Section 37 of ITA, 1961 : Section 37: General

Explanation using Example

Imagine a company, XYZ Pvt. Ltd., spends money on various activities throughout the financial year. One of the expenses is the salary paid to its employees, which is covered under a different section of the Income-tax Act and hence not applicable here. Now consider XYZ Pvt. Ltd. also spends money on a marketing campaign to promote its new product. This marketing expense is not of a capital nature (it doesn't create a long-term asset) and is not personal to any of the directors or employees. Therefore, under Section 37(1) of the Income-tax Act, 1961, this marketing expense can be claimed as a deduction while computing the company's taxable income.

However, if XYZ Pvt. Ltd. incurred an expense that was related to an activity considered illegal or prohibited by law, for instance, if they paid for a service that involved bribery, this expense would not be allowed as a deduction under Explanation 1 to Section 37.

Moreover, if the company made donations to a local political party's publication as an advertisement, even if this was intended to promote their business in the community, under Section 37(2B), this expense would not be eligible for a deduction.

Lastly, if the company undertakes a project as part of its Corporate Social Responsibility (CSR) activities, which is mandatory for certain companies under the Companies Act, 2013, the costs incurred for CSR would not be considered a business expenditure under Explanation 2 to Section 37 and hence, cannot be claimed as a business expense deduction.