{"id":29194,"date":"2025-04-25T21:20:02","date_gmt":"2025-04-25T15:50:02","guid":{"rendered":"https:\/\/carajput.com\/blog\/?p=29194"},"modified":"2026-05-25T23:57:26","modified_gmt":"2026-05-25T18:27:26","slug":"cbdt-clarify-on-non-deductibility-of-settlement-exp-u-s-37","status":"publish","type":"post","link":"https:\/\/carajput.com\/blog\/cbdt-clarify-on-non-deductibility-of-settlement-exp-u-s-37\/","title":{"rendered":"CBDT Clarify on Non-Deductibility of Settlement Exp. u\/s 37"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_58 counter-hierarchy ez-toc-counter ez-toc-light-blue ez-toc-container-direction\">\n<p class=\"ez-toc-title\">Page Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-6a2b2a5039777\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #000000;color:#000000\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #000000;color:#000000\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-6a2b2a5039777\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/carajput.com\/blog\/cbdt-clarify-on-non-deductibility-of-settlement-exp-u-s-37\/#Non-Deductibility_of_Settlement_Expenses_us_37_of_the_Income-tax_Act_1961_CBDT\" title=\"Non-Deductibility of Settlement Expenses u\/s 37 of the Income-tax Act, 1961 :\u00a0CBDT\u00a0\">Non-Deductibility of Settlement Expenses u\/s 37 of the Income-tax Act, 1961 :\u00a0CBDT\u00a0<\/a><ul class='ez-toc-list-level-3'><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/carajput.com\/blog\/cbdt-clarify-on-non-deductibility-of-settlement-exp-u-s-37\/#Section_135_%E2%80%93_Companies_Act_2013_Applicability_of_CSR\" title=\"Section 135 \u2013 Companies Act, 2013 (Applicability of CSR)\">Section 135 \u2013 Companies Act, 2013 (Applicability of CSR)<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/carajput.com\/blog\/cbdt-clarify-on-non-deductibility-of-settlement-exp-u-s-37\/#The_CSR_Expenditure%E2%80%94Section_37_vs_Section_80G\" title=\"The CSR Expenditure\u2014Section 37 vs. Section 80G\">The CSR Expenditure\u2014Section 37 vs. Section 80G<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/carajput.com\/blog\/cbdt-clarify-on-non-deductibility-of-settlement-exp-u-s-37\/#Budget_Amendment%E2%80%94Finance_Bill_2024-_No_Deduction_us_37_for_Settlement_Amounts_Paid_for_Legal_Violations\" title=\"Budget Amendment\u2014Finance Bill 2024- No Deduction u\/s 37 for Settlement Amounts Paid for Legal Violations\">Budget Amendment\u2014Finance Bill 2024- No Deduction u\/s 37 for Settlement Amounts Paid for Legal Violations<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/carajput.com\/blog\/cbdt-clarify-on-non-deductibility-of-settlement-exp-u-s-37\/#Implications_of_CBDT_FAQs_on_Notification_No_382025\" title=\"Implications of CBDT FAQs on Notification No. 38\/2025\">Implications of CBDT FAQs on Notification No. 38\/2025<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/carajput.com\/blog\/cbdt-clarify-on-non-deductibility-of-settlement-exp-u-s-37\/#Action_Points\" title=\"Action Points:\">Action Points:<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/carajput.com\/blog\/cbdt-clarify-on-non-deductibility-of-settlement-exp-u-s-37\/#Complete_Crux_Under_Section_33_34_35_in_Simple_Language_%E2%80%93_NEW_INCOME_TAX_ACT_2025\" title=\"Complete Crux Under Section 33, 34 &amp; 35 in Simple Language &#8211; NEW INCOME TAX ACT, 2025\u00a0\">Complete Crux Under Section 33, 34 &amp; 