Section 36

Other Deductions

Stock or Stores/Damage/Destruction - Clause (i) Of Sub-Section (1)

n The expression ‘stocks or stores’ has not been defined and must, therefore, be given its ordinary meaning. The word ‘damage’ would mean injury or harm that impairs the value of any property. Destruction of property would take place where the injury caused thereto is beyond repair or reduces the utility of the property to nil or results in complete ruination of the property - CIT v. Khodidas Motiram Panchal [1986] 27 Taxman 208/161 ITR 99 (Guj.).

Profit Bonus

n A profit bonus is strictly not wages, at least, not for the purpose of computing liability to income-tax; it is not an expense in the ordinary sense of the term, incurred for the purpose of earning profits. A fortiorari profits have already been made. It is more like sharing of profits on the basis of a certain formula - CIT v. Swadeshi Cotton & Flour Mills (P.) Ltd. [1964] 53 ITR 134 (SC).

Commission - Clause (ii) of sub-section (1)

n The expression ‘commission’ has no technical meaning but both in legal and commercial acceptation of the term it has definite signification and is understood as an allowance for service or labour in discharging certain duties, such for instance, of an agent, factor, broker or any other person who manages the affairs or undertakes to do some work or renders some service to another. Mostly it is a percentage on price or value or upon the amount of money involved in any transaction of sale or service or the quantum of work involved in a transaction. It can be for a variety of services and is of the nature of recompense or reward for such services - Harihar Cotton Pressing Factory v. CIT [1960] 39 ITR 594 (Bom.).

n The word ‘commission’ in this clause should be interpreted ejusdem generis with the word ‘bonus’. - Raja Ram Kumar Bhargava v. CIT [1963] 47 ITR 680 (All.).

Business - Clause (iii) of sub-section (1)

“Business” is an adventure or undertaking to gain profit out of the transaction. Even if it is one transaction, even then it is an adventure and a business. If someone starts a business and then leaves it after one transaction, even then it would be a business. As such a sporadic action cannot be singled out to discard that it is not part of the business - Tetron Commercial Ltd. v. CIT [2003] 261 ITR 422/133 Taxman 781 (Cal.).

Capital - Clause (iii) of sub-section (1)

n The expression ‘capital’ in the context in which it occurs means money and not any other asset, for interest is payable on capital borrowed and interest becomes payable on a loan of money and not on any other asset acquired under a contract. - Bombay Steam Navigation Co. (1953) (P.) Ltd. v. CIT [1965] 56 ITR 52 (SC).

Capital Borrowed - Clause (iii) of sub-section (1)

n The expression ‘capital borrowed’ predicates relation of a borrower and a lender and contemplates lending of money and borrowing of the lender’s money by the borrower with a contractual stipulation for repayment with interest on the loan - Ramaswaran Iyyanger v. CIT [1950] 18 ITR 150 (Mad.).

n The expression ‘capital borrowed’ used in section 36(1)(iii), in the context in which it is placed in the provision, means money and not any other asset - CIT v. Saraswati Chemicals & Allied Industries (P.) Ltd. [2001] 114 Taxman 564/249 ITR 235 (Delhi).

Interest - Clause (iii) of sub-section (1)

n “Interest” is the return or compensation for the retention by one person of a sum of money belonging to or owed to another. The essence of interest is that it is a payment which becomes due because the creditor has not had his money at the due date. It may be regarded either as representing the profit he might have made if he had the use of the money or, conversely, the loss he suffered because he had not that use. It is only interest in the above sense which is deductible under section 36(1)(iii). If in the garb of interest, something more is paid over and above “interest”, that something cannot be allowed as deduction under this section - CIT v. Hindustan Conductors (P.) Ltd. [1999] 240 ITR 762 (Bom.).

For the purpose of business – Clause (iii) of sub-section (1)

n Expression ‘for the purpose of business’ in section 36(1)(i) is wider in scope than the expression “for the purpose of making or earning income” used in section 57(iii). Therefore, the scope for allowing a deduction under section 36(1)(iii) is much wider than the one available under section 57(iii) - CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377/121 Taxman 706 (Delhi).

Paid - Clause (iv) of sub-section (1)

n A conjoint reading of section 36(1)(iv) and section 43(2) makes it abundantly clear that the term ‘paid’ appearing in section 36(1)(iv) means not only ‘actually paid’ but also ‘incurred’ according to the method of accounting upon the basis of which the profits and gains are computed under the head ‘Profits and gains of business or profession’ - CIT v. Tata Hydro Electric Supply Co. Ltd. [1996] 85 Taxman 444/219 ITR 178 (Bom.).

Paid - Clause (v) of sub-section (1)

n The expression ‘paid’ in section 36(1)(v) cannot be construed as or confined to only payment of cash during assessment year in question - CIT v. Vellore Electric Corpn. Ltd. [1998] 101 Taxman 616 (Mad.).

Any sum Paid - Clause (v) of sub-section (1)

n The expression ‘any sum paid’ in section 36(1)(v) would include not only cash payment but also the payment by way of transfer of valuable securities - CIT v. Vellore Electric Corpn. Ltd. [1998] 101 Taxman 616 (Mad.).

Bad - Clause (vii) of sub-section (1)

n The word ‘bad’ used in conjunction with the word ‘debt’ in section 36(1)(vii) means worthless - CIT v. Coates of India Ltd. [1998] 99 Taxman 174/232 ITR 324 (Cal.).

Any such debt or part thereof - Clause (vii) of sub-section (1)

n The use of the words ‘any such debt or part thereof’ clearly indicates that the exclusion provision in proviso of section 36(1)(vii) will apply only in cases where a provision for bad and doubtful debts has been made in the relevant accounting year in respect of the bad and doubtful debts, which were outstanding at the commencement of the relevant accounting year and/or were also outstanding at the end of the relevant year - CIT v. Bank of Rajasthan Ltd. [2002] 124 Taxman 781/255 ITR 599 (Raj.).

Irrecoverable - Sub-clause (b) of clause (i) of sub-section (2)

n Whatever be the attendant circumstances, unless and until a debt has been written off as ‘irrecoverable’ as provided under section 36(2)(i)(b), the assessee cannot claim any deduction for bad debts. The word ‘Irrecoverable’ in section 36(2)(i)(b) means the amount that is not recoverable - Kerala State Industrial Development Corpn. Ltd. v. CIT [2006] 151 Taxman 127/281 ITR 413/201 CTR 144 (Ker.).