Meaning of “For the purpose of the business”

The meaning of for the purpose of the business under section 37(1) of the Income Tax Act is not defined in the act itself. But we can take guidance from decisions by various high courts. Here are excerpts of courts orders in which the Hon’ble High Court tried to explain the meaning of for the purpose of the business.

Meaning of for the purpose of the business defined by court

The phrase ‘for the purpose of the business’ used in section 37(1) of the Income Tax Act came up before various high courts as detailed under :

1. Hon’ble Supreme Court explained the meaning of ‘for the purpose of the business’ while delivering judgment in Haji Aziz & Abdul Shakoor Bros. Vs. CIT [1961] 41 ITR 350 (SC) as under :

Meaning : The words ‘for the purpose of business’ have been construed in irc v. Anglo breweries co. Ltd. 12 Tax cas. 803 To mean for the purpose of keeping the trade going and making it pay.

2. Hon’ble Supreme Court explained the meaning of ‘for the purpose of the business’ while delivering judgment in CIT Vs. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC) as under :

Meaning : The expression ‘for the purpose of business’ in section 10(2)(xv) of the 1922 act [corresponding to section 37(1) of the 1961 act] is wider in scope than the expression ‘for the purpose of earning profits’. Its range is wide; it may take in not only the day-to-day running of a business but also the rationalisation of its administration and modernisation of its machinery, it may include measures for the preservation of the business and for the protection of its assets and property from expropriation or coercive process;

it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it.

The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory; in that event, he pays the amount on behalf of another, and for a purpose unconnected with the business.

3. Hon’ble Supreme Court explained the meaning of ‘for the purpose of the business’ while delivering judgment in CIT Vs. Birla Cotton Spg. & Wvg. Mills Ltd./Birla Bros. (P.) Ltd. [1971] 82 ITR 166 (SC) as under :

Meaning: The expression ‘for the purpose of the business’ is essentially wider than the expression ‘for the purpose of earning profits’. It covers not only the running of the business or its administration but also measures for the preservation of the business and protection of its assets and property. It may legitimately comprehend many other acts incidental to the carrying on of the business.

4. Hon’ble Supreme Court explained the meaning of ‘for the purpose of the business’ while delivering judgment in Mysore Kirloskar Ltd. Vs. CIT [1987] 30 TAXMAN 467/166 ITR 836 (KAR.) as under :

Meaning : The words ‘for the purpose of business’ used in section 37(1) should not be limited to the meaning of ‘earning profit alone’

5. Hon’ble Bombay High Court explained the meaning of ‘for the purpose of the business’ while delivering judgment in CIT Vs. Mahendra Sobhagchand Shah [1993] 203 ITR 178/71 TAXMAN 287 (BOM.) as under :

Meaning : There is a marked difference between the language of section 37(1) and section 57(iii) both of which are residuary provisions to allow deduction in respect of certain expenditure which do not fall under any of the items of expenditure specifically enumerated in the provisions of the act.

In section 37(1), the expression used is ‘for the purposes of the business’ whereas in section 57(iii), it is ‘for the purpose of making or earning such income.’ The expression ‘for the purposes of business’ used in section 37(1) is much wider in scope than the expression ‘for the purpose of earning profits’. Its range is wide.

6. Hon’ble Kolkata High Court explained the meaning of ‘for the purpose of the business’ while delivering judgment in L.M. Thapar Vs. CIT [1988] 37 TAXMAN 95/173 ITR 577 (CAL.) as under :

Meaning: The expression ‘purpose of business’ appears to be wider in scope than the expression ‘purpose of earning income’.

7. Hon’ble Bombay High Court explained the meaning of ‘for the purpose of the business’ while delivering judgment in Krishna Sahakari Sakhar Karkhana Ltd. Vs. CIT [1998] 229 ITR 577 (BOM.) as under :

Meaning : It is well-settled by the decision of the supreme court in cit v. Malayalam plantations ltd. [1963] 53 ITR 140, that the range of the expression ‘for the purpose of earning profits’ is wide. It may take in not only the day to day running of a business but also the rationalisation of its administration and modernisation of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process of assertion of hostile title;

it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for the carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. The only limitation is that the purpose should be for the purpose of the business, that is to say, the expenditure incurred should be for the carrying on of business and the assessee should incur it in his capacity as a person carrying on the business. It cannot include sums spent for purposes unconnected with the business.

8. Hon’ble ITAT-Visakhapatnam explained the meaning of ‘for the purpose of the business’ while delivering judgment in S.R.M.T. Ltd. Vs. Dy. CIT [2005] 97 TTJ (VISAKHAPATNAM – TRIB.) 580 as under :

Meaning: The scope of the term ‘for the purpose of business’ is surely wider than the term ‘for the purpose of earning profit’.

Section 37(1) of Income Tax Act

General.

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.—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.

(2) [***]

(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.

(3) [***]

(3A) [***]

(3B) [***]

(3C) [***]

(3D) [***]

(4) [***]

(5) [***]

In this article, you can get guidance from high courts on the meaning of for the purpose of the business under section 37(1) of the Income Tax Act.

Updated up to Finance Act 2021