New Tax Rules Eliminate Deduction for Settlement Expenditures

The income tax department announced that taxpayers cannot claim deductions for expenses incurred in settling proceedings under four laws, including SEBI and the Competition Act. Changes by the CBDT, effective from the Finance Act 2024, aim to provide clarity despite ongoing debates and exceptions under other regulatory laws.

The income tax department has declared that taxpayers will be prohibited from claiming deductions on expenditures made to settle proceedings initiated under four significant laws, such as the SEBI Act and the Competition Act.

In a recent announcement, the Central Board of Direct Taxes (CBDT) stated that expenses related to the settlement of proceedings for contraventions under these four specified laws will not qualify as deductible business or professional expenses. The laws in question include the Securities and Exchange Board of India Act, 1992, the Securities Contracts (Regulation) Act, 1956, the Depositories Act, 1996, and the Competition Act, 2002.

Amit Maheshwari, a Tax Partner at AKM Global, noted that this move addresses ongoing judicial debates, especially following cases like Income Tax Officer v. Reliance Share & Stock Brokers (P.) Ltd., where certain settlement expenses were previously allowed. However, the revised rules introduced in the Finance Act of 2024 no longer permit such deductions, though uncertainties linger regarding other regulatory frameworks like FEMA and RBI guidelines.

(With inputs from agencies.)