Clause 34 of the Income Tax Bill 2025: General Conditions for Allowable Deductions
The general conditions for claiming permissible deductions in computing "Profits and Gains of Business or Profession" are thus laid down under Clause 34 of the Income Tax Bill 2025. This provision ensures that only genuine business expenses, incurred to earn income, can have the profit or income of the assessee reduced from the taxable income of an assessee. This article shall carefully analyze these key provisions of Clause 34, their implications, and the justification for claiming deductions or otherwise of certain expenses.
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Key Provisions of Clause 34
Clause 34 defines the nature of allowable and disallowed
deductions while computing taxable income under the Profits and Gains of
Business or Profession head. Let’s break it down into subsections.
1. Allowable Deductions – Clause 34(1)
In accordance with clause 34(1), expenditure can be
deductive if it complies with any of the under-mentioned four conditions:
- It
is not covered by sections 28-33 of the Income Tax Act.
- It
is not a capital expenditure (i.e., it does not involve acquiring
an asset or creating an enduring benefit).
- That
it is not capital expense, that is, it does not relate into acquire
an asset or create an enduring benefit.
- It
is not a personal expense of the assessee.
- It
is incurred wholly and exclusively for the purpose of business or
profession.
2. Disallowed Deductions – Clause 34(2)
Despite meeting the general criteria under Clause 34(1),
certain expenses are expressly disallowed under Clause 34(2). These
include:
a) Expenses Related to Offenses or Prohibited by Law
- Any
expenditure incurred on activities that constitute an offence or
prohibited under any law in India or at other places.
- Any
sum spent for the grant of any benefit or perquisite to a person in
contravention of any law, rules, regulations, or guidelines.
- Expenses
incurred for compounding (settling) an offense under any law.
- Payments
made for settling proceedings related to contraventions under a law
notified by the Central Government.
b) Corporate Social Responsibility (CSR) Expenditure
- Any
amount spent on CSR activities, as per Section 135 of the
Companies Act, 2013, is not deductible under business expenses.
- The
reasoning behind this is that CSR expenses are considered a statutory
obligation rather than a business expense aimed at earning profits.
c) Political Advertisement Expenditure
- Any
expenditure incurred on advertisements in souvenirs, brochures,
pamphlets, or tracts published by political parties is not allowed
as a deduction.
- This prevents businesses from using such payments as a means to indirectly fund political parties while reducing taxable income.
Practical Implications of Clause 34
This provision has significant implications for businesses
and professionals in India. Here’s how:
1. Business Expenses Must Be Justifiable
Businesses must ensure that expenses claimed as deductions
are genuine, wholly, and exclusively incurred for business purposes.
2. CSR Expenditure Not a Tax Benefit
Companies spending on CSR should note that these amounts are
not deductible under income tax, reinforcing the idea that CSR is a moral
and legal responsibility, not a tool for tax planning.
3. Legal Compliance is Crucial
Expenses related to violations of laws, bribery,
settlements, or compounding offenses will not be deductible. This
emphasizes the need for businesses to adhere to legal and ethical business
practices.
4. No Tax Benefits for Political Funding via Advertisements
The restriction on deductions for advertisements in political party souvenirs and brochures ensures transparency and prevents misuse of tax deductions for indirect political contributions.
Conclusion
The Income Tax Bill 2025 is a comprehensive framework
laid down under clause 34 that will make clear deductions for business
permissible and impermissible expenses. It becomes legitimate to then
allow deductions for having incurred that expense in running a business, to
the extent such deductions will be disallowed for use in computing income with
misapplication for illegal purposes, corporate social responsibility
(CSR), or political contributions.
Frequently Asked Questions (FAQs)
1. What is the purpose of Clause 34 in the Income Tax Bill 2025?
Clause 34 ensures that only legitimate business expenses are allowed as deductions while computing taxable income. It prevents the misuse of deductions for non-business purposes.
2. Are all business expenses automatically allowed as deductions?
No, only expenses that are wholly and exclusively incurred for business or profession are allowed. Personal expenses and certain other disallowed expenditures cannot be deducted.
3. Why is Corporate Social Responsibility (CSR) expenditure not allowed as a deduction?
CSR is considered a statutory obligation and not an expense incurred for generating business profits. Therefore, it is not deductible under income tax laws.
4. Can I claim a deduction for penalties or fines paid to government authorities?
No, any expenditure incurred for offenses, penalties, or fines imposed by the government or regulatory bodies is not allowable as a deduction.
5. Is legal settlement expenditure deductible under Clause 34?
If a business incurs expenses to settle proceedings for legal violations, such expenses are not allowed as deductions. However, general legal expenses related to business operations may still be deductible.
6. Are promotional expenses, like advertisements, fully deductible?
Yes, general advertisement and promotional expenses are deductible, except for those spent on political party souvenirs, brochures, or pamphlets, which are specifically disallowed.
7. Can expenses incurred outside India be deducted?
Yes, provided that such expenses are legally incurred for business purposes. However, any expenditure related to offenses or violations of foreign laws is not allowed.
8. What is the impact of Clause 34 on companies with large CSR obligations?
Companies with high CSR obligations must account for these as a non-deductible expense in their tax calculations, affecting their net taxable income.
9. How can businesses ensure compliance with Clause 34?
Businesses should:
- Maintain proper records and documentation for expenses.
- Ensure expenses are directly related to business activities.
- Avoid claiming deductions for penalties, settlements, and non-business activities.
10. Does Clause 34 apply to professionals as well?
Yes, Clause 34 applies to both businesses and professionals earning income under Profits and Gains of Business or Profession. They must ensure that expenses claimed are exclusively for professional purposes.
Read More: Finance Bill 2025: Extended Time for Updated Income Tax Returns