Loss
a)   Business Loss-Advance Form Customer – Exchange Fluctuation

     Assessee received advance amount from overseas customer towards
     supply of particular commodity. Before the assessee could export the
     commodity, the Government imposed a ban on the export of that
     commodity and as a result of which the assessee could not supply and had
     to refund the advance amount. But due to exchange rate fluctuation, the
     assessee had to incur a higher amount and claimed the same as business
     loss. Held the loss is eligible for deduction as a business loss. Loksons
     Pvt. Ltd. vs. ACIT(2010)187 Taxman 55(Bom.)

b)   Losses of illegal business :

        Assessee carrying lawful business
        Not entitled to get deduction for expenses incurred in connection with
         execution of some illegal activity. Loss incurred due to confiscation for
         infraction of law is not allowable as trading loss. (Satyanarayan Rice
         Mill 155 ITR 676)

        But the assessee carrying on an illegal business is entitled to get
        deduction of losses incurred engaging on such business. (S.C. Kothari
        82 ITR 749)

        Thus assessee carrying on smuggling activity is entitled to get
        deduction of loss arising from confiscation of goods or monies
        (Pyrasingh 124 ITR 40)

        Gold seized from Smuggler‟s car can be treated as income from
        undisclosed source but loss on account of confiscation is allowable as

c) When bad debt is otherwise allowable as trading loss

   A bad debt may also be a trading loss but trading loss need not be a bad
   debt. There may be bad debt which may not fall within the purview of section
   36(1) (VII) but May well be regarded as one eligible for deduction. For
   example commission agent selling goods on behalf of principal some times
   make advance payments to the principal. In such case if the debt get bad, it
   may successfully by claimed as a trading loss.

   Pendency of litigation no bar to allow ability

                 4. DEPRECIATION

     i.    Depreciation admissible even if building is not Registered in the
           name of assessee.
              239 ITR 775 (SC) Mysore Minerals
              243 ITR 825 (Guj.) Dipak Nitrite Ltd.
              24 ITD 135 (AHD) Narendra Ceramics Pvt. Ltd.

     ii.    Depreciation admissible on vehicle used for the purpose of
            assessee‟s business even though the same are not Registered in
            the name of assessee.
               45 TTJ 31 (AHD) Lalitchandra M. Patel
               143 ITR 39 (Cal) Salkia Transport Associates

iii.    Depreciation admissible on machinery purchased under hire
        purchase agreement - Board Circular to be followed
        155 ITR 430 (Del) General Industries Corporation

iv.    Owner is a person who is entitled to receive income from the
       property in his own right. In order to claim benefit of sec.32 it
       is not necessary that the assessee should be a complete
       owner. The buses on which the assessee had claimed
       depreciation were not registered in her name, however the
       assessee producer all the documents relating to loans
       obtained, insurance etc. relating to the business to establish
       that she was beneficial owner and received income. It was
       held she was entitled to depreciation. CIT vs. A. Sivakami &
       Anr. (Smt.)(2010)322 ITR 64(Mad.)

b)      USER :
     i.     The term „used‟ for the purpose of business is to be given a wide
            meaning and it includes both active as well as passive user.
              123 ITR 404 (Del) Capital Bus Service Pvt. Ltd.
              128 ITR 675 (Mad) Vayithri Plantations
              209 ITR 993 (Guj.) Khimji Vishram & Sons

     ii.      If income from letting out of an asset is taxable as income from
              property no Depreciation can be allowed in respect of such an asset.
                  201 ITR 308 (Guj.) New India Industries

     iii.     If income derived by an assessee from hiring of machinery is
              business Income assessee must be considered as having used the
              machinery for the purpose of his business.
                 231 ITR 308 (SC) Shaan Finance Pvt. Ltd.

     iv.      Assets provided by employer at residence of employees should be
              considered to be Wholly used for employers‟ business – Board
              Circular F.No. 10/14/66-IT (AI) dated 12.12.1966.
                 Panchmahal Steel Ltd. – ITA NO. 4253/94 Dated 1.3.2000

      i. Intention of legislator is to give a wide meaning to the term „Plant‟.
         In determining whether an article is Plant, the enquiry must be as
         to what operation it performs in assessee‟s business and whether it
         fulfills the function of a plant.
                 151 ITR 75 (Guj.) Tarun Commercial Mills Ltd.

     ii.    Theater building and Hotel building specially equipped for the
            purpose of business are still buildings and not entitled to
            depreciation at the rate applicable to Plant.
                244 ITR 192 (SC) Anand Theaters

     iii.   Depreciation – Earth Moving Equipment
            Earth moving equipment namely JCB is eligible depreciation at
            40% which rate is provided for “Motor Buses, Motor Lorries, Motor
            Taxis” which is used in the business of running them on hire. CIT
            vs. Gaylord Construction, Kachappilly House, Angamaly (2010)40
            TAX L.R. 85(Ker.)

