Section 41 of Income Tax Act "Profits chargeable to tax"
41. (1) Where an allowance or deduction has been made in
the assessment for any year in respect of loss, expenditure
or trading liability incurred by the assessee (hereinafter
referred to as the first-mentioned person) and subsequently
during any previous year,-
(a) the first-mentioned person 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 by way of remission or cessation thereof,
the amount obtained by such person or the value of benefit
accruing to him 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;
or
(b) the successor in business has obtained, whether in cash
or in any other manner whatsoever, any amount in respect of
which loss or expenditure was incurred by the
first-mentioned person or some benefit in respect of the
trading liability referred to in clause (a) by way of
remission or cessation thereof, the amount obtained by the
successor in business or the value of benefit accruing to
the successor in business shall be deemed to be profits and
gains of the business or profession, and accordingly
chargeable to income-tax as the income of that previous
year.
Explanation 1.-For the purposes of this sub-section, the
expression "loss or expenditure or some benefit in respect
of any such trading liability by way of remission or
cessation thereof" shall include the remission or cessation
of any liability by a unilateral act by the first-mentioned
person under clause (a) or the successor in business under
clause (b) of that sub-section by way of writing off such
liability in his accounts.
Explanation 2.-For the purposes of this sub-section,
"successor in business" means,-
(i) where there has been an amalgamation of a company with
another company, the amalgamated company;
(ii) where the first-mentioned person is succeeded by any
other person in that business or profession, the other
person;
(iii) where a firm carrying on a business or profession is
succeeded by another firm, the other firm;
(iv) where there has been a demerger, the resulting company.
(2) Where any building, machinery, plant or furniture,-
(a) which is owned by the assessee;
(b) in respect of which depreciation is claimed under clause
(i) of sub-section (1) of section 32; and
(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, 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.
Explanation.-Where the moneys payable in respect of the
building, machinery, plant or furniture referred to in this
sub-section become due in a previous year in which the
business for the purpose of which the building, machinery,
plant or furniture was being used is no longer in existence,
the provision of this sub-section shall apply as if the
business is in existence in that previous year.
(2A) [***]
(3) Where an asset representing expenditure of a capital
nature on scientific research within the meaning of clause
(iv) of sub-section (1), or clause (c) of sub-section (2B),
of section 35, read with clause (4) of section 43, is sold,
without having been used for other purposes, and the
proceeds of the sale together with the total amount of the
deductions made under clause (i) or, as the case may be, the
amount of the deduction under clause (ia) of sub-section
(2), or clause (c) of sub-section (2B), of section 35 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.
Explanation.-Where the moneys payable in respect of any
asset referred to in this sub-section become due in a
previous year in which the business is no longer in
existence, the provisions of this sub-section shall apply as
if the business is in existence in that previous year.
(4) Where a deduction has been allowed in respect of a bad
debt or part of debt under the provisions of clause (vii) of
sub-section (1) of section 36, then, if the amount
subsequently recovered on any such debt or part 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.
Explanation.-For the purposes of sub-section (3),-
(1) "moneys payable" in respect of any building, machinery,
plant or furniture includes-
(a) any insurance, salvage or compensation moneys payable in
respect thereof;
(b) where the building, machinery, plant or furniture is
sold, the price for which it is sold,
so, however, that where the actual cost of a motor car is,
in accordance with the proviso to clause (1) of section 43,
taken to be twenty-five thousand rupees, the moneys payable
in respect of such motor car shall be taken to be a sum
which bears to the amount for which the motor car is sold
or, as the case may be, the amount of any insurance, salvage
or compensation moneys payable in respect thereof (including
the amount of scrap value, if any) the same proportion as
the amount of twenty-five thousand rupees bears to the
actual cost of the motor car to the assessee as it would
have been computed before applying the said proviso;
(2) "sold" includes a transfer by way of exchange or a
compulsory acquisition under any law for the time being in
force but does not include a transfer, in a scheme of
amalgamation, of any asset by the amalgamating company to
the amalgamated company where the amalgamated company is an
Indian company.
(4A) Where a deduction has been allowed in respect of any
special reserve created and maintained under clause (viii)
of sub-section (1) of section 36, 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.
Explanation.-Where any amount is withdrawn from the special
reserve in a previous year in which the business is no
longer in existence, the provisions of this sub-section
shall apply as if the business is in existence in that
previous year.
(5) Where the business or profession referred to in this
section is no longer in existence and there is income
chargeable to tax under sub-section (1), sub-section (3),
sub-section (4) or sub-section (4A) in respect of that
business or profession, any loss, not being a loss sustained
in speculation business, 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 shall, so far as may be, be set
off against the income chargeable to tax under the
sub-sections aforesaid.
(6) References in sub-section (3) to any other provision of
this Act which has been amended or omitted by the Direct Tax
Laws (Amendment) Act, 1987 shall, notwithstanding such
amendment or omission, be construed, for the purposes of
that sub-section, as if such amendment or omission had not
been made.