Question 3 OR (b)

Conditions for deducting an expense under the residuary provision

6 marks

Time to write: About 12 minutes
Topic: Profits and gains of business or profession
Notes: Crux notes

Question

Question 3 OR (b) · 6 marks

Section 37(1) is a residuary section, used to determine whether an expense is admissible or inadmissible. With suitable examples, explain the conditions of section 37(1). (6)

Paper note: Set under the Income-tax Act, 1961 for assessment year 2024-25 (previous year 2023-24); answered under the Income-tax Act, 2025 for tax year 2026-27, so the year term moves forward by 3 years and every date in the question moves forward by the same 3 years, so that intervals, holding periods and ages are as printed. Every figure and name is as printed. The question names section 37(1) of the Income-tax Act, 1961; the answer gives the corresponding provision of the Income-tax Act, 2025 and says so.

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

12 minfor 6 marks

Read from the question

suitable examplesExamples are asked for: one short example with each point.
Section 37(1)The section is named: open with what it says, then explain or apply it.

Write it in this order

Read; underline the asks; jot your points 1 min
1 The residuary provision 1 mark 2 min
2 Conditions for allowance 2 marks 3 min
3 Expenses deemed not incurred for business 1½ marks 3 min
4 Examples 1½ marks 2 min
Check: every ask answered, key terms underlined 1 min

1234

Short on time? Trim steps 2–4 evenly rather than skip one: each is capped at its own marks.

Try it first. About 12 minutes for 6 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

The residuary provision

Specific sections allow particular business expenses: rent, repairs and insurance of premises, depreciation, bad debts, contributions to employees' funds and so on. An expense not covered by any of them is still deductible if it meets the conditions of the general, residuary provision: section 37(1) of the Income-tax Act, 1961, now section 34 of the Income-tax Act, 2025.

Conditions (section 34(1))

An expenditure is allowed in computing business income if all of the following hold:

It is not of a kind covered by the specific sections (sections 28 to 33, 44 to 49, 51 and 52 of the 2025 Act). An expense dealt with by a specific section is governed by that section alone.
It is not capital expenditure. Expenditure that brings an enduring benefit or acquires an asset is not allowed under this provision.
It is not a personal expense of the assessee. Household expenses or the cost of a family holiday are excluded.
It is laid out wholly and exclusively for the purposes of the business or profession. The purpose must be business; an expense with a mixed purpose is allowed only for the part that is for business.
It relates to the tax year and to a business carried on during that year.
It is not an expense the Act treats as not incurred for business (section 34(2)-(3)).

Expenses deemed not incurred for business (section 34(2)-(3))

The following are not wholly and exclusively for business, even if incurred in the course of it:

expenditure for a purpose that is an offence or is prohibited by law, in India or abroad;
benefits or perquisites given to a person whose acceptance of them breaks the law, rules or guidelines governing his conduct (for example, gifts to doctors by a pharmaceutical company in breach of their professional code);
amounts paid to compound an offence, or to settle proceedings for contravening a law notified by the government;
expenditure on corporate social responsibility under section 135 of the Companies Act, 2013; and
advertisement in a souvenir, brochure, tract or pamphlet published by a political party.

Examples (our own)

Expense	Allowed?	Reason
Free samples distributed to customers	Yes	Incurred wholly for promoting the business
Legal fees to defend a business contract	Yes	Revenue expense for the business
Fee for a trade association	Yes	Business purpose, not capital
Penalty for breaking traffic rules while delivering goods	No	Paid for an offence
Gifts to the owner's relatives	No	Personal expense
Cost of a new delivery van	No	Capital expenditure (depreciation is allowed instead)
CSR expenditure required by the Companies Act	No	Deemed not for business

Conclusion

The residuary provision allows any genuine revenue expense of the business that no specific section covers, provided it is not capital, not personal and wholly and exclusively for the business, and is not of the kinds the Act excludes.

Where the 6 marks sit

#	Component	Marks
1	The residuary provision	1
2	Conditions for allowance	2
3	Expenses deemed not incurred for business	1.5
4	Examples	1.5
	Total	6

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