     iv.    Assessee is entitled to higher rate of depreciations per Appendix I,
            Income Tax Rules, 1961 Entry III(3)(ii) in respect of motor cars
            used in the business of running them on hire. Magma Fincorp Ltd.
            vs. ACIT (2010)35 DTR 76(Kol.)                                  10
d)      ACTUAL COST :
     i.    Grant of subsidy by Government as an incentive for setting up an
           Industry in backward area is not to be deducted in computing the
           actual cost under section 43(1) of the Act for the purpose of
           calculation of depreciation.
             210 ITR 830 (SC) P.J. Chemicals Ltd.

     ii.      The assessee entitled to depreciation on additional liability resulting
              from exchange rate fluctuation as on the last day of accounting year,
              though the liability is to be discharged in installments which becomes
              due and payable from the subsequent accounting year.
                203 ITR 933 (Guj.) New India Industries

     iii.     Assets received as grant in aid including conditional assistance or
              gift in kind are eligible for depreciation and covered within the ambit
              of Explanation (2) to section 43 (1) of the Act.
                 Panchmahal District Co.Op. Milk Producers Union Ltd. – ITA No.
                  1638/91 Dated 26.9.1995
                 116 ITR 125 (SC) Groz – Beckert Saboo Ltd. - applied in above
                 141 ITR 712 (Cal) Simon Carves India Ltd. – applied in above
                  case.                                                           11
      i.  Depreciation is available on Plant and Machinery used for trial
          production/sample production even though the assessee begins
          commercial production in subsequent years.
             Gujarat Themis Biosyn Ltd. – ITA NO. 457/90 Dated
             159 ITR 524 (Cal.) Kanoria General Dealers Pvt. Ltd.
             58 TTJ 767 (AHD) Bollard Oil Field Pvt. Ltd.

                           5. Interest
Sec 36 (1) (iii)
    The amount of interest paid in respect of capital borrowed for the purpose
    of business.
Pre – Condition
              Money must have been borrowed by the Assessee.
              It must have been borrowed for the purpose of business.
              Assessee must have been born interest on the borrowed amount.

i.   Section 36(1) (iii) of the Income-tax Act, provides for a deduction of interest
     on capital borrowed for the purposes of business or profession. The section
     does not make any difference as regards the utilization of the borrowed
     funds for the acquisition of a capital asset or a revenue asset. In India
     Cements Ltd. V/s. C.I.T. 60 ITR 52 (S.C.) the Supreme Court held that the
     loan obtained cannot be treated as an asset or advantage for the enduring
     benefit of a business that the interest on borrowed capital for acquiring a
     capital asset can be of revenue nature. In principle, there is no distinction
     between interest paid on capital borrowed for the acquisition of a new
     business and that the interest on borrowed capital for acquiring a capital
     asset can be of revenue nature. The provision allows deduction of interest
     on capital borrowed for the purposes of business irrespective of utilization
     of such capital for revenue expenditure or for the acquisition of capital
     asset.                                                                      13
ii.    Commencement of business :
       Deduction of interest u/s. 36 (1) (iii) is allowable in computing the
       income from business. This presupposes the commencement of
       business, without which there would be no income from business.
       Prior to the commencement of business, there is no question of
       deduction of interest. Therefore, for the prior period, interest is
       capitalized. During the construction or establishment of the new
       business the interest is capitalized and forms the part of cost of
       acquisition. In case of expansion of existing business the interest
       on borrowed capital is allowable u/s 36 (1)(iii) of the Act, as
       revenue expenditure.

iii.   User for non-business purposes :
       Section 36(1) (iii) allows deduction of interest on capital borrowed
       for the purposes of business. Where the borrowing is utilized for
       non-business purposes it would attract disallowance since the
       basic requirement of capital borrowed for the purposes of the
       business would be missing in that case. Therefore, to the extent
       the borrowed fund is utilized for non-business purposes, the
       interest on such borrowed fund would be liable to be disallowed.
       However, such a disallowance will be possible only if there is a
       nexus between the borrowed funds and the use of the funds for
       the non-business purposes. This is consistently accepted view
       and in particular in the following cases:                         14
R.D.Joshi & Co. v/s. C.I.T. 251 ITR 332 (M.P.)
I.T.O v/s. Bharat Motors 68 TTJ 431 (Jd).
Gujarat Narmada Valley Fertilizers Co. Ltd. v/s. Dy. C.I.T. 108 Taxman
213 (Ahd)
Varinder Agro Chemicals Ltd. v/s. Asstt. C.I.T. 120 Taxman 150 (Chd)
Meenakshi Synthetics (P) Ltd. v/s. Asstt. C.I.T. 84 ITD 563 (Lucknow)
Purbanchal Stores v/s. I.T.O. 125 Taxman 35 (Gau)
I.T.O v/s. Naresh Fabrics 75 TTJ 386 (Jodh)
Oswal Industries v/s. Asstt. C.I.T. 109 Taxman 279 (Mum) (SMC)
Smt. Tara Devi v/s. I.T.O. 68 TTJ 361 (Jodh)