35 in Simple Language &#8211; NEW INCOME TAX ACT, 2025\u00a0<\/a><ul class='ez-toc-list-level-3'><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/carajput.com\/blog\/cbdt-clarify-on-non-deductibility-of-settlement-exp-u-s-37\/#SECTION_33_%E2%80%93_DEPRECIATION_DEDUCTION\" title=\"SECTION 33 \u2013 DEPRECIATION DEDUCTION\">SECTION 33 \u2013 DEPRECIATION DEDUCTION<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/carajput.com\/blog\/cbdt-clarify-on-non-deductibility-of-settlement-exp-u-s-37\/#SECTION_34_%E2%80%93_GENERAL_BUSINESS_EXPENSE_RULE\" title=\"SECTION 34 \u2013 GENERAL BUSINESS EXPENSE RULE \n\">SECTION 34 \u2013 GENERAL BUSINESS EXPENSE RULE \n<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/carajput.com\/blog\/cbdt-clarify-on-non-deductibility-of-settlement-exp-u-s-37\/#SECTION_35_%E2%80%93_EXPENSES_DISALLOWED_IN_CERTAIN_CASES\" title=\"\nSECTION 35 \u2013 EXPENSES DISALLOWED IN CERTAIN CASES\">\nSECTION 35 \u2013 EXPENSES DISALLOWED IN CERTAIN CASES<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/carajput.com\/blog\/cbdt-clarify-on-non-deductibility-of-settlement-exp-u-s-37\/#FINAL_UNDERSTANDING%E2%80%94Core_Principle_of_Tax_Law\" title=\"FINAL UNDERSTANDING\u2014Core Principle of Tax Law\">FINAL UNDERSTANDING\u2014Core Principle of Tax Law<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-25865\" src=\"https:\/\/carajput.com\/blog\/wp-content\/uploads\/2023\/12\/Income-Tax-Return-Form-ITR-1-ITR-4-notified-for-AY-2024-25.jpg\" alt=\"Income Tax Return Form ITR 1 &amp; ITR 4 notified for AY 2024-25\" width=\"1200\" height=\"675\" srcset=\"https:\/\/carajput.com\/blog\/wp-content\/uploads\/2023\/12\/Income-Tax-Return-Form-ITR-1-ITR-4-notified-for-AY-2024-25.jpg 1200w, https:\/\/carajput.com\/blog\/wp-content\/uploads\/2023\/12\/Income-Tax-Return-Form-ITR-1-ITR-4-notified-for-AY-2024-25-300x169.jpg 300w, https:\/\/carajput.com\/blog\/wp-content\/uploads\/2023\/12\/Income-Tax-Return-Form-ITR-1-ITR-4-notified-for-AY-2024-25-1024x576.jpg 1024w, https:\/\/carajput.com\/blog\/wp-content\/uploads\/2023\/12\/Income-Tax-Return-Form-ITR-1-ITR-4-notified-for-AY-2024-25-768x432.jpg 768w, https:\/\/carajput.com\/blog\/wp-content\/uploads\/2023\/12\/Income-Tax-Return-Form-ITR-1-ITR-4-notified-for-AY-2024-25-800x450.jpg 800w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><\/h2>\n<h2><span class=\"ez-toc-section\" id=\"Non-Deductibility_of_Settlement_Expenses_us_37_of_the_Income-tax_Act_1961_CBDT\"><\/span><span style=\"color: #000080;\"><strong>Non-Deductibility of Settlement Expenses u\/s 37 of the Income-tax Act, 1961 :\u00a0<\/strong><strong>CBDT\u00a0<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"color: #000080;\"><strong>Introduction <\/strong><\/span><\/p>\n<p>Section 37 of the Income-tax Act, 1961, allows deduction of business or professional expenses incurred wholly and exclusively for business purposes. However, Explanation 1 disallows deduction for expenditures incurred for any purpose that is an offense or prohibited by law. Section 37 of the Income-tax Act, 1961\u2014Allows deduction for business or professional expenses incurred wholly and exclusively for business purposes. Conditions to Claim Deduction u\/s 37 (General Rules). Expenditure must<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-29198\" src=\"https:\/\/carajput.com\/blog\/wp-content\/uploads\/2025\/04\/No-bus.png\" alt=\"No