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FAQs on Notification No. 38/2025 [F. No 370142/11/2025-TPL] / SO 1838(E) Q1. What is Section 37 of the Income-tax Act, 1961 ('the Act')? Ans. Section 37 of the Act provides for the allowability of expenditure laid out or expended wholly andexclusively for the purpose of business or profession.
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FAQ :
Section 37 of the Income-tax Act, 1961, allows for the deductibility of expenses that are incurred wholly and exclusively for the purpose of business or profession.
Explanation 1 states that any expenditure incurred for an illegal or prohibited purpose cannot be considered as incurred for business purposes, and thus no deduction can be claimed for it.
Explanation 3 was amended by the Finance (No. 2) Act, 2024, to clarify that 'expenditure incurred for any purpose which is an offence or which is prohibited by law' includes expenses to settle proceedings related to contraventions under laws notified by the Central Government.
The laws notified 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.
Businesses can no longer claim expenditure incurred to settle proceedings under the specified laws as a tax deduction from Assessment Year 2025-26 onwards.
The amendment is effective from 1 April 2025, and applies to Assessment Year 2025-26 and subsequent years.
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