Settle a Sebi case? You can't claim it as a business expense anymore

By Admin

25 Apr, 2025

On April 24, 2025, the Central Board of Direct Taxes (CBDT) introduced a significant change that will affect how businesses report certain legal expenditures. In a move that tightens the scope of allowable deductions under the Income Tax Act, the CBDT has officially ruled that settlements or penalties paid under specific regulatory laws can no longer be claimed as business expenses for tax purposes.

What’s the New Rule?

The latest CBDT notification clarifies that any payments made by businesses to settle or resolve proceedings under the following four key legislations will not be eligible for tax deductions:

• SEBI Act, 1992 – for violations in the stock market
  
  

• Securities Contracts (Regulation) Act, 1956
  
  

• Depositories Act, 1996 – related to depository and shareholding systems
  
  

• Competition Act, 2002 – for cases involving anti-competitive practices
  
  

Previously, businesses could potentially treat these payments as part of their "ordinary course of business" and claim them as deductions under Section 37(1) of the Income-tax Act, 1961. This section generally allows deductions for expenses incurred wholly and exclusively for business purposes—unless expressly disallowed.

Closing a Long-Debated Loophole

The tax treatment of such expenses has long been under legal scrutiny. In landmark cases like Income Tax Officer v. Reliance Share Stock Brokers (P.) Ltd., consent fees paid to SEBI were allowed as deductible business expenses on the basis of commercial necessity.

However, the Finance Act, 2024, brought about key amendments, and the recent notification serves as a final word from the tax authorities. As Amit Maheshwari, Tax Partner at AKM Global, explained, "The CBDT has now notified that any expenditure incurred for settlement or compounding of proceedings under specific legislations in India or outside shall not be eligible for deductions."

What Does This Mean for Businesses?

Let’s break it down with a simple scenario:

• Before the Rule:
  A company fined by SEBI could treat the settlement as a business expense, thereby reducing its taxable income.
  
  

• After the Rule:
  That same company can no longer make such a claim. The expense will be disallowed, resulting in a higher tax liability.
  
  

This is a crucial development for tax planning. Companies will now have to reassess how they account for regulatory costs in their financials, especially those involving potential violations or compliance settlements.

Why Is This Important?

This move is more than just a policy update—it represents a clear stance by the government:

• Legal violations aren't part of regular business activities.
  The tax benefit of settling such issues is now removed.
  
  

• Discouraging misconduct:
  The rule aims to prevent businesses from using settlements as a cost-saving tool in their tax filings.
  
  

• Level playing field:
  By disallowing these deductions, compliant businesses are no longer at a disadvantage compared to those who settle regulatory infractions quietly and reduce their taxes.
  
  

Final Thoughts

This development emphasizes the growing importance of corporate compliance and ethical conduct in business operations. It also signals that the tax authorities are serious about removing gray areas that could be exploited under the guise of “business expenses.”

Companies should now work closely with legal and tax advisors to ensure that any payments related to regulatory matters are reported correctly—and are not mistakenly claimed as deductions. Going forward, businesses will need to factor in the real cost of non-compliance, which now includes both the penalty and the full tax on those amounts.