This is a residuary section under which only business expenditure is allowable but not the business losses, e.g., those arising out of embezzlement, theft, destruction of assets, misappropriation by employees etc.

Section 34(1)

Any expenditure (not being

an expenditure of the nature specified in sections 28 to 33, 44 to 49, 51 and 52 and

in the nature of capital expenditure or personal expenses of the assessee),

laid out or expended wholly and exclusively for the purposes of the business or profession

shall be allowed as deduction in computing the income chargeable under the head “PGBP”.

For an expenditure to qualify under this residuary clause, it must cumulatively satisfy the following conditions:

(i) It must not be covered under specific deduction sections (Sections 28 to 33, 44 to 49, 51, and 52).

(ii) It must not be a capital expenditure.

(iii) It must not be a personal expense of the assessee.

(iv) It must be laid out or expended wholly and exclusively for the purposes of the business or profession.

Ex

A firm pays an annual fee to an IT consultant to maintain its accounting software and cloud database. Since this is recurring revenue expenditure, entirely for business operations, and not covered under other specific sections, it is fully allowable.

Conversely, if the same firm buys a brand new ERP software license (Capital) or pays for the partner’s personal health insurance (Personal), it fails the test.

Section 34(2)

For the purposes of sub-section (1),

an expenditure laid out or expended wholly and exclusively for business or profession by the assessee shall not include any of the following:–

(a) Illegal/Unlawful Expenses: an expenditure incurred for any purpose which is an offence or is prohibited by law; or

(b) CSR Expenditure: an expenditure incurred on the activities relating to CSR referred to in section 135 of the Companies Act, 2013; or

(c) Advertisements in souvenirs of political parties an expenditure incurred on advertisement in any souvenir, brochure, tract, pamphlet or the like, published by a political party.

Ex

Example on Clause (b)

Company pays a corporate contribution of ₹5 Lakhs towards constructing a community park under its mandatory CSR obligations. Even though it is a statutory business obligation under corporate law, clause (b) explicitly denies a tax deduction for this expense.

Section 34(3)

The expenditure mentioned in sub-section (2)(a) shall include expenditure incurred for–

(a) Domestic and International Offences:

any purpose which is an offence under, or is prohibited by, any law in force in or outside India; or

(b) Prohibited Benefits/Perquisites (Freebies)

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 it’s acceptance by the person is in violation of any law or rule or regulation or guideline governing the conduct of that person; or

(c) Compounding Fees:

compounding an offence under any law in force in or outside India; or

(d) Settlement Charges:

settling proceedings initiated in relation to contravention under any law notified by the Central Government in this behalf.

Ex

Example on Clause (b)

Expenses incurred in providing freebies to medical practitioner by pharmaceutical and allied health sector industry are in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations.

Hence, such expenditure is considered to be expenses prohibited by the law and not allowed in the hands of such pharmaceutical or allied health sector industry or other assessee which has provided aforesaid freebies.

Ex

Example on Clause (c)

A manufacturing firm pays a penalty of ₹50,000 to a state pollution control board to compound an environmental violation and avoid prosecution. This compounding fee is strictly non-deductible.

The rationale behind the disallowance is that CSR expenditure, being an application of income, is not incurred wholly and exclusively for the purposes of carrying on business.