BACKGROUND

Section 37 of Income Tax Act, 1961 (‘IT Act’) provides any expense not being in the nature of capital or personal expenditure, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed as deduction while computing income chargeable under the head “Profits and Gains from Business or Profession”. Finance (No. 2) Act, 2024 amended the provisions of section 37 of the IT Act to provide that any expenditure incurred by a taxpayer for settlement of proceedings initiated in relation to contravention or defaults under the laws specified by the Central Government shall not be allowed as a deduction or allowance.

In view of giving effect to the aforesaid amendments, recently, the Central Board of Taxes (CBDT) has issued notification¹ specifying the list of laws in relation to expenditure incurred for settlement of proceedings shall not be allowed as business deduction. Additionally, the CBDT has provided clarifications on the amendments through a set of Frequently Asked Questions² (FAQs). We, at BDO in India, have analysed and summarised the key aspects of the said Notifications and FAQs, and provided our comments on its impact hereunder:                                        

• Which laws been notified under Section 37 of the IT Act?

Any expenditure incurred to settle proceedings initiated in relation to contravention or defaults under the following laws shall not be deemed to have been incurred for the purpose of business or profession –

1. the Securities and Exchange Board of India Act, 1992 (15 of 1992)

2. the Securities Contracts (Regulation) Act, 1956 [42 of 1956]

3. the Depositories Act, 1996 [22 of 1996]

4. the Competition Act, 2002 [12 of 2003]

• What amendments have been made to Form 3CD?

BDO INDIA COMMENTS

This notification is issued in pursuance of the amendment introduced vide Finance (No. 2) Act, 2024 to section 37 of the IT Act to reinforce the legislative intent of restricting the allowability of deductions in respect of expenditures incurred for purposes that are in contravention of law.

While the amendment is made effective from Assessment Year 2025-26, the Notification is issued on 23 April 2025. Hence, one needs to evaluate the implication of this Notification to the expenditure incurred during Fiscal Year 2024-25.