Pursuant to the provisions of section 37 of the Income-tax Act, 1961 (hereinafter referred to as ‘the IT Act’), any expenditure incurred wholly and exclusively for the purposes of business or profession, and not being in the nature of capital expenditure or personal expenses, is allowable as a deduction while computing income under the head "Profits and Gains of Business or Profession." However, certain expenditures are explicitly disallowed under the IT Act, as specified in the Explanations to section 37.

In furtherance to the same, the Central Government, vide Notification No. 38/2025 dated April 23, 2025 [S.O. 1838(E)], has notified that any expenditure incurred to settle proceedings initiated in relation to contraventions or defaults under the following laws shall not be deemed to have been incurred for the purpose of business or profession, and no deduction or allowance shall be allowed in respect of such expenditure under section 37 of the IT Act:

  • Securities and Exchange Board of India Act, 1992;
  • Securities Contracts (Regulation) Act, 1956;
  • Depositories Act, 1996;
  • Competition Act, 2002.

This notification shall take effect from the date of its publication in the Official Gazette, i.e., April 23, 2025.

This clarification is significant for businesses and professionals, as it restricts the deductibility of expenses related to regulatory non-compliance, reinforcing the principle that such expenditures do not qualify as legitimate business expenses under the Income-tax Act, 1961.

We trust you find the same useful.

RSM News Update - Disallowance of Expenditure Related to Regulatory Settlements us 37 - CBDT Notification No. 382025.pdf