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Allowable Business Expenses – Sections 30 to 37

To reduce your taxable profit, you must claim valid business expenses. From rent to bad debts, the Income Tax Act lists specific sections (30 to 36) and a general section (37) for deductions. Let's see what you can claim!

The Golden Rule of Business Deductions

"Expense must be incurred wholly and exclusively for business purpose."

If an expense falls under specific sections (30-36), claim it there. If not, check the General Clause (Section 37).

Key Specific Deductions (Sections 30-36)

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Section 30: Expenses on Building

Deductions allowed for building used for business:

  1. Rent (if you pay rent)
  2. Current Repairs (not capital nature)
  3. Municipal Taxes (actually paid)
  4. Insurance Premium

Note: Capital repairs (like adding a new floor) are not allowed here (claim depreciation instead).

Section 31: Plant, Machinery & Furniture

Deductions allowed:

  1. Current Repairs
  2. Insurance Premium

Rent for machinery? Not here! Claim under Section 37 (General Deduction).

Section 36: Other Specific Deductions

This section covers a wide range of everyday business expenses:

1. Insurance Premium (Stocks/Stores)

Premium paid for insurance of stock-in-trade is fully deductible.

2. Bonus or Commission to Employees

Allowable if it wouldn't be payable as dividend. Must be actually paid (Section 43B applies).

3. Interest on Borrowed Capital

Interest on loans taken for business is deductible.

  • For Asset: Interest AFTER asset usage starts is revenue (deductible). Interest BEFORE usage is capital (add to cost).

4. Contribution to Provident Fund/Gratuity

  • Employer's contribution to Recognized PF/Approved Superannuation Fund is allowed.
  • Deadline: Must be paid before the "due date" of the relevant fund laws.

5. Bad Debts (Section 36(1)(vii))

Deduction allowed if:

  • Debt was taken into account in computing income previously.
  • It is written off as irrecoverable in books.
  • Provision for Bad Debts is generally NOT allowed (except for banks).

6. Advertisement Expense

Fully allowed (Revenue nature). Capital nature ads (e.g., permanent neon sign) → Claim depreciation.

Section 37(1): The General Deduction

This is the residuary section. Any expense not covered in 30-36 is allowed here if conditions are met:

Conditions for Section 37(1):

  1. Not personal expense (e.g., household electricity).
  2. Not capital expenditure (e.g., buying a car).
  3. Not illegal purpose (e.g., bribes, protection money).
  4. Incurred wholly and exclusively for business/profession.
  5. Incurred during the previous year.

Common Examples: Allowed vs Disallowed

Expense ItemTreatmentReason/Section
Staff Salary✅ AllowedBusiness expediency
Diwali Gifts to Clients✅ AllowedBusiness promotion (Sec 37)
Personal Income Tax❌ DisallowedPersonal liability
Penalty for law violation❌ DisallowedIllegal/Infraction of law
Penalty for contract breach✅ AllowedCompensatory nature
Donation to Political Party❌ DisallowedNot business expense (Claim 80GGB/C instead)
CSR Expenditure❌ DisallowedSpecifically barred (Explanation to Sec 37)

Scientific Research (Section 35)

To encourage R&D, gov provides deductions:

  • In-house research: Revenue & Capital expenses (excluding land) are fully deductible.
  • Contribution to outsiders:
    • National Laboratory/IIT/University: 100% deduction.
    • Approved Indian Company (R&D): 100% deduction.

(Note: Weighted deductions like 150% have mostly been phased out to 100% in recent years to simplify the tax code.)

Practical Example

M/s Tech Solutions P&L for FY 2024-25:

  • Revenue: ₹50,00,000
  • Expenses Debited:
    • Salary: ₹10,00,000
    • Rent: ₹2,00,000
    • Personal Life Insurance of Owner: ₹50,000
    • Traffic Fine: ₹5,000

Computation:

  1. Net Profit per books: ₹50L - 12.55L = ₹37.45L
  2. Add Back Disallowed:
    • Personal Life Insurance (Personal): +₹50,000
    • Traffic Fine (Illegal/Penalty): +₹5,000
  3. Taxable Business Income: ₹37,45,000 + 55,000 = ₹38,00,000

Summary

  • Specific Sections (30-36) cover building, machinery, interest, bad debts, etc.
  • General Section (37) catches the rest (must be business-related, non-capital, non-personal, legal).
  • Bad Debts: Must be written off in books. Provisions are disallowed.
  • CSR: Not a business expense (disallowed).
  • Penalties: If for breaking law → Disallowed. If for breaking contract → Allowed.

Quiz Time! 🎯

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