The question that is debated is, as to whether the assessee is required to
establish that there is no nexus between the borrowed funds and the
funds used for non-business purpose or the burden lies on the authority to
establish the nexus between the borrowed funds and the user for such
funds for non – business purposes. In most of the above cases the view
taken is that the burden is on the revenue. A reasonable view seems to
be that the assessee is required to furnish the evidence available with him
and the burden to establish the nexus is on the revenue. In the absence
of the establishment of the nexus the disallowance of interest would not
be justified.
iv.   Capital asset : Explanation 8 to section 43 (1):
      As per the accounting principle, interest on borrowing directly relating to
      a capital asset is required to be capitalized and accordingly, the
      assessee would be entitled to depreciation on such capitalized amount.
      However, Explanation 8 to section 43(1) puts a bar and provides that the
      interest on capital borrowed for acquisition of an asset in respect of the
      period after the asset is put to use shall not be capitalized. The said
      Explanation reads as under :

      “Explanation 8 – For the removal of doubts, it is hereby declared that
      where any amount is paid or is payable as interest in connection with the
      acquisition of an asset, so much of such amount as is relatable to any
      period after such asset is first put to use shall not be included, and shall
      be deemed never to have been included, in the actual cost of such

      As seen above, once the business is commenced the interest on
      borrowed capital is allowable as deduction irrespective of whether the
      borrowed capital is utilized for acquisition of a capital asset or revenue
      asset. If the interest is capitalized it will not be allowed as deduction u/s.
      36 (1) (iii).

v.     Proviso to section 36 (1) (iii) :
     a) A.Y. 04-05 on wards proviso to section36(1)
          „Provided that any amount of the interest paid, in respect of
          capital borrowed for acquisition of an asset for extension of
          existing business or profession (whether capitalized in the
          books of account or not ; for any period beginning from the
          date on which the capital was borrowed for acquisition of the
          asset till the date on which such asset was first put to use,
          shall not be allowed as deduction.”

          This proviso puts a restriction on the option available to an
          assessee for claiming interest on capital borrowed for
          acquisition of asset in respect of the period up to date on
          which the asset is put to use. The restriction applies only in
          respect of the capital asset acquired for extension of the
          existing business. The only option left to the assessee is to
          capitalize the interest for the period up to date on which the
          asset is put to use and to claim depreciation. The assessee is
          not eligible to claim deduction u/s. 36 (1) (iii) in respect of such
                                         AMENDMENT                AMENDMENT

1. Before commencement of business       To be capitalized with   Same and no change
                                         cost of asset

2. After commencement of business, but   Allowable as revenue     Same and no change
   not for expansion                     expenditure

3. After commencement of business for
(a) If the new business is same.         (a) Allowable as         (a) Changed now, and
                                         revenue expenditure      to be capitalized as
                                         (b) To be capitalized    cost of asset
(b) If the new business is different     with cost of asset       (b) Same and no
                                         CAPITALIZED AS     CHANGE
                                         PER EXPLANATION
                                         8 OF SECTION 43(1)

Case Laws
       No need to show that the borrowing of the capital was necessary for
        the business.
       C.I.T. V. Bombay Samachar – 74 ITR 723
       Argument that the assessee could have decreased borrowing by
        controlling is outstanding & there by reduce interest burden can not be
       The AO should give clear finding that the borrowed money or part of it
        has been utilized for non-business purpose.

   Where the Assessee has both, his own money as well as
    borrowed money assumption can arise that the money lent
    came out of his own funds.
    Hotel Savera 148 CTR 585
   “A”had ample funds at his disposal, need not have
    borrowed is not a relevant ground.
    Annabay 51 ITR 835
   “A” used the borrowed money for giving loans on interest to
    others in normal course of business. Subsequently it waived
    interest in respect of certain such loan held subsequent
    waiver did not alter the nature of loans.
    City Motors 61 ITR 426
   Interest on borrowed funds invested in partnership business
    & earning interest there on - allowable.
    Shantikumar Narrotam 27 ITR 69

   Payment as well as receipt of interest by partner – only the net
    amount to be Consider.
    Keshavji Ravji 183 ITR I (SC)
    Circulate No. 33 – D, Dt. 8.11.65
   “C” Female member of HUF was partner of the Assessee firm.
    She made a gift of Rs. 35000 to her HUF. The “A” firm took loan
    from HUF. of Rs. 35000 for the purpose of business & paid
    interest on it. Held that the gift made by “c” to the HUF was the
    valid Gift & Interest paid by the firm to the HUF was allowable.
    Ramlal & Sons. 124 ITR 157
   No power to question the rate of interest in a bonafide transaction.
    Pudu Comp. 84 ITR 788.
   Interest not covered under Sec. 36 (1) (iii) may still be allowable
    under Sec. 37 (1).
    Interest on Debentures
    Interest on unpaid price of P & M.
    Interest on discounting of sale document.
    Interest to creditors.

