Sub-section (1) is the residuary deduction for business and profession: expenditure laid out or expended wholly and exclusively for the purposes of the business or profession is allowed under the head "Profits and gains of business or profession", provided it is not of the nature specified in sections 28 to 33, 44 to 49, 51 and 52, and is not capital expenditure or the personal expenses of the assessee.
Sub-section (2) removes three categories from the phrase "wholly and exclusively for business or profession": expenditure incurred for any purpose which is an offence or is prohibited by law; expenditure on activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013; and expenditure on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.
Sub-section (3) expands the first of those to include expenditure for any purpose which is an offence under, or prohibited by, any law in force in or outside India; for providing a benefit or perquisite to a person whose acceptance of it violates the law, rule, regulation or guideline governing his conduct, whether or not he carries on a business or profession; for compounding an offence under any law in force in or outside India; and for settling proceedings initiated in relation to contravention under any law notified by the Central Government.
Why it is there
The section supplies the general test for business deductions and then closes it against three claims the revenue would otherwise litigate item by item. Illegal payments, statutory corporate social responsibility spending and political advertising are all commercially explicable, and each could be defended as wholly and exclusively for the business; sub-sections (2) and (3) put them outside the phrase by definition.
Who it applies to
Any assessee computing income under the head "Profits and gains of business or profession"
A company incurring corporate social responsibility expenditure referred to in section 135 of the Companies Act, 2013
A person providing a benefit or perquisite whose acceptance breaches the rules governing the recipient's conduct
A person paying to compound an offence, or to settle proceedings under a law notified by the Central Government
What this means in practice
Sub-section (1) is residuary, not an alternative route: expenditure of a nature dealt with by the sections it excludes cannot be claimed here because the specific provision failed. The disallowances need no prosecution or finding of guilt — what matters is that the purpose is an offence or is prohibited, including under a law in force outside India. Clause (3)(b) tests the legality of acceptance in the recipient's hands, so a payer who has broken no rule himself still loses the deduction. The settlement limb in clause (3)(d) bites only where the Central Government has notified the law concerned.
An example
Illustrative only, and invented for this page. The figures are chosen to show the rule biting, not taken from any real matter.
A company spends Rs. 1.2 crore on corporate social responsibility activities under section 135 of the Companies Act, 2013, Rs. 50 lakh on gifts to practitioners whose own professional guidelines forbid accepting them, and Rs. 30 lakh to compound an offence under a foreign regulatory law. None is deductible — the first under sub-section (2)(b), the second under sub-section (3)(b), the third under sub-section (3)(c) — and the foreign character of that law does not save it.
Where you meet this section
You meet this section in an assessment order as an add-back to the profit and loss account: corporate social responsibility spending, compounding or settlement payments, freebies, and advertisements in a political party's souvenir.
The words themselves
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
Section 34(3)(b), Income-tax Act, 2025.
compounding an offence under any law in force in or outside India
Section 34(3)(c), Income-tax Act, 2025.
What people get wrong
Claiming corporate social responsibility spending because company law compels it. Sub-section (2)(b) excludes expenditure on activities referred to in section 135 of the Companies Act, 2013 whatever the compulsion.
Treating a compounding payment as a commercial settlement. Sub-section (3)(c) covers compounding an offence under any law in force in or outside India.
Assuming only Indian law counts. Sub-section (3)(a) and (c) both extend to law in force in or outside India.
Reading clause (3)(b) as limited to recipients in business or a profession. It applies whether or not the recipient carries on a business, the test being whether acceptance violates the rules governing his conduct.
Claiming an advertisement in a political party's souvenir as ordinary advertising. Sub-section (2)(c) excludes it.
What this replaced
The correspondence is the Income Tax Department’s own, from its comparison utility for the 1961 and 2025 Acts. A renumbering is the easy half; whether the words changed is the half that decides cases.
A circular binds the department, not you and not a court. Every one below was written under the 1961 Act; it reaches this section because the department’s own concordance carries the provision it names to this one.
Circular No. 05/2012 — Inadmissibility of expenses incurred in providing freebees to Medical Practitioner by pharmaceutical and allied health sector Indu 2012-08-01
Circular No. 727 — 372. Instructions regarding extent of expenditure incurred on food or beverages provided to employees by employers to be treated 1995-10-27
Circular No. 708 — 372. Instructions regarding extent of expenditure incurred on food or beverages provided to employees by employers to be treated 1995-07-18
Circular No. 671 — 368. Whether, where deposit made by an assessee for obtaining new telephone connection under ‘Tatkal Telephone Deposit Scheme’ cou 1993-10-27
Circular No. 644 — 371. Whether provision of food or beverages in places other than place of work in respect of low-paid employees can be treated as 1993-03-15
Circular No. 578 — 295. Effect of withdrawal of tax concession under section 35C in a case where expenditure has been incurred by sugar factory on ca 1990-09-12
Circular No. 328 — Section 37 l Valuation of Shares in Private Company 1982-02-18
Circular No. 247 — 370. Calculation of percentage limits of entertainment expenditure under section 37(2A) - Modification to para 24.2 of Circular No 1978-10-21
Circular No. 203 — Section 37(3) l Expenditure on Advertisement/ Maintenance of Guest House/travelling 1976-07-16
Circular No. 200 — Section 37(3) l Expenditure on Advertisement/ Maintenance of Guest House/travelling 1976-06-28
Circular No. 192 — 328. Apprentices training - Expenditure on apprentices covered under the Apprentices Act, 1961 - Whether allowable as business ded 1976-03-10
Circular No. 169 — Provision for estimated service gratuity payable to its employees -Deduction under section 37(1) and section 40A(7) after its inse 1975-06-23
Circular No. 146 — Provision for estimated service gratuity payable to its employees -Deduction under section 37(1) and section 40A(7) after its inse 1974-09-26
Circular No. 47 — Provision for estimated service gratuity payable to its employees -Deduction under section 37(1) and section 40A(7) after its inse 1970-09-21
Circular No. 16 — 355. Professional tax - Whether deductible as revenue expenditure 1969-09-18
Circular No. 19 — Section 37(3) l Expenditure on Advertisement/ Maintenance of Guest House/travelling 1969-06-13
A notification is made under a power the Act gives and, within that power, is law. These too were made under the 1961 Act and are placed here by the department’s concordance.
