Guide to .. Tax Management ,Tax Planning and Tax Saving

 

 

Deemed Profits chargeable to Tax as Business Income [Section 41 and 176(3A) & (4)]

By virtue of section 41, the following receipts are chargeable to tax as business income notwithstanding that the business or profession to which the receipts relate ceased to be in existence in the year in which they are received:

 

1.   Recovery against any allowance or deduction allowed earlier [Section 41(1)]  - chargeable to Tax as Business Income

 

(A) Recovery by the same assessee [Section 41(1)(a)]:

 

Where an allowance or deduction has  been made in the assessment for any year in respect of (i) loss, (ii) expenditure or (iii) trading liability  incurred by the assessee and subsequently, during any previous year, he (the same assessee) has  obtained, whether in cash or in any other manner, whatsoever— 

 

(i)            any amount in respect of such loss or expenditure; or 

(ii)           some benefit in respect of such trading liability by way of remission or cessation thereof, 

 

then, the amount obtained by the assessee or the value of benefit accruing to him shall be deemed to  be profit and gains of business or profession and accordingly chargeable to income-tax as the income  of that previous year.

 

It may be mentioned that the business or profession, in respect of which the  allowance or deduction has earlier been made, may or may not be in existence in the previous year in  which such amount is obtained or the benefit accrued to him. 

 

(B) Recovery by the successor in business or profession [Section 41(1)(b)]:

 

If in the above case,  instead of the assessee, the successor in business has obtained, whether in cash or in any other manner  whatsoever,— 

(a) any amount in respect of which loss or expenditure was incurred by the predecessor; or 

(b) some benefit in respect of trading liability referred to in clause (A) above by way of  remission or cessation thereof, 

 

the amount obtained by successor in business or the value of benefit accruing to the successor in  business shall be deemed to be income under the head profits and gains from business or profession of  the successor of that previous year. 

 

2.   Balancing charge on assets of an undertaking engaged in generation or generation and  distribution of power [Section 41(2)]:

 

Where any building, machinery, plant or furniture: 

 

(a)           which is owned by the assessee;

 

(b)          in respect of which depreciation is claimed under section 32( 1 )(i)

[i.e., assets of an undertaking engaged in generation or generation and distribution of power in respect of which depreciation is to be allowed on the actual cost thereof as per the prescribed rate(s)]:


(c)           which was or has been used for the purposes of business,

is sold, discarded, demolished or destroyed and the 'moneys payable' in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceeds the 'written down value', then, so much of the excess as does not exceed the difference between the 'actual cost' and the 'written down value' shall be chargeable to income-tax as income of the business of the previous year in which the moneys payable for the building, machinery, plant or furniture became due

If the business is no longer in existence the provisions of section 41(2) shall apply as if the business is in existence in that previous year.

 

3. Sale of Capital Assets used for Scientific Research [Section 41(3)]:

 

Where any capital asset, used for scientific research, is sold without having been used for other purposes and the sale proceeds together with the total amount of deduction u/s 35 exceed the amount of capital expenditure, the excess or the amount of deduction claimed and allowed earlier whichever is less shall be chargeable to Income-tax as "Income from business or profession" of the previous year in which the sale took place.

 

For example, the assessee purchases a machinery for Rs. 90,000 during the previous year 20 15-16 for scientific research and is allowed a deduction of Rs. 90,000 u/s 35. This machinery is sold during the previous year 2019-20 for Rs. 30,000. In this case Rs. 30.000 shall be treated as a business income for the previous year 20 19-20.

 
It may be noted that where the asset, after it ceases to be used for scientific research included is used for the purpose of business or profession, then such asset will form part of the block of asset and its 'cost of acquisition' to be included in the block of assets shall be nil.

 

Subsequently if this asset is sold, section 41(3) will not be applicable as the asset has been included in the block.

 

4.   Recovery out of Bad Debts allowed as a deduction [Section 41(4)]:

 

Where a deduction has been allowed in respect of a bad debt, or part of a debt u/s 36(1)(vii) then, if the amount subsequently recovered on any such debt or part is greater than the difference between the debt and the amount so allowed, the excess shall be deemed to be the profits and gains of business or profession and shall be chargeable to tax as the income of the previous year in which it is recovered, whether the business or profession in respect of which the deduction has been allowed is in existence in that year or not.

 

For example, the assessee who was allowed a deduction of Rs. 60,000 on account of bad debts in the previous year 2017-18, recovers the entire atnount of Rs. 60,000 during the previous year 2019-20. The amount so recovered, shall be taxable as income even if that business in respect of which deduction was allowed was not in existence in that year. If he recovers Rs. 15,000 only, then Rs. 15,000 shall be taxable.


5. Amount withdrawn from special reserve created and maintained by certain financial institutions [Section 41(4A)]:

 

'Where a deduction has been allowed in respect of any special reserve created and maintained under section 36(1)(viii), by certain financial institution, etc. if any amount is subsequently withdrawn from the special reserve, it shall be deemed to be the profits and gains of business or profession and accordingly be chargeable to income-tax as the income of the previous year in which such amount is withdrawn, whether the business is in existence in that previous year or not.


6. Deemed income in the hands of recipient in case of Discontinued Business Or Profession [Section 176(3A) and (4)]:

 

There may be income received after the discontinuance of the business or profession which will also be treated as deemed income of the previous year in which it is received.

(a)   Recovery of any sum in case of discontinued business [Section 176(3A)]:

 

Where any business is discontinued in any year, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance.

(b) Recovery of any sum in case of discontinued profession [Section 176(4)]:

 

Where any profession is discontinued in any year on account of the cessation of the profession by, or the retirement or death of, the person carrying on the profession, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the aforesaid person had it been received before such discontinuance.

 

You may also like ...

 
TallyPrime Book @ Rs.600
Tally.ERP9 Book @ Rs.550

| About Us | Privacy Policy | Disclaimer | Sitemap |
© 2021 : IncomeTaxManagement.Com