bus\" width=\"908\" height=\"501\" srcset=\"https:\/\/carajput.com\/blog\/wp-content\/uploads\/2025\/04\/No-bus.png 580w, https:\/\/carajput.com\/blog\/wp-content\/uploads\/2025\/04\/No-bus-300x166.png 300w\" sizes=\"(max-width: 908px) 100vw, 908px\" \/><\/p>\n<ul>\n<li>Be business-related (not personal or capital)<\/li>\n<li>Exp Be legal and not for prohibited acts<\/li>\n<li>Be incurred in the previous financial year<\/li>\n<li>Exp be wholly and exclusively for business\/profession<\/li>\n<\/ul>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-29195\" src=\"https:\/\/carajput.com\/blog\/wp-content\/uploads\/2025\/04\/37.jpg\" alt=\"37\" width=\"935\" height=\"285\" srcset=\"https:\/\/carajput.com\/blog\/wp-content\/uploads\/2025\/04\/37.jpg 807w, https:\/\/carajput.com\/blog\/wp-content\/uploads\/2025\/04\/37-300x91.jpg 300w, https:\/\/carajput.com\/blog\/wp-content\/uploads\/2025\/04\/37-768x234.jpg 768w, https:\/\/carajput.com\/blog\/wp-content\/uploads\/2025\/04\/37-800x244.jpg 800w\" sizes=\"(max-width: 935px) 100vw, 935px\" \/><\/p>\n<p>Excludes:<\/p>\n<ul>\n<li>Capital or personal expenditures<\/li>\n<li>CSR expenses (as per Explanation 2)<\/li>\n<li>Expenses for offences or prohibited activities (Explanation 1)<\/li>\n<li>Now extended to include settlement-related expenditures (Explanation 3, amended)<\/li>\n<\/ul>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-29196\" src=\"https:\/\/carajput.com\/blog\/wp-content\/uploads\/2025\/04\/Capture-2-768x286-1.png\" alt=\"Nature 37\" width=\"959\" height=\"357\" srcset=\"https:\/\/carajput.com\/blog\/wp-content\/uploads\/2025\/04\/Capture-2-768x286-1.png 768w, https:\/\/carajput.com\/blog\/wp-content\/uploads\/2025\/04\/Capture-2-768x286-1-300x112.png 300w\" sizes=\"(max-width: 959px) 100vw, 959px\" \/><\/p>\n<h3 class=\"\" data-start=\"1528\" data-end=\"1592\"><span class=\"ez-toc-section\" id=\"Section_135_%E2%80%93_Companies_Act_2013_Applicability_of_CSR\"><\/span><span style=\"color: #000080;\">Section 135 \u2013 Companies Act, 2013 (Applicability of CSR)<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<ul data-start=\"2041\" data-end=\"2439\">\n<li class=\"\" data-start=\"1594\" data-end=\"1862\">\n<p class=\"\" data-start=\"1596\" data-end=\"1705\">Applicable to companies (including holding\/subsidiary and foreign companies with Indian branches) having:<\/p>\n<ul data-start=\"1708\" data-end=\"1862\">\n<li class=\"\" data-start=\"1708\" data-end=\"1740\">\n<p class=\"\" data-start=\"1710\" data-end=\"1740\">Net Worth \u2265 INR 500 crore, or<\/p>\n<\/li>\n<li class=\"\" data-start=\"1743\" data-end=\"1775\">\n<p class=\"\" data-start=\"1745\" data-end=\"1775\">Turnover \u2265 INR 1000 crore, or<\/p>\n<\/li>\n<li class=\"\" data-start=\"1778\" data-end=\"1862\">\n<p class=\"\" data-start=\"1780\" data-end=\"1862\">Net Profit \u2265 INR 5 crore<br data-start=\"1805\" data-end=\"1808\" \/>during the immediately preceding financial year.<\/p>\n<\/li>\n<\/ul>\n<\/li>\n<li class=\"\" data-start=\"1864\" data-end=\"2014\">\n<p class=\"\" data-start=\"1866\" data-end=\"2014\">Mandate: Spend at least 2% of average net profits (as per Section 198) of the 3 immediately preceding financial years on CSR activities.<\/p>\n<\/li>\n<li class=\"\" data-start=\"2041\" data-end=\"2241\">\n<p class=\"\" data-start=\"2043\" data-end=\"2241\">The CSR Expenditure is not deductible under Section 37(1) since it is mandated by law and is considered an application of income, not an expenditure incurred wholly and exclusively for business.