SECTION 37(1) Business expenditure EXPENDITURE Expenditure is equal to expense and expense is money laid out by calculation and

intention though in many uses of the word this element may not be present, as when one speaks of a joke at anothers expense. But the idea of spending in the sense of paying out or away money is the primary meaning which is relevant. Expenditure is thus what is paid out or away and is something which has gone irretrievably - Indian Molasses Co. (P.) Ltd. v. CIT [1959] 37 ITR 66 (SC). In its normal meaning, the expression expenditure denotes spending or paying out or away, i.e., something that goes out of the coffers of the assessee. A mere liability to satisfy an obligation by an assessee is undoubtedly not expenditure : it is only when he satisfies the obligation by delivery of cash or property or by settlement of accounts, that there is expenditure. But expenditure does not necessarily involve actual delivery of or parting with money or property. If there are cross-claims - one by the assessee against a stranger and the other by the stranger against the assessee - and as a result of accounting the balance due only is paid, the amount which is debited against the assessee in the settlement of accounts may appropriately be termed expenditure within the meaning of section 37(1). However, a mere forbearance to realise a claim is not expenditure - CIT v. Nainital Bank Ltd. [1966] 62 ITR 638 (SC). 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. Although expenditure primarily denotes the idea of spending or paying out, it may, in given circumstances, also cover an amount of loss which has not gone out of the assessees pocket but which is all the same, an amount which the assessee has had to give up. It also covers a liability which the assessee has incurred in praesenti although it is payable in future. A contingent liability that may arise in future is, however, not expenditure. It would also cover not just a one-time payment but a liability spread out over a number of years - Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 91 Taxman 340/225 ITR 802 (SC). The expression expenditure, as used in section 37, may in the circumstances of a particular case, cover an amount, which is really a loss and the said amount has not gone out from the pockets of the assessee - M.P. Financial Corpn. v. CIT [1986] 26 Taxman 42 (MP). The expenditure primarily denotes the idea of spending or paying out or away. It is something which has gone irretrievably, but should not be in respect of an unascertained liability of the future. It must be an actual liability in praesenti, as opposed to contingent liability of the future - Mysore Kirloskar Ltd. v. CIT [1987] 30 Taxman 467 (Kar.). The Income-tax Act has not defined the word expenditure. In the absence of a statutory definition, the court will have to consider the meaning of a word in the manner it is understood generally by those who deal with the subject in question - Akash Films v. CIT [1991] 191 ITR 32 (Kar.). Spending in the sense of paying out or away of money is the primary meaning of expenditure. The word expenditure means what is paid out or away and is something which is gone irretrievably - B.K. Khanna & Co. (P.) Ltd. v. CIT [2000] 113 Taxman 164 (Delhi).

CAPITAL EXPENDITURE - GENERALLY DEFINED There is no definition of the expression capital expenditure in the Act, and it must be construed in a business sense save insofar as there may be rules of construction applicable to it - Mohanlal Hargovind of Jubbulpore v. CIT [1949] 17 ITR 473 (PC). The expression capital expenditure is not defined in the Income -tax Act and the words in the nature of capital expenditure occurring in section 37(1) make the meaning of the expression more elastic in its application to the facts of each case. The consistent view of the Court is that the expression is to be construed in a business sense save insofar as there may be rules of construction applicable to it. The word capital connotes permanency and capital expenditure is, therefore, closely akin to the concept of securing something, tangible or intangible property, corporeal or incorporeal right so that they could be of a lasting or enduring benefit to the enterprises in issue. Revenue nature expenditure, on the other hand, is operational in its perspective and solely intended for the furtherance of the enterprise - CIT v. Wolkem (P.) Ltd. Co. [2002] 258 ITR 350 (Raj.). The word capital connotes permanency and capital expenditure is, therefore, closely akin to the concept of securing something, tangible or intangible property, or corporeal or incorporeal right, so that they could be of a lasting or enduring benefit to the enterprise in issue. Revenue expenditure, on the other hand, is operational in its perspective and solely intended for the furtherance of the enterprise - CIT v. Lake Palace Hotels & Motels (P.) Ltd. [2002] 258 ITR 562 (Raj.).

