Tax deductions cannot be claimed to settle proceedings under 4 laws

New Delhi: The income tax department on Thursday said taxpayers will not be allowed to claim deduction for expenditures incurred to settle proceedings initiated under four laws, including the Sebi and the Competition Act.

In a notification issued on April 23, the Central Board of Direct Taxes (CBDT) notified that any expenditure incurred to settle proceedings initiated in relation to contravention or defaults under the four specified laws shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance will be allowed for such expenditure.

The four laws are the Securities and Exchange Board of India Act, 1992; the Securities Contracts (Regulation) Act, 1956; the Depositories Act, 1996; and the Competition Act, 2002.

Amit Maheshwari, Tax Partner at AKM Global, said, “The deductibility of settlement payments under Section 37(1) of the Income-tax Act, 1961, has long been a subject of judicial debate, particularly in cases like Income Tax Officer v. Reliance Share & Stock Brokers (P.) Ltd., where consent fees paid to SEBI were allowed as business expenditure on grounds of commercial

expediency.”

However, the CBDT brought in changes to law via Finance Act, 2024, and has now notified that any expenditure incurred for settlement or compounding of proceedings under specific legislations in India or outside, including the SEBI Act, the Securities Contracts (Regulation) Act, the Depositories Act, and the Competition Act, shall not be eligible for deduction, Maheshwari said.

“This effectively overrides prior tribunal rulings and brings much needed clarity to the tax landscape, although grey areas persist under other regulatory laws such as FEMA and RBI directions,” Maheshwari added.