General conditions for allowable deductions.
34(1)
Any expenditure (not being an expenditure of the nature specified in sections 28 to 33 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”.
34(2)
For the purposes of sub-section (1), an expenditure laid out or expended wholly and exclusively for business or profession by the assessee shall not include any of the following:––
- (a) an expenditure incurred for any purpose which is an offence or is prohibited by law; or
- (b) an expenditure incurred on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013; or
- (c) an expenditure incurred on advertisement in any souvenir, brochure, tract, pamphlet or the like, published by a political party.
34(3)
The expenditure mentioned in sub-section (2)(a) shall include expenditure incurred for––
- (a) any purpose which is an offence under, or is prohibited by, any law in force in or outside India; or
- (b) providing a benefit or perquisite in any form to a person, who may or may not be carrying on a business or exercising a profession, when its acceptance by the person is in violation of any law or rule or regulation or guideline governing the conduct of that person; or
- (c) compounding an offence under any law in force in or outside India; or
- (d) settling proceedings initiated in relation to contravention under any law notified by the Central Government in this behalf
Section Summary:
Section 34 of the new income tax law outlines the general conditions under which business or professional expenses can be claimed as deductions while computing taxable income under the head "Profits and gains of business or profession." It specifies what types of expenses are allowable and explicitly excludes certain expenditures that are either illegal, related to corporate social responsibility (CSR), or connected to political advertising.
This section is significant because it clarifies the boundaries of deductible expenses, ensuring that only legitimate business expenses are allowed while preventing misuse of tax deductions for non-business or unlawful purposes.
Key Changes:
- Explicit Exclusion of CSR Expenses: Under Section 34(2)(b), expenses related to CSR activities under Section 135 of the Companies Act, 2013, are now explicitly disallowed as deductible business expenses. This is a new addition compared to the prior income tax law.
- Expansion of Prohibited Expenditures: Section 34(3) expands the scope of prohibited expenditures to include:
- Expenses related to activities that are illegal under Indian or foreign laws.
- Benefits or perquisites provided in violation of laws or regulations.
- Expenses for compounding offenses or settling legal proceedings related to contraventions of laws.
Practical Implications:
For Businesses and Professionals:
- Businesses can no longer claim deductions for CSR-related expenses, which may increase their taxable income.
- Expenses related to illegal activities or those prohibited by law are strictly disallowed, which could lead to higher tax liabilities if such expenses were previously claimed.
- Companies must ensure that any benefits or perquisites provided to individuals comply with applicable laws and regulations to avoid disallowance of such expenses.
For Tax Compliance:
- Taxpayers must carefully review their expense claims to ensure they do not include any disallowed items, such as CSR expenses or political advertising costs.
- Businesses must maintain proper documentation to substantiate that their expenses are legitimate and comply with the conditions outlined in Section 34.
Critical Concepts:
- Capital Expenditure vs. Revenue Expenditure: Only revenue expenditures (day-to-day business expenses) are deductible under this section. Capital expenditures (long-term investments like machinery or property) are not allowed.
- Personal Expenses: Expenses incurred for personal purposes are not deductible, even if they are related to the business.
- CSR Expenses: These are expenses mandated under Section 135 of the Companies Act, 2013, for companies meeting certain criteria. Such expenses are now explicitly disallowed as deductions under Section 34(2)(b).
- Prohibited Expenditures: These include expenses related to illegal activities, benefits provided in violation of laws, and costs associated with compounding offenses or settling legal proceedings.
Compliance Steps:
- Review Expense Claims: Ensure that all claimed expenses are legitimate business expenses and do not fall under the disallowed categories (e.g., CSR, political advertising, or illegal activities).
- Maintain Documentation: Keep detailed records and supporting documents for all business expenses to substantiate their legitimacy during tax assessments.
- Avoid Non-Compliant Practices: Ensure that any benefits or perquisites provided to individuals comply with applicable laws and regulations.
Examples:
CSR Expenses:
- A company spends ₹10 lakh on building a school in a rural area as part of its CSR obligations under the Companies Act, 2013. Under Section 34(2)(b), this expense cannot be claimed as a deduction while computing taxable income.
Illegal Activities:
- A business pays a bribe to secure a government contract. This expense is illegal and prohibited under Section 34(3)(a). It cannot be claimed as a deductible business expense.
Political Advertising:
- A company spends ₹5 lakh on advertising in a brochure published by a political party. Under Section 34(2)(c), this expense is disallowed as a deduction.
Compounding Offenses:
- A business pays ₹2 lakh to settle a legal case involving a violation of environmental laws. Under Section 34(3)(c), this expense is disallowed as a deduction.
By following these guidelines, taxpayers can ensure compliance with Section 34 and avoid disallowance of expenses during tax assessments.