On 23 April 2025, the Central Board of Direct Taxes (CBDT) issued Notification No. 38/2025, specifying certain laws under which any expenditure incurred towards settling initiated proceedings for contraventions will be disallowed as a tax deduction under Indian tax laws.
Notified Laws:
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Securities and Exchange Board of India (SEBI) Act, 1992
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Securities Contracts (Regulation) Act (SCRA), 1956
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Depositories Act, 1996
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Competition Act, 2002
Key Context:
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Under Section 37 of the Income Tax Act, only legitimate business expenses are deductible.
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The Finance Act, 2022, clarified that expenses related to offenses or prohibited acts, including compounding of offenses, are not deductible.
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To further clarify ambiguities around settlements (especially those not involving an admission of guilt), the Finance (No. 2) Act, 2024 amended the law to disallow such settlements if related to notified laws.
Effective Date:
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The notification is effective from 23 April 2025.
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FAQs issued by CBDT state it applies from tax year 2024–25 (AY 2025–26), though this could lead to disputes regarding possible retroactive application.
Implications:
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Only expenses related to notified laws are impacted.
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Taxpayers must differentiate between settlement and compounding of offenses—compounding applies broadly across all laws (Indian and foreign), while settlement disallowance applies only to notified ones.
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Additional disclosures are now required in the tax audit report (Form 3CD) following CBDT Notification No. 23/2025 dated 28 March 2025.
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