Clause 35 - Determination of operating expenditure. - Direct Taxes Code, 2010

Determination of operating expenditure. 35. (1) The amount of operating expenditure referred to in clause (a) of sub-section (1) of section 34 shall be the aggregate of— (a) the amount of expenditure specified in sub-section (2), if— (i) the expenditure is laid out or expended, wholly and exclusively, for the purposes of the business; and (ii) it fulfills other conditions, if any, specified therein; and (b) the amount of deductions specified in sub-section (3) subject to the fulfillment of the conditions, if any, specified therein. (2) The amount of expenditure referred to in clause (a) of sub-section (1) shall be the amount of expenditure on, or on account of,— (i) purchase of raw material, stores, spares and consumables, or stock-in-trade; (ii) rent paid for any premises if it is occupied and used by the person; (iii) current repairs to buildings if it is occupied and used by the person; (iv) land revenue, local rates or municipal taxes in respect of premises occupied and used by the person is actually paid; (v) current repair of machinery, plant or furniture used by the person; (vi) current maintenance or repairs of computer software or hardware; (vii) salary or wages of employees; (viii) remuneration to any working participant which is in accordance with the agreement of the unincorporated body and relates to the period falling after the date of such agreement limited to the extent as may be preseribed; (ix) any premium paid to effect, or to keep in force, an insurance in respect of,— (a) any premise occupied and used by the person; (b) any machinery, plant or furniture used by the person; (c) stocks or stores belonging to the person; (d) the health of any employee of the person; and (e) any other asset owned and used by the person; (x) any premium paid by the person, being a federal milk co-operative society, to effect, or to keep in force, an insurance on the life of the cattle owned by a member of a co-operative society, being a primary society engaged in supplying milk, raised by its members to such federal milk co-operative society. (xi) welfare of workmen and staff; (xii) power and fuel; (xiii) freight, clearing and forwarding charge; (xiv) selling expense in the nature of commission, brokerage, discount, or warranty charge; (xv) sales promotion including advertisement and publicity; (xvi) training of employees; (xvii) conference; (xviii) use of hotel or boarding and lodging facilities; (xix) conveyance, tour or travel; (xx) running or maintenance of motor car or aircraft; (xxi) postage and telecommunications; (xxii) audit and such other professional fees; (xxiii) legal services; (xxiv) entertainment and provision of hospitality; (xxv) maintenance of guest-house; (xxvi) subscription, including entrance fee, to a club or a trade association or the use of their facilities; (xxvii) scientific research and development related to the business; (xxviii) salary to an employee engaged in, or the purchase of material used in, scientific research and development, within a period of three years immediately preceding the commencement of the business; (xxix) contribution by the person, being an employer, to an approved fund subject to such limits and conditions, as may be prescribed and to the extent the amount is actually paid; (xxx) contribution to any fund, referred to in clause (xvi) of sub-section (2) of section 33, to the extent,— (a) the amount has been received from his employees as their contribution to the fund; and (b) it is actually paid; (xxxi) any head office expenditure by a non-resident, as is attributable to his business in India, not exceeding an amount equal to one-half per cent. of the total sales, turnover or gross receipts of business in India; (xxxii) cost of acquisition of the asset as in the case of the predecessor and cost of any improvement made thereto and expenditure incurred wholly and exclusively in connection with the transfer of the asset, by the predecessor, if — (a) the person is the successor in the business reorganisation; (b) the asset becomes the property of the person under a scheme of business reorganisation; and (c) the asset is sold by the person as a business trading asset; (xxxiii) cost of acquisition of the asset as in the case of the transferor or the donor, and cost of any improvement made thereto and expenditure incurred wholly and exclusively in connection with the transfer of the asset (including the payment of gift tax, if any), by the transferor or the donor, if — (a) the person is the transferee or the donee; (b) the asset becomes the property of the person on the total or partial partition of a Hindu undivided family or under a gift or will or an irrevocable trust; and (c) the asset is sold by the person as a business trading asset; (xxxiv) protecting or safeguarding the goodwill of person, which has necessarily to be preserved for the purpose of his business; (xxxv) tax (not being a tax under this Code), duty, cess, royalty or fee, by whatever name called, under any law for the time being in force, if the amount is actually paid; (xxxvi) bonus or commission to employees