Law: Income Tax Act, 1961

Section: 37

Income-tax-----Business expenditure---General principles---Company---Discount on debentures---Is revenue expenditure---Discount written off proportionately each year over period for redemption---Amount relating to relevant accounting year deductible---" Expenditure"--- Meanings---Indian. Income Tax Act, 1961, S.37.---[CIT v. Madras Industrial Investment Corporation Ltd. (1980) 124 ITR 454 reversed]. Section 37 of' the Indian Income Tax Act, 1961, enjoins that any expenditure not being expenditure of the nature described in sections 30 to 36 laid out or expended wholly and exclusively for the purpose of the business or profession should be allowed in computing the income chargeable under the head "Profits and gains of business or profession". The expression "profits or gains" has to be understood in its commercial sense; and there could be no computation of such profits and gains until the expenditure, which is necessary for the purpose of earning the receipt is deducted therefrom, whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date. Thus, "expenditure" is not necessarily confined to the money, which has been actually paid out. It covers a liability which has accrued or which has been incurred although it may have to be discharged at a future date. However, a contingent liability which may have to be discharged in future cannot be considered as expenditure. When a company issues debentures at a discount, it incurs a liability to pay a larger amount than what it has borrowed. The liability to pay the discounted amount over and above the amount received for the debentures, is a liability which has been incurred by the company for the purposes of its business in order to generate funds for its business activities. The amounts so obtained by issue of debentures are used by the company for the purposes of its business. This would, therefore, be expenditure. Section 37(1) further requires that the expenditure should not be of a capital nature. The question whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined…

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