Expenditure incurred to settle proceedings initiated in relation to contravention or defaults under (1) SEBI Act, (2) Competition Act, (3) Depositories Act and (4) Securities (Contracts) Regulation Act – Deductibility.
CBDT has issued a Notification no.38/2025 dated 23.05.2025 notifying the above four laws as required by the recent amendment to Expln.3(iii) of section 37(1) of the Income Tax Act, 1961 made vide Finance Act (no.2),2024.
Section 37(1) provides for allowing deduction of expenses incurred 'for the purpose of business'. However, Explanation 1 to that section forbids deduction of expenses which forbidden under any law or which is an offence. In the year 2022, the law was amended (by inserting Expl.3) to clarify that the expenditure which is forbidden under the laws in force even 'outside' India would be covered by this prohibition. The same amendment also made payment like 'bribes' even in private sector and compounding charges etc. paid for settling disputes under any law as non-deductible.
There has been a lot of controversy as to what constitutes a forbidden expenditure and whether an authority under the Income Tax Act is competent to decide on the nature of an expenditure incurred under some other law. Vide Finance Act(no.2), 2025, an amendment was made to Expln.3(iii) of section 37(1) providing for notification of 'different laws' which would be covered by the prohibition imposed by that section.
The effect of this notification is that such expenditure incurred to settle any disputes under the above-mentioned four laws are not chargeable to P&L A/c and cannot be claimed as deduction in computing the total income.
Two points are worth considering:
(1) By notifying these four laws under Expln. 3 to section 37(1), the Govt has impliedly accepted that similar expenses under other laws would not be affected.
(2) Eeven though Expln. 3 provides a retrospective interpretation to Expl.1 of section 37(1), it would be worth seeing if the Courts accept retrospectivity to this notification.
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