<\/p>\n<\/li>\n<li class=\"\" data-start=\"2242\" data-end=\"2439\">\n<p class=\"\" data-start=\"2244\" data-end=\"2439\">CSR contributions made to specific notified funds (like Swachh Bharat Kosh or Clean Ganga Fund) can be claimed under Section 80G, provided all prescribed conditions are fulfilled.<\/p>\n<\/li>\n<\/ul>\n<h3 class=\"\" data-start=\"200\" data-end=\"252\"><span class=\"ez-toc-section\" id=\"The_CSR_Expenditure%E2%80%94Section_37_vs_Section_80G\"><\/span><span style=\"color: #000080;\"><strong data-start=\"204\" data-end=\"252\">The CSR Expenditure\u2014Section 37 vs. Section 80G<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<div class=\"group pointer-events-none relative flex justify-center *:pointer-events-auto\">\n<p>&nbsp;<\/p>\n<div class=\"tableContainer horzScrollShadows relative\">\n<table class=\"min-w-full\" data-start=\"254\" data-end=\"1521\">\n<thead data-start=\"254\" data-end=\"306\">\n<tr data-start=\"254\" data-end=\"306\">\n<th data-start=\"254\" data-end=\"267\"><strong data-start=\"256\" data-end=\"266\">Aspect<\/strong><\/th>\n<th data-start=\"267\" data-end=\"287\"><strong data-start=\"269\" data-end=\"286\">Section 37(1)<\/strong><\/th>\n<th data-start=\"287\" data-end=\"306\"><strong data-start=\"289\" data-end=\"304\">Section 80G<\/strong><\/th>\n<\/tr>\n<\/thead>\n<tbody data-start=\"361\" data-end=\"1521\">\n<tr data-start=\"361\" data-end=\"589\">\n<td class=\"max-w-[calc(var(--thread-content-max-width)*2\/3)]\" data-start=\"361\" data-end=\"402\">Classification under Income Tax<\/td>\n<td class=\"max-w-[calc(var(--thread-content-max-width)*2\/3)] min-w-[calc(var(--thread-content-max-width)\/2)]\" data-start=\"402\" data-end=\"492\">Falls under PGBP\u00a0as per Section 14.<\/td>\n<td class=\"max-w-[calc(var(--thread-content-max-width)*2\/3)] min-w-[calc(var(--thread-content-max-width)\/2)]\" data-start=\"492\" data-end=\"589\">Part of Chapter VI-A deductions, applicable after computing Gross Total Income (GTI).<\/td>\n<\/tr>\n<tr data-start=\"590\" data-end=\"864\">\n<td class=\"max-w-[calc(var(--thread-content-max-width)*2\/3)]\" data-start=\"590\" data-end=\"619\">Nature of Deduction<\/td>\n<td class=\"max-w-[calc(var(--thread-content-max-width)*2\/3)] min-w-[calc(var(--thread-content-max-width)\/2)]\" data-start=\"619\" data-end=\"712\">Allows deduction for expenses &#8220;wholly and exclusively&#8221; incurred for business purposes.<\/td>\n<td class=\"max-w-[calc(var(--thread-content-max-width)*2\/3)] min-w-[calc(var(--thread-content-max-width)\/2)]\" data-start=\"712\" data-end=\"864\">Provides specific deductions for donations to specified funds, charitable institutions, etc., not necessarily linked to business activities.<\/td>\n<\/tr>\n<tr data-start=\"865\" data-end=\"1281\">\n<td class=\"max-w-[calc(var(--thread-content-max-width)*2\/3)]\" data-start=\"865\" data-end=\"903\">Treatment of CSR Expenditure<\/td>\n<td class=\"max-w-[calc(var(--thread-content-max-width)*2\/3)] min-w-[calc(var(--thread-content-max-width)\/2)]\" data-start=\"903\" data-end=\"1049\">Explanation 2 to Section 37(1) (inserted via Finance Act 2014) disallows CSR expenditure as it is not deemed incurred for business.