               S. 36 (1) (iii)                        S. 37 (1)
1   It must be interest on capital     It may be interest even on any debt
    (moneys) borrowed                  incurred
2   The borrowing must be for the      The debt incurred must be wholly
    “purpose of the business”          exclusively for the purpose of the
3   The borrowed amount may be         The debt incurred must be not
    utilized even for procuring a      utilized for procuring a capital asset
    capital asset related to the       so as to fall within the gamut of
    Business.                          “capital expenditure”.
         Disallowance of Interest:
           o Interest free funds given prior to interest bearing funds
             borrowing G R Agencies. ITA No.625 (All) of 1998
           o Interest free money advanced in earlier year and no addition
             made in earlier year on such advances on account of interest
             free advances.
           o Total interest free advances including debit balances of
             partners do not exceed the total interest free fund. Available
             with A.
  Tingri Tea. (Cal.) HC 79 ITR 294
  Torrent Financiers. 73 TTJ (Ahd.) 624.
  Manjal Sales Corp. (Sc.) 168 Taxman 43
o Advances to sister concern.
   • Current years profit more then the interest free advance.
      United Agency 37 TTJ (Ahd.) 374
   • Amount advanced to siter concern were made out of
      creditors balance.
      Rajvikas Queries 42 TTJ (Del.) 262
   • Continuous out flow & inflow of funds. The funds given to
      keep the sister concern live.
      Advance was a commercial expediency. Premier Brass 51
      ITD (Mah.) 114.
   • SA Builders (SC) 158 Taxman 74.
      Advance to sister concerns a Measure of commercial

“However, money can be said to be advanced to a sister concern for
commercial expediency in many other circumstances (which need not
be enumerated here). However, where it is obvious that a holding
company has a deep interest in its subsidiary, and hence if the holding
company advances borrowed money to a subsidiary and the same is
used by the subsidiary for some business purpose, the assessee
would, in our opinion, ordinarily be entitled to deduction of interest on
its borrowed loans.”

                              6. P.F.
Sec. 36 (IV) & (V)
    i.    Conditions:
           a) Any sum paid by “A” as an employer.
           b) By way of contribution towards a recognized P.F.
           c) Subject to such limit.

    ii.    The due date in case of contribution to P.F is 20th each succeeding
           month Including grace period of 5 days as per (PDC‟s circular No. E
           128 (1) 60. III dt. 19.03.64 as modified by circular no. E-11/128/73
           dt. 24.10.736. Also refer Hunsar plywood works ltd. 5 ITD 394
           Ganpathy Mills Co. Ltd. 243 ITR 849.

    iii.   If last day Bank holiday, a payment can be made on next day.

    iv.    Only if check 15 realized within 15 days from due date.

                          7. Bad Debt
Sec. 36 (i)(vii)
For & from assessment yrs. 1989-90 the conditions requisite for allowance of a
debt as bad debt are
   It must be a proper debt, or a part thereof
   Of a revenue nature contra distinguished from capital nature
   Which has been written off as irrecoverable in the accounts of the
     assessee for the previous year or
   Which represents money lent in the ordinary course of the business of
     banking or money lending which is carried on by the assessee.

Section 36 (1) (vii) read with section 36 (2) provides for deduction of bad debts.
One of the conditions that has been is that debt or part thereof has been taken
into account in computing income of the assessee or represents money lent in
ordinary course of business or money lending carried on by the assessee. Not
all and every debt as understood by an accountant is allowable and it is only
those debt which have been taken into account in computing income is eligible
as deduction on write off.

Mere Write-Off Sufficent
After 1st April, 1989 it is not necessary for the assessee to establish that
the debts in fact have became irrecoverable. It is sufficient if they are
written off as irrecoverable in the accounts of the assessee. T.R.F.
Limited vs. CIT (2010) 35 DTR 156(SC)/230 CTR14(SC).

In Cawnpore Sugar Works Ltd. V. CIT 243 ITR 345 [All], the assessee
had advanced money to controller of a sugar mill, which it had acquired
in an auction. Major part of advance had been received back and a
small amount was written off as bad debt. The High Court affirmed the
decision of the ITAT holding that the said sum was not debt and
therefore cannot be allowed as bad debt.

In Turner Morrison and Co. Ltd. V. CIT, 245 ITR 724 [Cal] it has been held that
irrecoverable amount advanced to the subsidiary company is allowable as
deduction as bad debts.

Assessee having valid reason for judging that amount was not recoverable
though assessee had obtained a decree to recover debt. Assessee entitled to
deduction of bad debt. CIT vs. Punjab Tractors Ltd.(2010)320 ITR 153 (P&H).

Assessee is not required to prove that the debt has become bad. Assessee only
to write off the debt as bad its books. Law with effect from Assessment Year
1989-90. Lawlys Enterprises Pvt. Ltd. vs. CIT(2010)214 Taxation 256(Patna).

