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Income-tax Act, 1961 · Chapter IV: Computation of Total Income · D.—Profits and gains of business or profession

Section 37: General

The Income-tax Act, 1961 was repealed by the Income-tax Act, 2025 from 1 April 2026. The text is kept here because the judgments below apply it.

In plain words

This is the general deduction for business expenses. Any expenditure laid out wholly and exclusively for the business or profession is allowed, if it is not capital expenditure or a personal expense and is not covered by sections 30 to 36.

  • The expense must be for the business. It need not be compulsory, and courts look at it from the point of view of a businessman, not the tax officer.
  • Capital expenditure, which brings an asset or advantage of enduring benefit, is not allowed here.
  • Expenditure for a purpose that is an offence or prohibited by law is not allowed, under Explanation 1.
  • Spending on corporate social responsibility under section 135 of the Companies Act, 2013 is not treated as a business expense.
  • Advertisement in a souvenir, brochure or pamphlet published by a political party is not allowed, under sub-section (2B).

Example: A trader pays rent for a shop and fees to an accountant. Both are revenue expenses for the business and can be deducted under this section.

A simplified explanation, prepared with AI assistance from the official text below and checked automatically against it for numbers and cross-references. The official text is the law and prevails over this summary. Not legal advice.

Read the in-depth explanation, with key Supreme Court rulings ↓

Official text

(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.]—For the removal of doubts, it is hereby declared that 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 and no deduction or allowance shall be made in respect of such expenditure.] [Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.] * * * * * [(2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.] * * * * * * * * * * * * * *

Source: India Code (Legislative Department), the text of the Act as it stood before its repeal. Words in square brackets [ ] were inserted or substituted by later amending Acts, and *** marks words omitted by an amendment. The amendment footnotes are not reproduced here. Official text on India Code.

Understanding this section

Section 37(1) is the residuary deduction for business expenses. Expenditure is allowed if it is laid out wholly and exclusively for the business or profession, is not capital expenditure or a personal expense, and is not of a kind covered by sections 30 to 36.

Wholly and exclusively

The test is the purpose of the spending, judged as a businessman would judge it. The expense need not be compulsory or produce income in the same year. If it is incurred for commercial expediency, the fact that someone else also benefits does not defeat the deduction. The tax officer cannot decide how much a business ought to spend.

Capital or revenue

Capital expenditure is not deductible under this section. The classic test asks whether the spending brings an asset or advantage of enduring benefit, but the Court has warned that this test is not conclusive. What matters is whether the advantage is in the capital field, such as acquiring a business asset, or only makes the trading operations more efficient or profitable, which is revenue.

Illegal and prohibited expenses

Explanation 1 bars any deduction for expenditure on a purpose that is an offence or prohibited by law. Penalties for breaking the law were never deductible. Payments that are compensatory in nature, such as interest for delay, are judged by their real character. Explanation 2 excludes corporate social responsibility spending.

Key Supreme Court rulings

Common mistakes

  • Disallowing an expense because it is not strictly necessary. Commercial expediency is enough.
  • Applying the enduring benefit test mechanically.

Read with: Section 28 Income-tax Act, 1961, Section 40 Income-tax Act, 1961, Section 40A Income-tax Act, 1961

Prepared with AI assistance as a study aid. Every ruling listed was checked against the Supreme Court's own judgments on this site, and quoted words appear in those judgments; linked names open the full judgment. Read the judgments themselves before relying on them. Not legal advice.

Supreme Court judgments citing the section 37