<\/td>\n<td class=\"max-w-[calc(var(--thread-content-max-width)*2\/3)] min-w-[calc(var(--thread-content-max-width)\/2)]\" data-start=\"1049\" data-end=\"1281\">Allowed only if contribution is made to specific notified funds like:<br \/>\nSection 80G(2)(iiihk) \u2013 Swachh Bharat Kosh<br \/>\nSection 80G(2)(iiihl) \u2013 Clean Ganga Fund<br \/>\nSubject to fulfilment of prescribed conditions.<\/td>\n<\/tr>\n<tr data-start=\"1282\" data-end=\"1521\">\n<td class=\"max-w-[calc(var(--thread-content-max-width)*2\/3)]\" data-start=\"1282\" data-end=\"1318\">Timing and Manner of Claim<\/td>\n<td class=\"max-w-[calc(var(--thread-content-max-width)*2\/3)] min-w-[calc(var(--thread-content-max-width)\/3)]\" data-start=\"1318\" data-end=\"1383\">Cannot be claimed even if mandatory under Companies Act, 2013.<\/td>\n<td class=\"max-w-[calc(var(--thread-content-max-width)*2\/3)] min-w-[calc(var(--thread-content-max-width)\/2)]\" data-start=\"1383\" data-end=\"1521\">Can be claimed while filing return, if donation is to eligible fund, and supported by valid receipt and registration of donee.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<\/div>\n<h3><span class=\"ez-toc-section\" id=\"Budget_Amendment%E2%80%94Finance_Bill_2024-_No_Deduction_us_37_for_Settlement_Amounts_Paid_for_Legal_Violations\"><\/span><span style=\"color: #000080;\"><strong>Budget Amendment\u2014Finance Bill 2024- No Deduction u\/s 37 for Settlement Amounts Paid for Legal Violations<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>The Finance (No. 2) Act, 2024 amended Explanation 3 to Section 37(1) to expand the scope of non-deductibility. Now, expenses incurred to settle proceedings for contraventions under certain notified laws are also non-deductible. The amendment is effective from 1st April 2025, and is applicable from Assessment Year 2025-26 onwards. CBDT issues FAQs on Notification No. 38\/2025.<\/p>\n<p><span style=\"color: #000080;\"><strong>CBDT has clarified via Notification No. 38\/2025 dated 23.04.2025 &amp; issued FAQs:\u00a0<\/strong><\/span><\/p>\n<p>Section 37 of the Income-tax Act, 1961 : Section 37 allows deduction of expenses incurred wholly and exclusively for business or professional purposes, provided they are not of a capital or personal nature or covered u\/s 30 to 36.<\/p>\n<p>Explanation 1 states it is linked to Explanation 3 by the Finance (No. 2) Act, 2024<\/p>\n<ul>\n<li>The Explanation 1 disallows any expense incurred for an offense or for purposes prohibited by law. It disallows deduction of any expenditure incurred for:<\/li>\n<\/ul>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li>Any offence, or<\/li>\n<li>In case of any activity prohibited by law, even if incurred during the course of business or profession.<\/li>\n<\/ul>\n<\/li>\n<li>Explanation 3, introduced later, clarifies that such disallowed expenses include not only penalties or fines but also any expenditure incurred to settle proceedings initiated for such offenses. It clarified that \u201cexpenditure incurred in settlement of proceedings\u201d for contraventions of law\u2014notified by the Central Government\u2014will also be disallowed.<\/li>\n<li>The amendment broadened Explanation 3 to include settlement expenses related to contraventions of any law notified by the Central Government. Such expenses are now considered as being incurred for a prohibited purpose.