Where share broker purchasing shares for its clients and paying money against
purchase and money receivable from client becoming bad and treated as bad
bed. Held that brokerage payable by client is part of bad debt to be taken into
account. CIT vs. Bonanza Portfolio Ltd.(2010)320 ITR 178 (Delhi).

Amount paid by assessee (a stock broker) on behalf of sub-broker, which could
not be recovered, is eligible for being claimed as bad debt. CIT vs. DB(India)
Securities Ltd. (2010)187 Taxman 161(Del.)

                   8. Section 37 (1)
i.    Any Expenditure:
      Not being capital expenditure
      Not being expenditure of the nature described in section 30 to 36.
      Not being personal expenditure of the assessee Laid out wholly and
      exclusively for the purpose of business.

ii.   Wholly and exclusively for the purpose of business
      The Test
         Though the question must be decided on the facts of each case, the
          final conclusion is one of law.
         It is not necessary to show that the expenditure was profitable one
          or that any profit was earned.
         It is enough to show that money was spent.
         Not out of necessity and with a view to direct and immediate benefit
          to the trade but voluntarily and on the ground of commercial
          expediency and in order to indirectly facilitate carrying on the
          business.                                                          30
   Nexus between expenditure and business is essential
   Commercial expediency
    Doctrine that the business man is the best judge of the business
    expediency does not affect the right of A.O. to know whether it was
    incurred for business purpose and not for other extraneous
    (Jaipur Electro 223 ITR 535)
   The test is whether the assessee has reasonably in the interest of
    business incurred the expenditure in question.

Held allowable
   Foregoing interest on loan to raw material suppliers.
   Foregoing of higher charges recoverable from a contractor.
   Tea samples and complimentary tea distributed to Directors,
    Shareholders and friends at the AGM of the assessee company.
   Expenditure incurred for construction of fountain resulting into
    beautification traffic island.

Positive and Negative Test
  In CIT v. Navsari Cotton & Silk Mills [(1982) 135 ITR 546, 554-6
  (Guj)], Thakkar J., has formulated two types of tests, positive and
  negative. If an expenditure falling into the phraseology of section
  37(1) fits in any one of the positive tests and none of the negative
  tests apply to it, then only it can be allowable as a business
  expenditure. The positive tests are :

‘If It is Incurred
 with a view to bring profits or monetary advantage either today or
 to render the assessee immune from impending or reasonably
     apprehended litigation,
 in order to save losses in foreseeable furture,
 for effecting economy in working which may pay dividends today or
 for increasing efficiency in working,
 for removing inefficiency in the working,
 where the expenditure incurred is such as a (i) wise, (ii) prudent, (iii)
     pragmatic, (iv) ethical man of the world of business would
     consciously incur with an eye on promoting his business prospects
     subject to the expenditure being genuine and within reasonable
   where it is incurred solely by way of a civil duty owed by the
    assessee to the society having regard to the nature of his business
    which brings him profits but results in some detriment to the public at
    large either by way of health hazard or ecological pollution or serious
    inconvenience to the citizens with a view to mitigate the aforesaid
    evil consequences and consequences of a like nature, subject to its
    being genuine and within reasonable limit.‟

The Negative Tests are:
‘If it is incurred
 for a mere altruistic consideration
 mainly in order to satisfy his philanthropic urges.
     Explanantion ,- Factors (1) and (2) are laudable but the altruistic or
     philanthropic urges can be satisfied at one‟s own cost or sacrifice
     (and) not at the cost of public exchequer or other taxpayers and
     those living below the poverty line,
 mainly in order to win applause or earn garlands or public
 for illegal, immoral or corrupt purposes or by any such means or for
     any such reasons,
   mainly in order to oblige a relative or an official,
   mainly in order to earn the goodwill of a political party or a politician,
   mainly in order to show-off or impress others with his affluence or for
    ostentatious purposes,
   apparently for a factor listed as a positive factor…but in reality for one
    of the obnoxious purposes listed hereinabove.
   On a nebulous plea or pretext by way of an alibi in the name of
    winning profits in remote future or promoting business prospects but
    really for one or the other of the above-mentioned purposes.
   It must not be a bogus, fictitious or sham transaction.
   It must not be unreasonable and out of proportion
   It must not be an expenditure merely with a view to avoid tax liability
    without any genuine purpose or reason in good faith.
   The advantage to be secured by incurring the expenditure must not
    be of the nature of a remote possible advantage depending on “ifs”
    and “buts”, and if at all, to be secured at an uncertain future date
    which may be considered too remote.‟

iii.   Expenditure in respect of stopped or discontinued business
       Some business continues
       One business stopped
       The expenses of discontinued business cannot be claimed against
       other continued business.

