Profits chargeable to tax [Section 41] :
This section enumerates certain receipts which are deemed to be income under the head “Business or profession.” Such receipts would attract charge even if the busines s from which they arise had ceased to exist prior to the year in which the liability under this section arises. The particulars of such receipts are given below:
(i) Section 41(1) – Suppose an allowance or deduction has been made in any assessment year in respect of loss, expenditure or trading liability incurred by A. Subsequently, if A has obtained, whether in cash or in any manner whatsoever, any amount in respect of such loss or expenditure of some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by A, or the value of benefit accruing to him shall be taxed as income of that previous year. It does not matter whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not.
It is possible that after the above allowance in respect of loss, expenditure, or trading liability has been given to A, he could have been succeeded in his business by another person. In such a case, the successor will be liable to be taxed in respect of any such benefit received by him during a subsequent previous year.
Successor in business:
(i) Where there has been an amalgamation of a company with another company, the successor will be the amalgamated company.
(ii) Where a firm carrying on a business or profession is succeeded by another firm the successor will be the other firm.
(iii) In any other case, where one person is succeeded by any other person in that business or profession the other person will be the successor.
(iv) In case of a demerger, the successor will be the resulting company. Remission or cessation of a trading liability includes remission or cessation of liability by a unilateral act of the assessee by way of writing off such liability in his accounts.
(ii) Balancing charge, etc. – The provisions of section 41(2) relating to balancing charge, of section 41(3) relating to assets acquired for scientific research and of section 41(4) dealing with recovery of bad debts have been dealt with earlier under the respective items.
(iii) Section 41(4A) – The withdrawal from special reserve created and maintained under section 36(1)(viii) will be deemed to be profits and gains of business and charged accordingly in the year of withdrawal. Even if the business is closed, it will be deemed to be in existence for this purpose. This also applies to section 41(5).
Brought forward losses of defunct business – In cases where a receipt is deemed under this section to be profit of a business under this section relating to a business that had ceased to exist and there is an unabsorbed loss, which arose in that business during the previous year in which it had ceased to exist, it would be set off against income that is chargeable under this section. This sub-section thus constitutes an exception to the rule that if a business has ceased to exist, any loss relating to it cannot be carried forward and set off against any income from any source.