<\/li>\n<\/ul>\n<h3><span class=\"ez-toc-section\" id=\"Implications_of_CBDT_FAQs_on_Notification_No_382025\"><\/span><span style=\"color: #000080;\"><strong>Implications of <a href=\"https:\/\/carajput.com\/archives\/cbdt-notification-no-38-2025-no-deduction-u-s-37-for-settlement.pdf\">CBDT FAQs on Notification No. 38\/2025<\/a><\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<ul>\n<li>Any settlement expenditure related to contraventions\/defaults under the above laws is non-deductible under the Income Tax Act. So any expenditure incurred to settle proceedings related to contraventions under the above laws cannot be claimed as a deduction or allowance under the Income-tax Act. This includes consent orders, settlement amounts, and penalty settlements. Settlement amounts paid to regulatory bodies like SEBI or CCI will not be eligible for deduction under Section 37. And applicable from AY 2025\u201326. Form 3CD of the Tax Audit Report has been amended via Notification No. 23\/2025 to include disclosures of such expenses.<\/li>\n<li>This will affect companies involved in regulatory settlements with SEBI, CCI, or similar bodies. As per CBDT Notification No. 38\/2025, the following laws have been notified:\n<ul>\n<li>Securities and Exchange Board of India Act, 1992<\/li>\n<li>Securities Contracts (Regulation) Act, 1956<\/li>\n<li>Depositories Act, 1996<\/li>\n<li>Competition Act, 2002<\/li>\n<\/ul>\n<\/li>\n<li>Any compliance changes: Tax Audit Report Form 3CD has been amended via Notification No. 23\/2025 dated 28.03.2025 to mandate disclosure of such expenses. Income Tax Form No. 3CD has been amended via CBDT Notification No. 23\/2025 (dated 28.03.2025) to require disclosure of such expenses during tax audits.<\/li>\n<\/ul>\n<h3><span class=\"ez-toc-section\" id=\"Action_Points\"><\/span><span style=\"color: #000080;\"><strong>Action Points<\/strong><strong>:<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<ul>\n<li>Review all legal settlements and verify their nature.<\/li>\n<li>Update accounting policies and tax planning documentation.<\/li>\n<li>Disclose appropriately in tax audit reports and notes to accounts.<\/li>\n<li>Educate clients and teams on the implications of the amended Explanation 3.<\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"Complete_Crux_Under_Section_33_34_35_in_Simple_Language_%E2%80%93_NEW_INCOME_TAX_ACT_2025\"><\/span><span style=\"color: #000080;\">Complete Crux Under Section 33, 34 &amp; 35 in Simple Language &#8211; <strong>NEW INCOME TAX ACT, 2025\u00a0<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone  wp-image-31984\" src=\"https:\/\/carajput.com\/blog\/wp-content\/uploads\/2025\/04\/1778256839960.jpeg\" alt=\"Crux Under Section 33, 34 &amp; 35\" width=\"1123\" height=\"1685\" srcset=\"https:\/\/carajput.com\/blog\/wp-content\/uploads\/2025\/04\/1778256839960.jpeg 480w, https:\/\/carajput.com\/blog\/wp-content\/uploads\/2025\/04\/1778256839960-200x300.jpeg 200w\" sizes=\"(max-width: 1123px) 100vw, 1123px\" \/><\/p>\n<h3><span class=\"ez-toc-section\" id=\"SECTION_33_%E2%80%93_DEPRECIATION_DEDUCTION\"><\/span><span style=\"color: #000080;\">SECTION 33 \u2013 DEPRECIATION DEDUCTION<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<ul>\n<li>Depreciation means reduction in value of business assets due to usage, time or wear &amp; tear. Government allows this reduction as a tax deduction.