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Income tax sec. 41(3) and sec.35

Kaushik Dedhiya (Associate CWA CA Final) (133 Points)

01 February 2012

Friends please help me on a query relating to Sec.41(3) linked with sec.35. Of income tax act..an Indian pharmaceutical co. Incurred rs.3.5 lakh on capital exp for inhouse scientific exp. Eligible for weighted deduction of 200%. But during that year only co. Sold that asset for rs.8 lakh without being used for any other purpose. My question to you is what will be the deduction allowed to co. U/s 35 and hw sale proceeds shall be recorded? I.e its bus income or cap gain? Plz elaborate with explanation. Thanks in advance.

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6 Replies

Vignesh Killur (Articled Assistant) (1666 Points)
Replied 01 February 2012

Hi Kaushik,

Deduction U/s

The tax treatment when such capital asset is sold is as follows:

If the asset is sold without having been used for other purposes, the following amounts shall be chargeable to tax under business Income.

1. Surplus (i.e Sale Price) OR

2. Deduction already allowed under sec 35

WHICHEVER IS LESS

Therefore 700,000 is taxable as business income and the difference amount i.e 100,000 (Excess of Sale price over Cost of Acquisition is chargeable to tax under Capital Gains (Sec 45)

Regards,

Viggi

Kaushik Dedhiya (Associate CWA CA Final) (133 Points)
Replied 02 February 2012

Dear Vignesh,

Thanks for the solution but i have a doubt over the deduction of Rs.7,00,000/- from Sale of Rs.8,00,000/- as We are claiming deduction of 200% on capital exp. u/s 32(2AB) and Sec. 43(1) does not specify Sec.35(2AB) for allowable deduction. So in my opinion Sec.43(1) doesn't invoke as we are claiming deduction u/s 35(2AB) which is not specified u/s 41(3). So according to me deduction shall be 8 Lakhs - 3.5 Lakhs. But your answer is correct as per T.N.Manoharan book, still please see is there any alternative answer to it??? Thanks

Vignesh Killur (Articled Assistant) (1666 Points)
Replied 02 February 2012

Hi,

Please refer Vinod Singhania Page 415, para 156.3, 46th Edition 2011-12 in which it is clearly stated that if an asset which is used for scientific research is sold without being put to any other use, then the surplus amount received shall be taxed as business Income to the extent of Surplus received or Amount of deduction allowed under sec 35 (No sub section specified) whichever is less. The amount received over and above the deduction allowed is treated as Capital Gains.

I have found many some views in the internet. I think its better to believe themain stream authors. I tried to read the Act, but its a bit confusing.

Regards

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Kaushik Dedhiya (Associate CWA CA Final) (133 Points)
Replied 07 February 2012

Tahnks Vignesh...I have also tried to search for it..and one of the professor from highly reputed coaching classes is of the opinion that Sec.35(2AB) is not to be considered for the purpose of Sec.41(3) as in the legislation i.e. bare act it is specifically not mentioned. So this is contradiction from Singhania and manohran, but when you yourself read bare act you will realise that he is right as in sec.41(3) act has specifies sub sections also..So counting full Sec.35 will be wrong.. Hope this kind of Sum dnt come in exam. Any ways thanks a ton..

Vishal Thadhani (1 Points)
Replied 27 April 2016

As you have taken weighted deduction of 200% I.e amount being 700000. Therefore it was sold in the same year without being used for any other purpose so here section 41 (3) says if the asset eligible for weighted deduction and been sold in same year without being used for any other purpose than exemption will be forfeited therefore. Lesser of sale price or Deduction value. 700000 or 800000 w/l there 700000 is business income and 100000 is stcg.