       This is so because in case of several business each one is of
       distinct nature though the head business is same, each business is
       to be taken as separate unit for ascertainment of profit.
       (Chhabra & Sons 63 ITR 638)

       Where however, more than one business carried on by the
       assessee are found to constitute one of the same business due to
       interlacking, interconnect etc. and one of them is closed, the
       expenditure in relation to such closed business is deductible.
       (Bansidhar Ltd. 127 ITR 65)

       Business carried on at head office and also at several branches,
       expenditure for maintaining certain closed branches deductible.
Typical Cases

         Payment of percentage of profit besides cash consideration for
          purchasing a business (Travancore Sugar Ltd. 62 ITR 566)
         Payment for Goodwill
         Use of Quota Rice
         Acquisition of Monopoly Rice
         Expenses for New Route Permits
         Assets purchased for the purpose of advertisement.
         Fees paid to Registrar of Companies for increasing authorized
          capital. (Kishanchand Chelaram 130 ITR 385)

However, in case of Mohan Makin Breveries 117 ITR 505 held that fees
are not allowable as increase in capital results in an advantage of
enduring nature. Finally Supreme Court in Punjab State Industrial
Development Corporation 225 ITR 792 held that it is capital

iv.   Foreign Exchange Fluctuation:
      Depreciation on Account of Enhanced Cost
      The Supreme Court relying on its earlier decision in the case of
      CIT vs. Woodward Governor India P. Ltd. 312 ITR 254 (SC) held
      that the claim for depreciation on account of enhanced cost due to
      fluctuation in the foreign exchange rate is admissible as a
      deduction under section 37 of the Act. CIT vs. Maruti Udyog
      Ltd.(2010)320ITR 729(SC).

      Foreign Exchange Fluctuation Loss
      The Supreme Court has held that the loss claimed by the appellant
      on account of fluctuation in the rate of foreign exchange as on the
      date of the balance sheet was allowable as expenditure under
      section37(1). Liberty India vs. CIT(2010)28 DTR 73(SC).

      Advance payment made for purchase of machinery written off as
      business loss. Hon‟ble Tribunal allowed the Appeal by Relying on
      the Hon‟ble High Court of Rajasthan in the case of CIT vs. Anjani
      Kumar Co. Ltd. 259 ITR 114(Raj). Pik Pen Pvt. Ltd. vs.
      Shatlaj Cotton Mills Ltd.(SC) 116 ITR 1
      “The law may; therefore, now be taken to be well-settled that where
      profit or loss arises to an assessee on account of appreciation or
      depreciation in the value of foreign currency held by it, on conversion
      into another currency, such profit or loss would ordinarily be trading
      profit or loss if the foreign currency is held by the assessee on revenue
      account or as a trading asset or as part of circulating capital embarked
      in the business. But, if on the other hand, the foreign currency is held as
      a capital asset or as fixed capital, such profit or loss would be of capital

vi.   Section 37 (1) Explanation:

      Any expenditure incurred by an assessee for any purpose which is in
      offence or which is prohibited by law therefore not be deemed to have
      been incurred for the purpose of business and no deduction shall be
      allowed in respect of such expenditure.

      A commission agent, incurred expenditure towards gifts to officials and
      customers for sale of various products, free samples, prizes distribution
      for the purpose of sales promotion in army/navy/CSD canteens. Held
      the amounts are deductible as being incurred for the purpose of
      business and out of business expediency. CIT vs. C.B.K.R. Enterprises
      (2010)186 Taxman 14(Del.)
         9. Salary & Remuneration
i.     Whether another employee would be available at less salary is not a

ii.    But if expenses grossly disproportionate to the volume and salary paid to
       employee is wholly disproportionate to the industries standards the
       expenditure is not allowable.
       (D.N. Sinha 162 ITR 421)

iii.   Extra commercial considerations like relatives or friends

iv.    Evidence of services rendered

v.     Payment in recognition of long faithful service

vi.    Remuneration payable to Karta or member for managing HUF Business.
       (Sunderlal Nathalal 151 ITR 25)
            10. Penalties & Interest
   Penalty for infraction not allowable if penal in nature. Except when the
    business itself is illegal.
    Haji Aziz (Sc) 41 ITR 350
   Penalty due to bona fide infringement or malafide.
   Compensatory penalty is allowable.
   Damages/Penalties are Contractual allowable.
   It is not relevant that the penalty is in rem or personal.

    Penalty for infraction of Central Excise Rule. Goods removed under self
    clearance scheme without maintaining adequate credit of excise by mistake
    of clerk. Angle Fench Textiles 8 ITD 161 (Mad.)

    Breach of a contract and breach was not dishonest for example breach of a
    warranty or for failure to performa trading contract – allowable. Dishonest
    breach – example – payment under a decree passed against company for
    misfeasance committed by its Directors.

i.   Contractual Penalty:
     The A failed to export Stanforized Cloth as its obligation to export. The
     terms of bond provided that the A should pay penalty @ Rs.0.10 per
     Meter of shortfall of export of cloth to the government. The scheme gave
     an option either to fulfill the export or to pay the penalty for failure. Court
     held that exercise of option of non export & payment of penalty may be
     the result of commercial expediency as well as certain extraneous factors
     over which the manufacturer might not have control”
     Tarun Commercial Mills 107 ITR 172 (Guj.)

       a)   Interest on delayed payments of Custom Duty, Purchase Tax
            Sales Tax. Mahalaxmi Sugar Mills (Sc) 123 ITR 429
       b)   But Guj. H.C. in Oriental Trading Co. 208 ITR 216 (Guj.) has
            taken a contrary view.
       c)   Penalty for non compliance with the requirement of notice.

