The Income Tax Department on Thursday said that taxpayers will not be allowed to claim deductions for expenses made to settle proceedings under four laws, including the SEBI Act and the Competition Act. These 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. In a notification issued on April 23, the Central Board of Direct Taxes (CBDT), which controls the Income Tax Department, clearly stated that any expense made to settle violations or defaults under these laws will not be considered as a business or professional expense.

The CBDT stated that no deductions or allowances will be granted for such expenses. Amit Maheshwari, tax partner at AKM Global, explained that the deduction of settlement payments under Section 37(1) of the Income Tax Act, 1961, has been a topic of judicial debate for a long time. In the past, the consent fee paid to SEBI was allowed as a business expense based on commercial convenience.

A Grey Area

However, Maheshwari noted that the CBDT made changes to the law through the Finance Act, 2024, and has now officially notified it. According to the new rule, any expenses incurred for the settlement or compromise of proceedings under the specified laws—such as the SEBI Act, Securities Contracts (Regulation) Act, Depositories Act, and Competition Act, whether in India or abroad—will no longer be eligible for a deduction.

Maheshwari stated that this change effectively overrules previous tribunal decisions and brings much-needed clarity to the tax landscape. However, a “grey area” remains under other regulatory laws like FEMA and RBI instructions.