Circular No. 16

What it does

Holds that professional tax paid by a person carrying on business or trade is allowable as a revenue deduction under section 37(1). Section 40(a)(ii) disallows a rate or tax levied on the profits or gains of a business or profession, or assessed at a proportion of or otherwise on the basis of such profits, which the Board reads as directed at taxes on income. Profession tax is levied by local authorities under entry 60 of List II of the Constitution, and article 276 saves it from invalidity on the ground that it relates to a tax on income even though the amount may depend to some extent on income earned. It is payable whether or not profits arise in the year, and is a condition of carrying on business in the local authority's area, so it does not fall within section 40(a)(ii).

Why it was issued

It was represented to the Board that professional tax was being disallowed on the footing that section 40(a)(ii) did not permit its deduction.

Who it reaches

Businesses and professionals paying local authority profession tax
Assessing Officers applying section 40(a)(ii)
Employers and firms in States levying profession tax

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.37	s.34
s.40	s.35, s.66

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

355. Professional tax - Whether deductible as revenue expenditure
It has been represented to the Board that the professional tax is not being allowed as a revenue expenditure under section 37(1), as its deduction is not covered by the specific provisions of section 40(a )(ii).
Section 40(a)(ii) authorises disallowance of any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits and gains.
The professional tax levied by local authorities cannot normally be considered to fall within section 40(a)( ii). In order to fall in this category, it would be necessary that the rate of tax is levied on the profits or gains of the business, profession or vocation and it should be assessed at a proportion or otherwise, on the basis of such profits or gains. In other words, what the section essentially seeks to convey is to prohibit the deduction of taxes on income.
Profession taxes are levied under entry 60 of List II of the Constitution of India which speaks of taxes on professions, rates, callings and employments. Article 276 of the Constitution makes it clear that such taxes shall not be invalid on the ground that they relate to a tax on income, though the quantum of tax might to some extent depend upon the amount of income earned. Strictly speaking, a professional tax is leviable whether or not any profits or gains accrue or arise in a particular year. The payment of such tax is a necessary condition for the carrying on of business within the area of a local authority.
It would, accordingly, appear that the professional tax paid by a person carrying on a business or trade can be allowed to him as a deduction under section 37(1).
Circular : No. 16 [F. No. 9/38/69-IT(A-II)], dated 18-9-1969.

What to watch

The reasoning turns on the tax not being measured on profits; a levy that is assessed on profits would still fall in section 40(a)(ii).
The circular deals with profession tax on the person carrying on the business, not with any other local levy.
Deduction under section 37(1) still needs the expenditure to satisfy that section's own conditions.
The constitutional ceiling on profession tax in article 276 has since been altered, but the reasoning here does not depend on the figure.

Where you meet it

On a disallowance of profession tax in a business assessment, argued under section 40(a)(ii).

On the same provision

Other instruments in this library that name the same provision of the 1961 Act. They are not necessarily still operative, and a later one may have replaced an earlier one without saying so.

Notification No. 38/2025 [F. No 370142/11/2025-TPL] / SO 1838(E) — 2 the Gazette of INDIA : Extraordinary [Part Ii—sec. 3(ii)] 23 April 2025
Circular No. 05/2012 — Inadmissibility of expenses incurred in providing freebees to Medical Practitioner by pharmaceutical and allied health s 1 August 2012
Circular No. 727 — 372. Instructions regarding extent of expenditure incurred on food or beverages provided to employees by employers to be 27 October 1995
Circular No. 708 — 372. Instructions regarding extent of expenditure incurred on food or beverages provided to employees by employers to be 18 July 1995
Circular No. 671 — 368. Whether, where deposit made by an assessee for obtaining new telephone connection under ‘Tatkal Telephone Deposit S 27 October 1993
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 t 15 March 1993

← Circular No. 30 · Circular No. 29 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.

What this is