     Though every member of National Stock Exchange is obliged to abide by
     its rules and regulations, fine imposed on the assessee a member of NSE
     for violation of regulations of NSE cannot be disallowed. Gold Crest
     Capital Markets Ltd. vs. ITO(2010)36 DTR 177(Mum.)

 11. Expenditure on Foreign Tour
If the object is dominantly commercial the expenditure would qualify for
deduction. If however, the advantage made by the assessee‟s business was
secondary and was a remote consequence the expenditure would not be
(Dr. B.V. Raman 59 ITR 20)
         i. Expenditure on foreign tour by director of a company to study and
            get acquainted with new method of production and new machineries
            (Ambica Mills 54 ITR 167)

       ii.   Expenditure for attending international conference

       iii. Expenditure on foreign tour of the managing director‟s wife who
            accompanied her husband as he was keeping indifferent health –
            held not allowable
            (Bombay Mineral 153 ITR 437)                                 42
iv.     Expenditure incurred on bringing back dead body of Chairman who died
        while on business tour – Allowable.

v.      Expenditure incurred on foreign tour of the director and his wife in
        connection with medical treatment of the director – held allowable (Still
        ingots 220 ITR 552)
        Board‟s circular No. 4 dated 19.6.1950)

        The allow ability should not be viewed as to whether such visit results
        immediately in the earning of profit. All that the law requires is that
        expenditure should not be in the nature of capital expenditure or personal
        expenditure of the assessee.

vi.     Foreign travel expenditure in relation to existing business or expansion of
        the same business v/s. new business.

vii.    Wife accompanying husband Director held – in modern age, executives
        as a matter of social custom, accompanied by wife – allowable. Glaps
        Laboratories – 18 ITD 2 26 (Mumb.)

viii.   Foreign travel expenditure on tax consultant of assessee.
        Sarabhai Technological Development 254 ITR 84 (Guj.)

12. Diwali & Muhurat Expenses
Circular No. 17 dated 6.5.1943

Deposit under Tatkal Telephone deposit scheme, OYT scheme, Telex

                   13. Section 40
Amounts not deductible
Section 40 a (i)
Fees for technical services
Or other sum chargeable under 1961 Act

Which is payable outside India on which tax has not been paid or
deducted is not allowable.

However, proviso says that if tax has been paid or deducted in any
subsequent year the sum will be allowed in the year in which such tax
is paid or deducted.

                14. Section 40a(i)(a)
Sum payable to resident as
Commission or brokerage
Fees for professional services.
Fees for technical services.
Contractor or subcontractor for carrying out any work rent.

Tax has been deducted in the previous year Deduction will be allowable in the
(hereinafter referred to as „PY‟) (other than last PY
month of PY i.e. month of March) and deposited in
PY even the same is after the time prescribed under
section 200(1).
Tax has been deducted in the PY (other than las t Deduction will be allowable in the
month of PY i.e. month of March) but not deposited PY in which such tax has been
during the PY.                                     deposited.
Tax has been deducted in the PY (in the last month Deduction will be allowable in the
of PY i.e. month of March) and deposited during the PY
PY or deposited on or before the due date of
submission of return of income under section 139(1)
Tax has been deducted in the PY (in the last month Deduction will be allowable in the
of PY i.e. month of March) but tax has neither been PY in which such tax has been
deposited during the PY nor deposited on or before deposited.
the due date of submission of return of income under
section 139(1) i.e. deposited after the due date
prescribed for submission of return of income under
section 139(1)
Tax has been not deducted in the PY but deducted Deduction will be allowable in the
after closed of PY.                              PY in which such tax has been
What about non TDS on salary.                                                     47
                   15. Section 40 (b)
Interest and salary to partners

   Salary to HUF partner or partner in different capacity Brijmohandas
    Laxmandas (SC) 15CC 352
   Whether Salary belongs to Individual or HUF.
   Disallowance of Remuneration U/s.40A(2)(b) Chhajed Steel Corp. 77 ITD
    419 (Ahd.) …… paid salary of Rs.4,23,000 against earlier year salary of
    Rs.43,000A.O. recorded the statement of Deed also brought other
    evidences on record.
   If remuneration disallowed for any reason and taxed in the hands of firm, it
    cannot be taxed twice in the hands of partner. Vikas Oil Mill 95 TTJ (J)

                    16. Section 40A
Section 40 A (2) (a)
Excessive or unreasonable to relatives

Term relative is defined u/s. 2 (41)
Department Circular No. 6 – P dated 6.7.1968

“It should be born in mind provision is meant to check evasion to tax through
excessive payments to relatives and should not be applied in a manner which
will cause hardship in a bonafide case”.

