Key Highlights
- Section 37: Any expenditure wholly and exclusively for business and not capital expenditure is deductible
- Section 40A(3): Cash payment above Rs 10,000 to a single person in a day — disallowed
- Section 43B: Certain expenses deductible only when actually paid — PF, gratuity, TDS, MSME dues
- Capital expenditure: NOT deductible as revenue — but eligible for depreciation
- Personal expenses: Not deductible even if paid from business account
- Donations: Not deductible as business expense — only under Section 135 (80G equivalent)
1. Section 37: The General Deduction Rule
Section 37 of ITA 2025 allows deduction of any expenditure incurred wholly and exclusively for the purposes of business or profession, provided:
- It is a revenue expenditure (not capital)
- It is not personal in nature
- It is not specifically disallowed by any other provision of ITA 2025
- It is incurred during the Tax Year (not before/after)
Examples of allowable expenses: raw materials, salaries, rent, repairs, telephone, advertising, legal fees, accounting fees, travel for business purposes, software subscriptions.
2. Section 40A(3): Cash Payment Disallowance
Under Section 40A(3), if any payment to a person in a single day exceeds Rs 10,000 in cash, the entire payment (not just the excess) is disallowed:
- Applies to any business expenditure paid in cash
- Threshold: Rs 10,000 per person per day (Rs 35,000 for transporters)
- The entire payment is disallowed — not just the amount above Rs 10,000
- To deduct the expense, pay by cheque, RTGS/NEFT, UPI, or other digital means
3. Section 43B: Payment-Based Deductions
Certain expenses are deductible only when paid before the due date of ITR, regardless of the accrual method:
| Expense | Condition for Deduction |
|---|---|
| Employer PF/ESI contribution | Must be deposited before due date of filing ITR (or statutory due date, whichever is earlier) |
| Gratuity fund contributions | Must be deposited before ITR due date |
| TDS deducted | Must be deposited before due date of ITR filing |
| MSME payments | Must be paid within 45 days (or 15 days) of acceptance |
| Bank interest (banks, FIs) | Deductible on actual payment basis |
4. Capital vs Revenue Expenditure
The distinction between capital and revenue expenditure is critical:
- Revenue expenditure: Recurring, day-to-day business expenses that do not create a new asset or bring an enduring benefit. Fully deductible in the year incurred.
- Capital expenditure: Creates an asset or provides enduring benefit beyond one Tax Year. Not directly deductible — eligible for depreciation over time.
- Examples of capital: purchase of land, building, machinery, goodwill; renovation adding new floor; long-term software licences creating IP.
- Grey areas: Initial business setup costs, major repairs, software development — classification depends on specific facts.
5. Other Key Disallowances
| Disallowance | Section (ITA 2025) |
|---|---|
| Salary to partner in excess of limits | Section 57A |
| Interest to partner above 12% p.a. | Section 57A |
| Any expenditure on advertising in political party publications | Section 40B |
| Payments to related parties above market rate | Section 40A(2) |
| Disallowed capital expenditure | Section 37(1) proviso |
6. Why TaxClue
Identifying all allowable deductions and avoiding disallowances is the core of business tax planning. TaxClue audits your business expenses for deductibility, avoids Section 40A and 43B disallowances, and maximises your net income deductions. Contact us for business income tax advisory and ITR/audit filing.