Background and Rationale:

Central Government has issued this notification to clarify the scope of Explanation 3 to Section 37(1) that deals with General Expenditure of the Income-tax Act, 1961. Under this Explanation, any expenditure incurred for an offence or for activities that are prohibited by law is disallowed as a business expenditure.

The new notification specifically targets amounts paid for settling proceedings related to certain regulatory laws, reinforcing the principle that violations of regulatory statutes cannot result in tax benefits through allowable deductions. This move aligns with the broader intent of discouraging non-compliance with financial, competition, and securities regulations.

Amendments and Their Implementation:

• Key Change: Any expenditure incurred by taxpayers for the settlement of proceedings related to contraventions or defaults under the following legislations will not be allowed as a deduction while computing business income:
  1. Securities and Exchange Board of India Act, 1992
  2. Securities Contracts (Regulation) Act, 1956
  3. Depositories Act, 1996
  4. Competition Act, 2002
• Effect:

• • Such expenses, even if incurred in the course of business, will be treated as inadmissible deductions under income-tax returns.
  • Taxpayers cannot claim any settlement amount or penalty paid under the above Acts as deductible business expenditure.

• Application: This applies to both pending and future expenditures claimed in assessments post the notification’s publication date.

Implications and Future Prospects:

• Impact on Companies: Corporates operating in securities, financial markets, or competition-sensitive sectors will need to be cautious, as any fines, settlements, or penalties under these acts will not be tax-shielded.
• Financial Planning Adjustments: Entities may need to revisit internal risk, compliance, and tax planning strategies to account for the non-deductibility of these expenses.
• Audit and Scrutiny: Tax audits are likely to review settlement payments carefully to check for inadmissible claims.

Conclusion:

The notification dated April 23, 2025, by the Ministry of Finance, clarifies that settlement expenditures related to contraventions under SEBI Act, SCRA, Depositories Act, and Competition Act will not qualify for tax deductions under the Income-tax Act. This move enhances accountability and regulatory compliance, and ensures that entities do not benefit tax-wise from unlawful activities.

For businesses, strict adherence to compliance protocols is now more critical, not only for regulatory purposes but also for maintaining tax efficiency.