CBDT Bars Tax Deductions for Settlement Expenses Under 4 Different Acts

The Central Board of Direct Taxes (CBDT) has made a clear rule: taxpayers can no longer claim income tax deductions on money spent to settle legal cases or proceedings under 4 specific laws. These include:

1. The SEBI Act, 1992
2. The Securities Contracts (Regulation) Act, 1956
3. The Depositories Act, 1996
4. The Competition Act, 2002

New Rule Under Finance Act 2024

 According to a notification dated April 23, 2025, the CBDT said these expenses will not be considered as business or professional expenses under Section 37(1) of the Income Tax Act. That means no deduction or allowance will be given, even if the settlement was done to avoid long legal battles.

Why This Matters

 Earlier, there were several court cases where companies were allowed to claim settlement expenses such as business costs. For example, in the case of ITO v. Reliance Share & Stock Brokers, the tribunal allowed consent fees paid to SEBI as a business expense, saying it was for “commercial expediency.”

But with the new rule—Explanation 3, Clause (iv) to Section 37(1)—these earlier judgments will no longer apply. The law is now clearer and stricter.

What Should Taxpayers Do Now?

Tax experts say this update is designed to remove confusion from the tax rules. However, there are still some unclear areas under laws like FEMA and RBI rules.

They advise businesses to reassess their tax positions and check if they are exposed to similar issues in ongoing or future cases.

Conclusion

This move by the CBDT aims to stop companies from reducing their tax burden using settlement payments. It brings clarity but also calls for companies to review their compliance and legal strategies.

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