CBDT disallows I-T deductions for expenses incurred to settle proceedings under SEBI Act, Competition Act & 2 other laws. New rule via Finance Act 2024 clarifies no business expense claims for such settlements, overriding past tribunal rulings. Taxpayers urged to reassess compliance stance.
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. (Freepik)
Taxpayers will not be allowed to claim a deduction for expenditures incurred to settle proceedings initiated for contravention or defaults under four laws, including the SEBI Act and the Competition Act, the Central Board of Direct Taxes (CBDT) said.
In a notification dated April 23, the CBDT notified that any expenditure incurred to settle proceedings initiated in relation to contravention or defaults under the four specified laws would 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.
“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,” said Amit Maheshwari, tax partner, AKM Global, a tax and consulting firm said.
However, the CBDT—by way of Explanation 3, clause (iv) to section 37(1), inserted via the Finance Act, 2024—has notified that any expenditure incurred for settlement or compounding of proceedings under specific legislations in India or outside India, including the SEBI Act, the Securities Contracts (Regulation) Act, the Depositories Act, and the Competition Act, shall not be eligible for deduction, he 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 said.
Taxpayers are thus advised to re-evaluate their positions and exposure in light of this definitive guidance, he added.
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