<\/li>\n<li>Eligible Assets: Building, Plant &amp; Machinery, Furniture, Patents, Trademark, License, Copyright etc.<\/li>\n<li>Goodwill is NOT eligible.Conditions:<\/li>\n<li>Asset must be owned wholly\/partly by assessee, Used for business\/profession, Used during tax year\n<p>Important Points<br \/>\nDepreciation calculated on \u201cBlock of Assets\u201d (WDV basis)<br \/>\n\u2022 If asset used for less than 180 days \u2192 only 50% depreciation allowed<br \/>\n\u2022 Personal use portion not allowed<br \/>\n\u2022 Depreciation allowed even if assessee does not claim it<\/p>\n<p>Additional Depreciation: Manufacturing &amp; power sector businesses can claim:<\/p>\n<ul>\n<li>20% extra depreciation on new machinery\/plant,<\/li>\n<li>If used &lt;180 days \u2192 10% now + 10% next year<\/li>\n<li>Unabsorbed depreciation can be carried forward.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h3><span class=\"ez-toc-section\" id=\"SECTION_34_%E2%80%93_GENERAL_BUSINESS_EXPENSE_RULE\"><\/span><span style=\"color: #000080;\"><strong>SECTION 34 <\/strong><strong>\u2013<\/strong><\/span><strong><span style=\"color: #000080;\"> GENERAL BUSINESS EXPENSE RULE<\/span><br \/>\n<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><strong>Basic Principle: <\/strong><\/p>\n<ul>\n<li>Any expense is allowed only when it is wholly &amp; exclusively for business, a genuine business expense, and not personal or capital in nature. Examples: Salary, Rent, Electricity, Professional fees and Advertisement.<\/li>\n<li>Expenses NOT Allowed : Expenses NOT Allowed, like if Illegal payments\/bribes, penalties for law violations, and CSR expenses u\/s 135 of Companies Act and Political advertisement expense<\/li>\n<\/ul>\n<p>Main Principle: \u201cOnly lawful and genuine business expenses are deductible.\u201d<\/p>\n<h3><span class=\"ez-toc-section\" id=\"SECTION_35_%E2%80%93_EXPENSES_DISALLOWED_IN_CERTAIN_CASES\"><\/span>\n<span style=\"color: #000080;\"><strong>SECTION 35 <\/strong><strong>\u2013<\/strong><strong> EXPENSES DISALLOWED IN CERTAIN CASES<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><strong>DISALLOWANCE PROVISIONS<\/strong><\/p>\n<ul>\n<li>Income tax, surcharge &amp; cess are NOT allowed as deductions.<\/li>\n<li>TDS Default Rule: If TDS is applicable but not deducted, or not deposited on time then expense may be disallowed. If Resident payment: 30% disallowance.<\/li>\n<li>In case of non-resident payment: The entire expense may be disallowed.<\/li>\n<\/ul>\n<p><strong>TDS Default <\/strong><\/p>\n<table style=\"height: 284px;\" width=\"1087\">\n<tbody>\n<tr>\n<td><strong>Case<\/strong><\/td>\n<td><strong>Disallowance<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Payment to resident<\/td>\n<td>30% disallowed<\/td>\n<\/tr>\n<tr>\n<td>Payment to non-resident<\/td>\n<td>100% disallowed<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Allowed later when TDS is deposited<\/p>\n<p><strong>Income Tax Not Allowed<\/strong><strong>\u00a0<\/strong><\/p>\n<p>Income tax, surcharge &amp; cess \u2192 Not deductible<\/p>\n<p><strong><span style=\"color: #000080;\">PARTNERSHIP FIRM RULES<\/span><br \/>\n<\/strong><br \/>\n<span style=\"font-size: 16px;\">Interest to partners allowed only if authorised by partnership deed and maximum 12% p.a.<\/span><\/p>\n<p>Salary\/remuneration allowed only to working partners.