The Central Board of Direct Taxes (CBDT), under the Ministry of Finance, has issued a crucial notification clarifying that any expenditure incurred by businesses to settle proceedings related to violations under key financial and competition laws will not qualify as deductible business expenses under the Income-tax Act, 1961.
Through Notification S.O. 1838(E), issued on April 23, 2025, the government has invoked clause (iv) of Explanation 3 of sub-section (1) of Section 37 of the Income-tax Act. The notification states that no deduction or allowance shall be permitted for expenses incurred to settle proceedings arising from contraventions or defaults under the following laws:
- The Securities and Exchange Board of India (SEBI) Act, 1992
- The Securities Contracts (Regulation) Act, 1956
- The Depositories Act, 1996
- The Competition Act, 2002
The notification makes it clear that such expenditures - whether in the form of penalties, settlements, or any financial liabilities will not be considered as expenses "wholly and exclusively" incurred for the purpose of business or profession.
This move is in line with the government’s broader objective of discouraging non-compliance with regulatory frameworks and reinforcing ethical corporate governance.
The notification comes into effect immediately upon its publication in the Official Gazette.
Official copy of the notification is as follows
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