SEO Title: Disallowance of Settlement Payments as Business Expenses
Summary: The Finance Bill 2024 proposes an amendment to Section 37 of the Income-tax Act, which governs the deductibility of business expenses. Currently, expenditures incurred for purposes that are illegal or prohibited by law are not allowed as business deductions. The amendment seeks to expand this provision by specifically including settlement amounts paid to resolve legal contraventions. Explanation 3 of Section 37 will be revised to clarify that any expenditure made to settle proceedings related to legal infractions, whether within India or abroad, will be disallowed as a business expense. This adjustment aims to prevent the misuse of business expense deductions for illegal activities and ensure compliance with legal standards. The new rules will be effective from April 1, 2025, applying to the assessment year 2025-2026 and beyond, reinforcing the legislative intent to maintain integrity in business expense claims.
Disallowance of settlement amounts being paid to settle contraventions
Section 37 of the Act provides for allowability of expenditure laid out or expended wholly and exclusively for the purpose of business or profession.
2. Explanation 1 of sub-section (1) of section 37 provides that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.
3. Explanation 3 of sub-section (1) of section 37 clarifies that the expression “expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law”, referred to in Explanation 1, includes expenditure incurred for any purpose which is an offence or is prohibited by, any law enacted in or outside India; or is incurred to provide any benefit or perquisite, in whatever form, to a person, whether or not carrying on a business or exercising a profession and acceptance of such benefit or perquisite by such person is in violation of any law or rule or regulation or guideline under the law governing the conduct of such person; or is incurred to compound an offence under any law for the time being in force in or outside India.
4. Settlement amounts are incurred due to an infraction of law and relate to contraventions etc and, therefore, should not be allowed as business expenses.
5. Accordingly, it is proposed to amend the Explanation 3 to sub-section (1) of section 37 of the Act to clarify that “expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law” under Explanation 1 shall include any expenditure incurred by an assessee to settle proceedings initiated in relation to a contravention under any law for the time being in force, as may be notified by the Central Government in the Official Gazette in this behalf.
6. The amendment is proposed to be made effective from the 1st day of April, 2025 and will accordingly apply from assessment year 2025-2026 onwards.
[Clause 13]
Extract of Clause 13 of Finance Bill 2024
Clause 13 of the Bill seeks to amend section 37 of the Income-tax Act relating to general.
Sub-section (1) of section 37, inter alia, provides that any expenditure not being the expenditure described under section 30 to 36 or of capital or personal nature, shall be allowed in computing the income chargeable under the head “profits and gains of business or profession”.
Explanation 1 to the said sub-section provides that if any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. Explanation 3 to the said subsection, clarifies the expression “expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law” for the purposes of Explanation 1.
It is proposed to amend the said Explanation 3 to include any expenditure incurred by an assessee to settle proceedings initiated in relation to contravention under such law as may be notified by the Central Government in the Official Gazette in this behalf within the scope of its clarification.
This amendment will take effect from 1st April, 2025 and will, accordingly, apply in relation to the assessment year 2025-2026 and subsequent years.
Proposed Amendment to section 37 of Income Tax Act, 1961 vide Finance Bill, 2024
In section 37 of the Income-tax Act, in sub-section (1), in Explanation 3, in clause (iii), for the words “outside India”, the following shall be substituted with effect from 1st day of April, 2025, namely:––
“outside India; or
(iv) to settle proceedings initiated in relation to contravention under such law as may be notified by the Central Government in the Official Gazette in this behalf.”.
