06/02/2019
Deemed profits chargeable to tax as business income [Secs. 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 :-
Recovery against any deduction (sec 41(1)] :-
Section 41(1) is applicable if the following conditions are satisfied :-
1. In any of the earlier years a deduction was allowed to the taxpayer in respect loss, expenditure or trading liability incurred by the assessee.
2. During the current previous year, the taxpayer :-
a. has obtained a refund of such loss or expenditure (it may be in cash or any other manner); or
b. has obtained some benefit in respect of such trading liability by way of remission or cessation thereof (“remission or cessation" for this purpose includes unilateral act of the assessee by way of writing off of such liability in his books of account).
If the above two conditions are satisfied 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 tax as the income of that previous year.
The following points should be noted :-
1. For the purpose of condition 2(a) (supra) there may (or may not) be any remission or cessation of trading liability. .
2. Where the assessee to whom any allowance or deduction has been allowed in respect of loss, expenditure or trading liability, is succeeded in his business either because of amalgamation or demerger of two companies or on account of the constitution of new firm or the business is continued by some other person when the assessee ceases to carry on the business, then the person succeeding will be chargeable to tax on any amount received in relation to which deduction or allowance has been made.
3. Provisions of section 41(1) can be invoked to tax excise duty refunds received in the relevant assessment year even when the part of excise duty was not claimed as expenditure in the profit and loss account of earlier years and the assessee had kept a separate account in respect of collection and payment of excise duty Mysore Thermo Electric (P.) Ltd. v. CIT(1996) 221 ITR 504 (Kar).The aforesaid rule is applicable even if the business is not in existence in the year of recovery.
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