CBDT Notifies New Disallowances Under Income Tax u/s 37

The Central Board of Direct Taxes (CBDT) has recently notified new disallowances under Section 37 of the Income Tax Act, 1961, bringing significant implications for businesses, professionals, and taxpayers at large. These new clarifications and additions are part of the government’s broader move to discourage unethical or non-business expenditures from being claimed as tax-deductible.

As a leading Tax Consultant Company in Delhi, we aim to help you understand what these new disallowances are, who they impact, and how to remain compliant without disrupting your legitimate business operations.

What is Section 37 of the Income Tax Act?

Section 37 is a residual section under the Income Tax Act. It allows deduction of business or professional expenditure not covered under Sections 30 to 36, provided:

• It is not a capital or personal expense
• It is wholly and exclusively for the purposes of business or profession

" Section 37 plays a vital role in determining taxable business income. Any tightening of rules here directly impacts business deductions. "

What Are the New Disallowances Notified?

CBDT’s notification introduces clarity and further restrictions on the following expenditures, disallowing them even if incurred in the course of business:

1. Expenditure Related to CSR Activities

• Although Corporate Social Responsibility (CSR) is a statutory requirement under the Companies Act, such expenses are now specifically disallowed under Section 37.
• These must be treated separately and are not deductible as business expenditure.

2. Violation of Law and Public Policy

• Any expenditure incurred for purposes that are unlawful or opposed to public policy is now disallowed.
• Examples: Penalties, fines, bribes, or payments made to secure contracts through illegal means.

3. Gifts and Perks to Government Officials

• Any benefits given to public servants, which can be perceived as bribes or inducements, are not allowed as deductions.

4. Expenditure Incurred on Yagyas, Religious Functions, etc.

• Expenses for religious or spiritual functions, even if used to motivate employees or community engagement, are not deductible.

5. Payments in Cash Above Permitted Limits

• If any expenditure is incurred in cash beyond the specified limit (Rs. 10,000 per day per person), it stands disallowed.

" CBDT's move aims to uphold ethical financial practices and promote transparent tax behavior."

How Will These Changes Impact Businesses?

The new disallowances will have practical consequences:

• Higher Tax Outgo: Businesses may not be able to claim certain routine expenses, thus increasing taxable income.
• Revisiting Expenditure Policies: Companies must now assess which expenses may no longer be deductible.
• Record-Keeping Pressure: Detailed documentation is essential to defend legitimate claims.
• Need for Professional Guidance: Engaging Tax consultant services in Delhi becomes crucial to avoid costly mistakes.

Common Mistakes Taxpayers Must Avoid

1. Assuming All Business Expenses Are Deductible

• Always consult a professional to validate if an expense qualifies under Section 37.

2. Lack of Documentation

• Keep invoices, purpose notes, and payment proofs for each expense.

3. Cash Payments Beyond Limit

• Avoid cash transactions beyond permissible limits to safeguard your deduction claims.

4. Treating CSR as Tax-Saving

• CSR is a statutory obligation and not a tax planning tool.

" Ignorance of disallowance rules is not a valid defense during assessment. Prevention is better than litigation. "

What Businesses Should Do Now

Here are actionable steps to stay compliant:

1. Re-evaluate Your Chart of Accounts

• Identify which expense heads may fall under the disallowed categories

2. Create Internal Approval Workflows

• Ensure all claims go through a tax vetting layer before being booked as expenses

3. Train Your Accounts and Finance Teams

• Make them aware of the new rules under Section 37

4. Seek Expert Consultation

• Partner with the Best Tax Consultant company in Delhi to audit your financial practices

How a Tax Consultant Can Help

Navigating these updates requires experience and in-depth knowledge. A trusted tax consultant can:

• Review your past deductions and highlight potential risks
• Guide you on legitimate structuring of expenses
• Assist during scrutiny or assessment proceedings
• Update you on real-time CBDT circulars and notifications

Our firm, a reputed Tax Consultant Company in Delhi, offers tailored tax solutions for SMEs, corporates, and professionals. With comprehensive Tax consultant services in Delhi, we ensure your compliance stays airtight.

Conclusion

The CBDT’s updated interpretation of Section 37 is a call for ethical, transparent, and policy-compliant business practices. Ignoring these disallowances can not only lead to tax disallowances but also trigger audits and scrutiny.

Stay on top of these changes by working with a professional Tax Consultant Company in Delhi. Our firm provides trusted Tax consultant services in Delhi, ensuring your business complies with evolving tax laws without compromising operational efficiency.

Proactive tax planning is not a luxury – it's a necessity. Choose the Best Tax Consultant company in Delhi to safeguard your business today!