Separate reporting of settlement related expenses in Form 3CD:

 

Introduction:

1.  Clause 21 of the amended Tax Audit Report (Form 3CD) mandates the reporting of expenditure incurred for settling proceedings related to legal contraventions notified by the Central Government.

2.  As per judicial precedents, penalties and expenses related to legal violations are not deductible under Section 37(1) of the Income Tax Act.

Impact:

1.  This reporting may prompt further tax scrutiny, leading to potential disallowances.

2.  Tax auditors and companies will need to carefully examine whether any settlement expenses fall under this clause and report them separately.

3.  Non-disclosure can lead to penalties under Section 271J of the Income Tax Act (for incorrect audit reports) or other penal provisions.

Issues requiring attention:

1.  Settlements with regulatory bodies such as SEBI, RBI, FEMA, GST, or Competition Commission of India (CCI).

2.  Fines paid for contractual breaches or environmental violations.