ENDURING BENEFIT - GENERALLY DEFINED It is an accepted proposition that the words permanent and enduring are only relative terms and not synonymous with perpetual or everlasting. Although an enduring benefit need not be of an everlasting character, it should not, at the same time, be so transitory and ephemeral that it can be terminated at any time at the volition of any of the parties. Any other view would have the effect of rendering the word enduring to be meaningless - CIT v. Coal Shipments (P.) Ltd. [1971] 82 ITR 902 (SC).

ENDURING BENEFIT/ RIGHTS OF A PERMANENT NATURE - GENERALLY DEFINED The expressions, enduring benefit, and rights of a permanent nature, are only descriptive and not definite and are relative in meaning, not synonymous with perpetual or everlasting. Although an enduring benefit need not be of an everlasting character, it should not, at the same time, be transitory or ephemeral, so that it can be terminated at any time at the volition of either of the parties. What the extent of durability or permanence should be depends on the facts of each case - Devidas Vithaldas & Co. v. CIT [1972] 84 ITR 277 (SC).

EXCLUSIVELY It is well-settled that expression wholly and exclusively does not denote necessarily. The word wholly refers to quantum of expenditure. The word exclusively refers to motive, objective or purpose with which the particular expense has been incurred. Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his business. Such expenses can be incurred voluntarily and without necessity. If it is incurred for promoting the business and to earn the profits, the assessee can claim the deduction - Addl. CIT v. Rajasthan Spinning & Weaving Mills Ltd. [2004] 137 Taxman 367 (Raj.).

ONCE AND FOR ALL - GENERALLY DEFINED The expression once and for all is used to denote an expenditure which is made once and for all for procuring an enduring benefit to the business as distinguished from a recurring expenditure - Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC).

WHOLLY AND EXCLUSIVELY The expression wholly and exclusively used in section 37(1) does not mean necessarily - Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261 (SC). The words wholly and exclusively pointedly signify that the expenditur e should be completely devoted to the business. It need not be essential, necessary or compelling ; it may be optional and purely voluntary. But it must be commercially expedient and should have the aim of the continuance and furtherance of the business and an eventual augmentation or stabilisation of profits. - Sree Meenakshi Mills Ltd. v. CIT [1963] 49 ITR 156 (Mad.). The word wholly refers to the quantum of expenditure and the word exclusively refers to the motive, object or purpose of the expenditure - Mysore Kirloskar Ltd. v. CIT [1987] 30 Taxman 467/166 ITR 836 (Kar.). The word wholly refers to quantum of expenditure. The word exclusively refers to the motive, objective and purpose of the expenditure and gives jurisdiction to the taxing authorities to examine these matters. The true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than that of a trader. It has to be examined whether the expense has been incurred with the sole object of furthering the trade or business interest of the assessee unalloyed or unmixed with any other consideration. If the expense is found to bear an element other than that of the trade or business interest of the assessee, the expenditure is not an allowable one - B.K. Khanna & Co. (P.) Ltd. v. CIT [2000] 113 Taxman 164 (Delhi). The term wholly refers to the quantum of the expenditure and exclusively refers to the motive, objective and purpose of the expenditure. The true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and making it pay and not in any other capacity than that of a trader - Ram Bahadur Thakur Ltd. v. CIT [2003] 128 Taxman 599/261 ITR 390 (Ker.) (FB).

FOR THE PURPOSE OF BUSINESS 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. - Haji Aziz & Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350 (SC). The expression for the purpose of business, in section 37(1) 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 - CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC). 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 - CIT v. Birla Cotton Spg. & Wvg. Mills Ltd./Birla Bros. (P.) Ltd. [1971] 82 ITR 166 (SC). The words for the purpose of business used in section 37(1) should not be limited to the meaning of earning profit alone - Mysore Kirloskar Ltd. v. CIT [1987] 30 Taxman 467/166 ITR 836 (Kar). 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 - CIT v. Mahendra Sobhagchand Shah [1993] 203 ITR 178/71 Taxman 287 (Bom.). Expression purpose of business appears to be wider in scope than the expression purpose of earning income -L.M. Thapar v. CIT [1988] 37 Taxman 95/173 ITR 577 (Cal.). 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 measure 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 - Krishna Sahakari Sakhar Karkhana Ltd. v. CIT [1998] 229 ITR 577 (Bom.).