# Section 37 - General Deduction (Residuary)

Section 37 is a residuary section — it allows any expense not covered by Sec 30 to 36, subject to conditions.

## Conditions for Allowability

1. Revenue in nature — Capital expenditure is NOT allowed.

2. Expenditure must be wholly and exclusively for the purpose of:

Business
Profession
Vocation

3. Personal expenses are NOT allowed.

4. Expense must be legal — not 'prohibited by law'.

5. Breach distinction:

Breach of Contract → Allowed
Breach of Law → NOT allowed (including expenses to settle proceedings initiated for breach of law).

6. Must be incurred during the accounting (previous) year.

7. Only post-commencement business expenditure is allowed; pre-commencement expenses are not.

8. Should not be of the nature already specified in Sec 30 to 36.

9. Only business expenses are allowed; business losses are dealt with elsewhere (e.g., Sec 28, 71, 72).

## Specifically Allowed Expenses (Examples)

#	Expense	Allowability
1	Buy-back of shares, bonus share issue, debenture issue	Allowed
2	Indirect tax (GST): Tax & Interest	Allowed; Penalty - only if compensatory
3	Legal expenses	Allowed
4	Damages for breach of contract	Allowed
5	Gifts to employees	Allowed
6	Customary expenses (Diwali pooja etc.)	Allowed
7	Tax audit fees, litigation expenses	Allowed
8	Keyman Insurance Premium (company on its keyman; firm on its partner)	Allowed
9	Cash embezzlement, theft, dacoity (if incidental to business)	Allowed

## Specifically Disallowed Expenses

#	Expense	Reason
1	IPO, FPO, Rights issue, increase in authorised share capital	Capital in nature
2	Direct Tax (Income Tax) - tax, interest, penalty	Not allowed; interest on loan for paying income tax also disallowed
3	Illegal expenses	Prohibited by law
4	Breach of law expenses / penalty	Not allowed
5	Advertisement in souvenir/brochure/pamphlet of political party	Not allowed (80GGB/80GGC may apply for donation portion)
6	Donation to political party or electoral trust	80GGB (companies) / 80GGC (others) - but only donation, not advertisement
7	CSR Expenditure	Explanation 2 to Sec 37 - not allowed; exception: PM Cares/PM Relief/Clean Ganga/Swachh Bharat - via 80G
8	Dividend distributed	Appropriation, not expense
9	Provisions: for losses of subsidiary, deferred tax, diminution in asset value, unascertained liability	Not real expense
10	Freebies/gifts by pharma companies to doctors	Prohibited by MCI regulations
11	Referral commission to doctors	Same as above
12	Payment/bribes to police etc.	Illegal
13	Expense incurred for offence prohibited by law or for compounding of offence — in India or outside India	Illegal
14	Benefit/perquisite to a person where accepting it violates any law/rule/regulation/guideline	Explanation 3 (FA 2022 - pharma freebies extended)

Worked example

### Example 1

Q.22 Example: A company pays ₹2,00,000 as damages for breach of a supply contract. → Allowed u/s 37 (breach of contract is incidental to business).

### Example 2

Q.23 Example: A company pays ₹50,000 penalty to GST authorities for late filing (compensatory in nature). → Allowed. If penalty is for tax evasion (not compensatory) → Not allowed.

### Example 3

Q.24 Example: Company spent ₹10,00,000 on CSR (mandatory under Companies Act 2013). → Not allowed u/s 37 per Explanation 2. However, if part of it is donation to PM CARES / Swachh Bharat Kosh, deduction may be available under Sec 80G.

⚠️ Common exam mistakes

Allowing direct income tax (or interest/penalty thereon) under Sec 37 — never allowed.
Allowing CSR expenditure as a business expense — explicitly disallowed by Explanation 2 to Sec 37.
Allowing pre-commencement business expenses — only post-commencement expenses are allowed.
Allowing capital expenditure under Sec 37 — only revenue expenses qualify.
Allowing political party advertisement in souvenirs/brochures — explicitly disallowed.
Confusing 'breach of contract' with 'breach of law' — only the former is allowed.
Allowing freebies/gifts by pharma companies to doctors — disallowed per CBDT Circular and Explanation 3.
Allowing personal expenses of proprietor as business expense.

Bare-Act text Section 37(1) with Explanations 1, 2 and 3 · Income Tax Act, 1961 · click to expand

Section 37(1): Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'. Explanation 1: Any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession. Explanation 2: Expenditure incurred by an assessee on activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to be expenditure incurred for the purpose of business or profession. Explanation 3 (FA 2022): The expression 'expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law' includes expenditure incurred for: (i) any purpose which is an offence under, or prohibited by, any law in force in India or outside India; (ii) providing any benefit or perquisite in any form to a person whose acceptance is in violation of any law/rule/regulation/guideline; (iii) compounding of an offence under any law in force in India or outside India.

Now that you've read this — what's next?

Move from understanding → mastery in 3 clicks. Each option below picks up from this lesson's topic.

🔥 Drill 5 Qs on this → ✍️ Adaptive practice →

Section 37 - General/Residuary Deduction

Worked example

⚠️ Common exam mistakes