No More Tax Relief on SEBI, Competition Settlements: CBDT

In a significant move aimed at curbing tax benefits associated with regulatory violations, the Central Board of Direct Taxes (CBDT) has issued a notification disallowing income tax deductions for expenses incurred in settling cases under four key financial and corporate laws. This change, effective from April 1, 2024, stems from amendments made in the Finance Act 2024 and targets an area that has long sparked legal and tax debates.

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Settlement Expenses Now Off the Deduction Table

As per the CBDT's notification dated April 23, no tax deductions will be permitted for settlement payments made under the Securities and Exchange Board of India (SEBI) Act, 1992; the Securities Contracts (Regulation) Act, 1956; the Depositories Act, 1996; and the Competition Act, 2002. These payments will no longer qualify as allowable business expenditures under Section 37(1) of the Income-tax Act, 1961.

Tax expert Amit Maheshwari, Partner at AKM Global, highlighted the significance of this clarification. "The deductibility of settlement payments under Section 37(1) has long been a subject of judicial interpretation, especially in cases like Income Tax Officer vs. Reliance Share & Stock Brokers, where SEBI consent fees were earlier accepted as business expenses," he noted.

The recent amendment, introduced through Explanation 3, clause (iv) to Section 37(1), overrides earlier tribunal rulings that had provided room for interpretation. With the new rule, any expenditure incurred for settlement or compounding of legal proceedings under the specified laws — whether in India or abroad — will not be considered a business or professional expense. Consequently, companies can no longer lower their taxable income using such payments.

Impact on Businesses: Higher Tax Burden Ahead

This notification clearly states the government's position: expenses arising from legal violations are not part of regular business activity and cannot be rewarded with tax benefits. "This brings clarity to the tax treatment of settlement costs," said Maheshwari, although he acknowledged that ambiguities still exist under other frameworks, such as FEMA and RBI regulations.

The move is seen as a step towards promoting corporate accountability and eliminating loopholes that allowed companies to gain tax relief for regulatory settlements. In light of this development, taxpayers are now advised to reassess their compliance strategies and financial reporting practices.

Conclusion

The CBDT's new rule signals a firm policy shift: Legal violations will not receive income tax relief even when settled out of court. Companies must now treat such settlements as non-deductible and update their compliance frameworks accordingly.