                17. Section 40A(3)
Proviso – no disallowance under this sub-section shall be made where
any payment in a sum exceeding Rs. 20,000 is made otherwise than by
Account Payee check in such case and under such circumstances as
may be prescribed having regard to the nature and extent of banking
facilities available, consideration of business expediency and other
relevant factors.

Mitigating circumstances of rule 6DD

Rule 6DD(i) is omitted with effect from 1.12.1995 Sub clause (j)
provided for exceptional or unavoidable circumstances or genuine
difficulty to the payee having regard to the nature of transaction.

Rule 6DD

a)   Payment made to Govt. where under the rules framed by it the payment is
     required to be tendered in cash.
b)   Whether the payment is made by way of adjustment against amount of
     any liability incurred by the payee for any goods supplied or services
     rendered by the assessee to such payee.
c)   Payment of purchase of agricultural or forest produce dairy, fish,
     horticulture etc.
d)   Where payment is made for purchase of products manufactured without
     aid of power in a cottage industry.
e)   Where the village or town is not served by any bank to a person who
     ordinarily resides in such town.
f)   Gratuity to an employee whose salary does not exceed Rs. 7500/-
g)   Salary after deducting tax to employee temporarily posted for continues
     period of 15 days or more in a place other than his normal place or duty.
h)   Bank holiday
i)   Payment made by person to his agent who is required to make payment
     in cash for goods. Press Note dt.02.05.2009 issued by ministry of finance.
j)   Payment made by an authorized dealer for purchase of foreign currency
     or travelers cheque.

     Though rule 6DD(j) prescribing Mitigating Circumstances with a view to
     relax the rigors of section 40A(3) effective from A.Y.1996-97, provided
     exeption of unavoidable difficulty, genuine difficulty etc. But still reference
     to 40A(3) can be made.

     - Payment to Railway, Excise
     - Payment to Electricity Board.
     - No disallowance under block assessment, assessment u/s.44AF.

                       18. Section 41
Section 41(1)

i.    In the assessment of an assessee, an allowance of deduction has been
      made in respect of any loss, expenditure or trading liability incurred by

ii.    (a) Any amount is obtained in respect of such loss or expenditure, or
           expenditure, or
       (b) Any benefit is obtained in respect of such trading liability by way of
          remission or cessation there of.

iii.   Such amount or benefit is obtained by an assessee and

iv.    Such amount or benefit is obtained in subsequent year.

Section 41(1) have thus two effects, namely:

i.    that although ordinarily the amount of remission or cessation etc. would
      not be profits and gains, it has to be regarded as such profits and gains

ii.   Such an amount so forgiven by way of remission or cessation etc. has to
      be regarded as profits and gains of business or profession accruing or
      arising in the previous year wherein it is obtained.
       a) The benefit need not necessarily be in cash -Even book
             adjustments are included.
       b) Method of accounting not relevant.
       c)    All books can not be called upon for production
       d) Section 41(1) concerns trading liability and not other type of
       e) A debt waived by the creditor can not be treated as income of the
             debtor. (P.Ganesh 133 ITR 103)
       f)    A time-bar on liability does not by itself attract u.s. 41(1).

When a doctor decides not to show an amount as due to creditor because the
debt had become time-barred and proceeds to credit it to his own account, all
that it means is that the amount is not recoverable from him and he does not
intend to repay it. Nonetheless, his obligation continues though the recovery is
barred. This does not by itself show that liability had ceased to exist.
(V.T. Kuttappu & Sons 96 ITR 327)

Cessation-Remission of Liability-Profits Chargeable to Tax – Old Outstanding

The fact that the liability was old would not make any ground for addition. So
long as there was no cessation of liability by writing back same no addition
could be made under section 41(1). CIT vs. Sita Devi Juneja(Smt.)(2010)187
Taxman 96(P&H). CIT vs. Jaipur Jewellers (Exports)(2010)187 Taxman 169

                     19. Section 43A
Where a capital asset has been acquired from a foreign country, the addition to
or deduction from the actual cost of the assets on account of change in
exchange rate shall be allowed to be made only in the year actual payment
towards cost of assets or repayment of foreign loan or interest irrespective of
the method of accounting adopted.

         20. Adopting of G.P. Rate
If the books of account are rejected and profit is estimated, it would take care of
all disallowances.
Vikas Trading 61TTJ (Ahd.) 6
Sarawan Singh Contractor 55 ITD 192 (Chd)

Deduction of Depreciation
    Circular dt.31-08-1965
      The gross profit or net profit should be estimated subject to allowance of
      depreciation and allowable depreciation should be deducted there from.
    Jain Construction 245 ITR 527 (Raj).
    However in J.P. Raja 143 Taxman 500 (Ker) view is taken that for
      claiming depreciation, maintenance of proper accounts by the A is
      required and therefore when books of accounts are separate deduction
      of Depreciation can be allowed.
    Deduction as per section 40(b) to be allowed.
      Bharat Construction 258 ITR 140 (Raj)
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