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What are Deemed Profits and How they are charged to Tax

The following receipts are chargeable to tax as business income :

1.    Recovery against any deduction [ Sec. 41(1)]

In any of the earlier years a deduction was allowed to the taxpayer  in respect of loss, expenditure or trading liability incurred by the assessee and subsequently during any previous year,—


(a)  the Taxpayer has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not.

2.    Sale of Assets used for Scientific Research [ Sec. 41(3)]
Where an asset representing expenditure of a capital nature on scientific research is sold, without having been used for other purposes, and the proceeds of the sale together with the total amount of the deductions made, the amount of the deduction exceed the amount of the capital expenditure, the excess or the amount of the deductions so made, whichever is the less, shall be chargeable to income-tax as income of the business or profession of the previous year in which the sale took place.

3.    Recovery of Bad Debt . Sec.41(4) :
if the amount subsequently recovered on any such Bad Debt or part allowed earlier is greater than the difference between the debt or part of debt and the amount so allowed, the excess shall be deemed to be profits and gains of business or profession, and accordingly chargeable to income-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.

4.    Amount withdrawn from Reserve created under 36(1)(viii) . [Sec. 40(4A) :
Where a deduction has been allowed in respect of any special reserve created and maintained under Section 36(1)(viii), any amount subsequently withdrawn from such special reserve shall be deemed to be the profits and gains of business or profession and accordingly be chargeable to income-tax as the income of the previous year in which such amount is withdrawn

5.    Adjustment of Loss [ Sec. 41(5)] :
Generally, Loss of a business cannot be carried forward after 8 years. An exception is, however, provided by Sec. 41(5). This exception is applicable if the following conditions are satisfied :

  1. Where the business or profession referred to in this section is no longer in existenc.
  2. any loss which arose in that business or profession during the previous year in which it ceased to exist and which could not be set off against any other income of that previous year.
  3. Such Business is not a speculation business.
  4. After discontinuation of such business or profession, there is a receipt which is deemed as business income.
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