Section 41 of Income Tax Act 1961 | CA B K Goyal & Co LLP

Understanding section 41 of the Income Tax Act, 1961 : Profits chargeable to tax

Section 41 of the Income Tax Act, 1961, outlines the treatment of certain financial transactions for tax purposes. Let’s simplify these provisions:

(1) Recovery of Previously Allowed Deductions: If a person had claimed a deduction for losses, expenses, or trading liabilities in a past assessment, and later receives money or benefits related to those claims, it will be treated as taxable income in the year of receipt. This applies even if the business or profession isn’t active in that year.

Example: If a business wrote off a debt as a loss in the past and later recovers more than the written-off amount, the excess is considered taxable income.

(2) Sale or Disposal of Business Assets: If a person sells or disposes of a business asset like a building, machinery, plant, or furniture, and the proceeds exceed the written down value, the difference is treated as taxable income in the year when the money becomes due.

Example: If a company sells machinery used in its business, and the sale proceeds are more than the depreciated value, the excess is taxable income.

(3) Sale of Assets from Scientific Research Expenditure: If an asset acquired for scientific research is sold, and the proceeds along with deductions exceed the capital expenditure, the excess is treated as taxable income in the year of the sale.

Example: If a company sells a research asset and the sale proceeds, along with deductions claimed, are more than the original expenditure, the excess is taxable income.

(4) Recovery of Bad Debts: If a deduction was claimed for a bad debt, and later the amount recovered is greater than the initially deducted amount, the excess is considered taxable income in the year of recovery.

Example: If a business wrote off a bad debt and later recovers more than the written-off amount, the excess is taxable income.

(4A) Withdrawal from Special Reserve: If a deduction was allowed for a special reserve, and later an amount is withdrawn from that reserve, it is treated as taxable income in the year of withdrawal.

Example: If a business had a special reserve and withdraws an amount from it, the withdrawn amount is taxable income.

(5) Setoff of Losses: If a business or profession ceases to exist and there is taxable income due to the above provisions, any unadjusted losses from the final year can be set off against this taxable income.

Example: If a business closes, and there’s taxable income due to recovered debts, any unadjusted losses from the last year can be used to offset this income.

These provisions aim to ensure that tax benefits previously claimed are appropriately accounted for when there are subsequent financial changes or recoveries.

Frequent FAQs on Section 41 of the Income Tax Act, 1961

What is Section 41 of the Income Tax Act, 1961?
- Section 41 outlines the tax treatment of certain financial transactions, such as the recovery of previously claimed deductions and the sale or disposal of business assets.
When does Section 41 apply?
- Section 41 applies when a taxpayer has claimed a deduction for losses, expenses, or trading liabilities in a past assessment, and subsequently receives money or benefits related to those claims.
How does Section 41 treat the recovery of bad debts?
- If a deduction was claimed for a bad debt, and the amount recovered later exceeds the initially deducted amount, the excess is considered taxable income in the year of recovery.
What happens in the sale or disposal of business assets under Section 41?
- When a person sells or disposes of business assets like buildings, machinery, or furniture, and the proceeds exceed the written down value, the difference is treated as taxable income in the year when the money becomes due.
Can you provide an example of Section 41 in action?
- Certainly. If a business claimed a deduction for a debt written off in the past, and later recovers more than the written-off amount, the excess is treated as taxable income under Section 41.
How does Section 41 handle the withdrawal from a special reserve?
- If a deduction was allowed for a special reserve, and an amount is later withdrawn from that reserve, the withdrawn amount is treated as taxable income in the year of withdrawal.
What is the significance of the setoff of losses in Section 41?
- If a business ceases to exist, and there is taxable income due to recovered debts or other provisions in Section 41, any unadjusted losses from the final year can be set off against this taxable income.
Are there specific rules for the sale of assets acquired for scientific research under Section 41?
- Yes. If such assets are sold, and the proceeds along with deductions exceed the capital expenditure, the excess is considered taxable income in the year of the sale.
How should businesses prepare for Section 41 implications?
- Businesses should maintain accurate records of deductions claimed, track recoveries, and be aware of the tax consequences outlined in Section 41 to ensure compliance with tax regulations.
Where can I find more information on Section 41 of the Income Tax Act, 1961?

For detailed information and specific queries, it is advisable to consult with tax professionals or refer to official tax resources provided by the relevant tax authorities.

Legal text of Section 41 of the Income Tax Act, 1961

(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

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.

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