S.37 – The expression “wholly and exclusively” does not mean necessarily.

The true test for an expenditure, laid out wholly and exclusively for the purpose of business, is that it is incurred by the assessee as incidental to its trade for the purpose of keeping its trade going on and that the expenditure must be incurred by the assessee as a trader and not in any other capacity. The word “wholly” refers to the quantum of expenditure and the word “exclusively” refers to the motive, objective and purpose of the expenditure. The expression “wholly and exclusively”, appearing in section 37, does not mean necessarily. When an expenditure is claimed to have been incurred by an assessee for promotion of his business, there is no legal obligation imposed on the assessee to prove that the expenditure was necessary for promotion of his business. CIT v. Williamson Tea (Assam) Ltd. [2013] 355 ITR 323 (Gau). [2013] 263 CTR (Gau) 96.

While applying section 37(1), it is to be noted that the expenditure claimed therein need not be ‘necessarily’ spent by the assessee. It might be incurred ‘voluntarily’ and without any ‘necessity’, but it must be for promoting the business. In other words, if the expenditure has been incurred by the assessee voluntarily, even without necessity, but if it is for promoting the business, the deduction would be permissible under section 37(1) of the Act. CIT v. Infosys Technologies Ltd. [2014] 360 ITR 714 (Kar). [2014] 223 Taxman 469 (Kar).

The expression “wholly and exclusively” found in section 37 of the Act cannot be understood in a narrowed manner. It has to be given interpretation so as to achieve the object of the Act. Thus, where the amount is expended and claimed as an expenditure allowable under section 37(1) of the Act, it need not be that such disbursement is made in the course of, or arises out of, or is connected with the trade or is made out of the profits of the trade. It must be made for the purpose of earning the profits. If the activity be undertaken with the object both of promoting business and also with some other purpose, such expenditure so incurred would not be disqualified from being claimed as a business expenditure, solely on the ground that the activity involved for such expenditure is not directly connected to the business activity. In other words, the issue of commercial expediency would also arise. Kanhaiyalal Dudheria v. JCIT [2019] 418 ITR 410 (Kar).