Read this before you rely on it. Every decision below was decided under the Income-tax Act, 1961. It appears here because it is tagged to a 1961 provision that the department’s own mapping carries to section 34. That is an inference we have drawn, not a holding on the new section: where the words changed in the move, the reasoning may not survive. Treat this as the place to start looking, not as authority on the 2025 Act.
Apex Laboratories P Ltd v DCITSupreme CourtHelps departmenttagged s.37(1) Can a pharmaceutical company deduct the cost of gifts given to doctors?
Badridas Daga v CITSupreme CourtHelps taxpayertagged s.37(1) My employee embezzled money from the business bank account. Can I write that off for tax?
Bharat Earth Movers v CITSupreme CourtHelps taxpayertagged s.37(1) My liability is certain but I cannot put a final figure on it yet and I will not pay it for years. Can I still deduct the provision?
CIT v Malayalam Plantations LtdSupreme CourtHelps departmenttagged s.37(1) The AO says my expenditure did not earn me any income, so it fails s.37(1). Is that the test?
CIT v Odeon Builders Pvt LtdSupreme CourtHelps taxpayertagged s.37(1) The whole disallowance rests on an Investigation Wing report. Is that enough?
CIT v Woodward Governor India P LtdSupreme CourtHelps taxpayertagged s.37(1) I restated my foreign currency creditors at the closing rate and debited an unrealised loss. Can the AO throw it out as a contingent liability?
Kedarnath Jute Manufacturing Co Ltd v CITSupreme CourtHelps taxpayertagged s.37(1) I never made a provision in my books for the demand, and I am disputing it in appeal. Can I still deduct it?
Prakash Cotton Mills P Ltd v CITSupreme CourtCuts both waystagged s.37(1) The AO disallowed a payment because the statute calls it a penalty. Does the label decide it?
S.A. Builders Ltd v CIT (Appeals)Supreme CourtCuts both waystagged s.37(1) I passed borrowed money to my sister concern interest-free. Can the AO disallow the interest I paid?
Sassoon J. David & Co P Ltd v CITSupreme CourtHelps taxpayertagged s.37(1) [corresponding provision of the Income-tax Act, 1961] The AO says the payment mainly benefited someone else. Does that destroy my business expenditure claim?
Union of India v Exide Industries LtdSupreme CourtHelps departmenttagged s.37(1) Can I deduct my provision for leave encashment in the year I make it, or only when I pay?
CIT v Bharat AluminiumHigh CourtHelps taxpayertagged s.37(1) One machine in my block of assets was not used this year. Can the AO deny depreciation on it?
CIT v Shivpal Singh ChaudharyHigh CourtHelps taxpayertagged s.37(1) The relief where the payee has paid the tax came in from 2013. Can I use it for an earlier year?
PCIT v Asian Mills P LtdHigh CourtHelps taxpayertagged s.37(1) I paid freight without TDS after taking the transporters' PANs. Can the AO still disallow the freight?
PCIT v Drisha Impex (P) LtdHigh CourtHelps departmenttagged s.37(1) The Tribunal gave me a small percentage addition on disputed purchases. Can the department get the whole disallowance back on appeal?
Garware Technical Fibres Ltd v DCITITATCuts both waystagged s.37(1) The addition rests on a pen drive seized in the search and no s.65B certificate was drawn at the time. Does that kill it?
Rameshchandra Balachand v JCIT (OSD)ITATHelps taxpayertagged s.37(1) The officer says my partner is a sleeping partner because she is not in the office every day. Can he disallow her remuneration?
Samsung C and T Corporation India P Ltd v DCITITATHelps taxpayertagged s.37(1) CPC issued the section 143(1)(a) notice and passed the intimation a week later, and the portal shows a response I never filed. Is that intimation…
Fitting out premises you do not owntagged s.37(1) I am a tenant and I have spent on partitions, flooring, wiring and a false ceiling. Do I depreciate it, or deduct it?
When a repair bill stops being a repairtagged s.37(1) How do I tell whether what I spent on my premises or plant is deductible as repairs or has to be capitalised?
What this page does not tell you. It does not reproduce the section. Everything above was written from the section’s own text as the Income Tax Department publishes it — the text is here, and nothing here is advice on your facts. Where a figure matters, read the sub-section it comes from.