Tax deductions barred for legal settlements under select laws
The Central Board of Direct Taxes (CBDT) has clarified that settlement payments made under key financial regulatory laws will no longer be eligible for tax deductions. This change, introduced through the Finance Act, 2024, will come into effect from 1 April 2025.
In a notification issued on 23 April 2025, the CBDT stated that taxpayers cannot claim deductions for settlement payments arising from legal proceedings 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.
This move seeks to settle long-standing ambiguity over whether such payments could be treated as deductible business expenditures under Section 37(1) of the Income-tax Act, 1961. The issue has been at the center of various legal debates, particularly in cases such as Income Tax Officer v. Reliance Share & Stock Brokers, where consent fees paid to SEBI were allowed as business expenses on grounds of commercial expediency.
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