for services rendered if— (a) the amount would not have been payable to employees as profits or dividends had it not been paid as bonus or commission; and (b) the amount is actually paid; (xxxvii) encashment of leave to the credit of employees, to the extent the amount is actually paid; (xxxviii) gratuity to employees on their retirement or on termination of their employment, to the extent the amount is actually paid; (xxxix) the purposes of a body corporate constituted or established under a Central, State or Provincial Act, if— (a) such purposes are authorised by the said Act; (b) such body corporate is notified by the Central Government for the purposes of this clause; (xl) the amount paid by a public financial institution by way of contribution to a credit guarantee fund trust for small industries which is notified by the Central Government for the purposes of this clause; (xli) the actual cost of the licence referred to in clause (iv) of sub-section (2) of section 33, in the year in which the consideration on account of sale forms part of gross earnings; (xlii) the actual cost of the right or benefit referred to in clause (v) of sub-section (2) of section 33, in the year in which the consideration transfer forms part of gross earnings; (xliii) the repayment of any advance or security deposit in respect of the long-term leasing referred to in clause (xx) of sub-section (2) of section 33, in the year in which such repayment is made; (xliv) any other operating expenditure not covered under clause (i) to clause (xliii). (3) The amount of deductions referred to in clause (b) of sub-section (1) shall be the following, namely:— (a) the value of inventory of the business, as at the beginning of the financial year; (b) loss of inventory, or money, on account of theft, robbery, fraud or embezzlement, occurring in the course of the business, if the inventory, or the money, is written off in the books of account; (c) any amount credited to the provision for bad and doubtful debts account, not exceeding one per cent of the aggregate average advances computed in the prescribed manner if,— (i) the person is a financial institution, or a non-banking finance company as may be notified; (ii) the amount is charged to the profit and loss account for the financial year in accordance with the prudential norms of the Reserve Bank of India in this regard; and (iii) the amount of trade debt or part thereof written off as irrecoverable in the books of the person is debited to the provision for bad and doubtful debts account; (d) the debit balance, if any, on the last day of the financial year, in the provision for bad and doubtful debts account made under clause (c), if the balance has been transferred to the profit and loss account of the financial year; (e) trade debt or part thereof, if,— (i) the person is other than a person referred to in sub-clause (i) of clause (c); and (ii) the amount is written off as irrecoverable in the books of the person; (f) payment during the financial year in discharge of any remitted or ceased liability which has been included in the gross earnings of any preceding financial year under clause (xii) or clause (xiii) of sub-section (2) of section 33. (4) Notwithstanding anything in sub-section (2) or sub-section (3) the amount of operating expenditure shall not include the amount of expenditure, being in the nature of, or on account of, — (a) personal expenses of the person; (b) capital expenditure including expenditure in respect of which capital allowance is allowable under section 37; (c) finance charges; (d) any unascertained liability of the person; (e) remuneration payable to any participant other than a working participant; (f) any expenditure incurred by a person on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party; (g) any amount of contribution by an employer during the finanical year to an approved superannuation fund on account of an employee to the extent it exceeds one lak rupees; (h) any tax, interest or penalty payable under this Code or the Income-tax Act, 1961 or the Welath Tax Act, 1957 as they stood before the commencement of this Code; (i) any amount paid which is eligible for relief of tax under section 207; and (j) any dividend declared or distributed or paid. (5) Any amount of expenditure or deduction referred to in sub-section (1) or subsection (2) or under section 36 or under section 37, if it is in excess of the amount or in breach of the condition specified therein, shall not be allowed as deduction under clause (xliv) of sub-section (2) on the ground that it is laid out or expended, wholly and exclusively, for the purposes of business. (6) The deduction in respect of the amount referred to in clauses (iv), (xxx) and clauses (xxxv) to (xxxviii) of sub-section (2) shall, notwithstanding anything contained in subsection (1), be allowed in the financial year in which the liability has arisen, if it is paid in the financial year or by the due date of filing return of tax bases of that financial year. (7) If any deduction is not allowed on account of the provisions of sub-section (6), it shall be allowed in the financial year in which the amount is actually paid.