[Opinion] Section 37 | The Magic Provision of the Income Tax Act

Gopal Nathani – [2025] 172 taxmann.com 679 (Article)

Section 37 of the Indian Income Tax Act, 1961 is goodies-bag magic provision. It begins with the words ‘any expenditure …..’ and ends with the words ‘…….shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”. This section lists certain conditions such as that the amounts shall not be capital in nature nor personal in nature and most importantly not those that are prohibited by any law or practice.

Interestingly there is no any condition anywhere in this section stating that ‘any expenditure’ therein shall not include any loss or a provision for loss or depreciation. Therefore, for all intents and purposes it shall include not only any kind of losses but also provisions that correspond to an expenditure capable of recording as debit to profit and loss account.

Vide Instruction No.17/2008, dated 26-11-2008 the CBDT seeks strict compliance of certain provisions of the Income tax Act, the Companies Act and RBI guidelines in the context of assessment of banks. Drawing reference to Companies Act it is in particular stated that the banks have to follow the mercantile system of accounting and prepare accounts on accrual basis. The Assessing Officers should ensure that this system is strictly followed by the Banks (in respect of all sources of income). Drawing further reference to RBI guidelines dated 16th October 2000 in the context of the investment/stocks portfolio of the banks it provides that the depreciation/appreciation is to be aggregated scrip wise and only net depreciation, if any, is required to be provided for in the accounts.

In a recent IndusInd bank controversy alleged accounting discrepancies are pointed in the derivative portfolio tor underreporting/unreporting of provisions for marked to market losses despite the 2008 Instruction above said.

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