Section 41: Deemed Profits

In this article, I have discussed deemed profits under the head PGBP. The following are the points related to deemed profits:

(i) Deductions allowed earlier but recovered later on [Section 41(1)] 

The Finance Act 1992 has substituted the sub-section 41(1) by the following with effect from assessment year 1993-94 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 (here-in-after referred to as firs mentioned persons) 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 value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to 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.

(b) in case such benefit or cash is obtained by successor in business in manner whatsoever in respect of which loss or expenditure was incurred by first-mentioned person the provisions mentioned in (a) above shall be applicable against such successor in business and he shall be liable to pay tax on such deemed profit.

The words successor in business means:

(a) in case of amalgamation-the amalgamated company;

(b) in case of succession-the successor;

(c) in case a firm is succeeded by another firm, such other firm. For the purposes of this section the expression "loss or expenditure or some benefit in respect of any such trading liability by way 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.

(ii) Balancing Charge [Section 41(2)]

In case any building, plant and machinery or furniture owned by assessee is sold, demolished, destroyed or discarded during the year and on which depreciation has been claimed by the assessee on straight-line method, the excess of amount realised over W.D.V. shall be deemed as business profit but it shall not exceed depreciation allowed on such asset.

(iii) Profit on sale of assets used for scientific research [Section 41(3)]

Where capital asset was purchased for scientific research and is sold without having been used for any other purpose. excess amount of sale price added with the deduction allowed earlier over the capital cost of the asset is taxable as deemed income of the year in which sale was affected.

(iv) Bad debts allowed earlier but recovered [Section 41(4)]

Bad debts allowed earlier but recovered later on shall be deemed profits of the year in which they are recovered.

(v) Amount withdrawn from special reserve [Section 41(4A)]

In case a deduction has been allowed u/s 36(1)(viii) in respect of any amount transferred to special reserve and subsequently some amount is withdrawn from such special reserve, the amount so withdrawn shall be deemed as income under the head "Profits & Gains" of the year in which amount is withdrawn. This provision shall remain applicable even if the business is no longer in existence in the year in which amount is withdrawn.

(vi) Setting off loss from deemed profit [Section 41(5)]

Any loss of a business incurred during the year in which it ceased to exist and which could not be set off against any other income of that previous year shall be set off against the above-mentioned deemed incomes. This does not apply to speculation loss.