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"FINAL_UNDERSTANDING%E2%80%94Core_Principle_of_Tax_Law\"><\/span><span style=\"color: #000080;\">FINAL UNDERSTANDING\u2014Core Principle of Tax Law<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Section 33 \u2192 Asset deduction<br \/>\nSection 34 \u2192 Genuine expense deduction<br \/>\nSection 35 \u2192 Disallowance for non-compliance<\/p>\n<p><strong>FINAL UNDERSTANDING\u00a0<\/strong><\/p>\n<table style=\"height: 310px;\" width=\"986\">\n<tbody>\n<tr>\n<td><strong>Topic<\/strong><\/td>\n<td><strong>Section<\/strong><\/td>\n<td><strong>Meaning<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Depreciation<\/td>\n<td>Sec 32<\/td>\n<td>Asset-based deduction<\/td>\n<\/tr>\n<tr>\n<td>Business Expenses<\/td>\n<td>Sec 37<\/td>\n<td>Genuine expense allowed<\/td>\n<\/tr>\n<tr>\n<td>Disallowances<\/td>\n<td>Sec 40 &amp; others<\/td>\n<td>Non-compliance \/ illegal<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Tax law rewards: Genuine business spending, legal compliance, and proper TDS compliance. and penalizes illegal expenses, TDS defaults, Personal\/capital expenses<\/p>\n<p><span style=\"color: #000080;\">You may also review the following blogs:<\/span><\/p>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li><span style=\"color: #000080;\"><a style=\"color: #000080;\" href=\"https:\/\/www.caindelhiindia.com\/blog\/cbdt-extends-due-date-for-tax-audit-itr-filing-ay-2025-26\/\" data-cke-saved-href=\"https:\/\/www.caindelhiindia.com\/blog\/cbdt-extends-due-date-for-tax-audit-itr-filing-ay-2025-26\/\">CBDT Extends Due Date for Tax Audit &amp; ITR Filing -AY 2025-26<\/a><\/span><\/li>\n<li><span style=\"color: #000080;\"><a style=\"color: #000080;\" href=\"https:\/\/www.caindelhiindia.com\/blog\/key-changes-introduced-by-cbdt-in-tax-audit-report\/\" data-cke-saved-href=\"https:\/\/www.caindelhiindia.com\/blog\/key-changes-introduced-by-cbdt-in-tax-audit-report\/\">Key Changes Introduced by CBDT in Tax Audit Report<\/a><\/span><\/li>\n<li><span style=\"color: #000080;\"><a style=\"color: #000080;\" href=\"https:\/\/carajput.com\/learn\/cbdt-issued-faqs-on-income-tax-bill-2025-with-key-highlights-and.html\">Income Tax Bill 2025\u00a0<\/a><\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Non-Deductibility of Settlement Expenses u\/s 37 of the Income-tax Act, 1961 :\u00a0CBDT\u00a0 Introduction Section 37 of the Income-tax Act, 1961, allows deduction of business or professional expenses incurred wholly and exclusively for business purposes. However, Explanation 1 disallows deduction for expenditures incurred for any purpose that is an offense or prohibited by law. Section 37 &hellip;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[150],"tags":[10296],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/posts\/29194"}],"collection":[{"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/comments?post=29194"}],"version-history":[{"count":5,"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/posts\/29194\/revisions"}],"predecessor-version":[{"id":31985,"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/posts\/29194\/revisions\/31985"}],"wp:attachment":[{"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/media?parent=29194"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/categories?post=29194"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/tags?post=29194"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}