Disallowance of settlement amounts being paid to settle contraventions (WIDENING AND DEEPENING OF TAX BASE AND ANTI-AVOIDANCE)

Union Budget 2024-25 (Full) + FINANCE (No.2) Bill, 2024

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]

Full Text:

Union Budget 2024-25 (Full) + FINANCE (No.2) Bill, 2024

Dated: 24-7-2024