Settle a Sebi case? You can't claim it as a business expense anymore

The Income Tax Department has ruled that businesses can no longer claim tax deductions for settlements or penalties paid under four key laws, including the SEBI and Competition Acts.

On April 24, the Income Tax Department (CBDT) issued a new rule that affects how businesses handle certain legal expenses in their tax filings. In a notification issued on Thursday, the Central Board of Direct Taxes (CBDT) clarified that any expenditure incurred to resolve or settle proceedings related to violations under four specific laws will not be considered a legitimate business expense. This means such amounts cannot be deducted from taxable income while computing profits for tax purposes.

 

What’s the rule About?

If a company pays money to settle a case or proceeding under any of the following four laws:

 

• SEBI Act, 1992 (for violations in the stock market)
• Securities Contracts (Regulation) Act, 1956
• Depositories Act, 1996 (related to shareholding systems)
• Competition Act, 2002 (anti-trust or monopoly-related cases)

 

then those payments cannot be claimed as a business expense while filing income tax.

 

The decision effectively closes a tax loophole that allowed companies to potentially reduce their taxable income by treating penalties or settlement payments related to regulatory violations as normal business expenditures.

 

 What Does It Mean for Taxpayers?

 

Let’s say a company is fined by SEBI or agrees to pay a settlement to resolve a case under the Competition Act.

 

Before this rule: They might have tried to reduce their taxable income by calling that settlement an "expense" in their profit & loss account.

 

After this rule: They can’t do that anymore. That settlement won’t reduce their taxable profit, so they’ll pay more tax.

 

Why is this important?

The government is drawing a line: Expenses related to breaking the law or settling legal violations aren't part of doing “normal business.”

 

It stops companies from getting tax benefits for wrongdoing, even if they settle instead of going through full legal proceedings.

 

 "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 deductions," said Amit Maheshwari, Tax Partner at AKM Global.