Deemed Business Profits

Introduction

Charge under this head is on the profits and gains of any business carried on by the assessee at any time during the tax year. However, some deeming provisions treat certain receipts, against which a deduction has been allowed, as profits of business even though the business or profession may not be in existence in the year of recovery/receipts.

1. Receipts deemed as business profits

Income earned from business or profession carried on by the assessee, at any time during the tax year, is taxable under the head profits and gains from business or profession. However, certain receipts, against which a deduction has been allowed in earlier years, is taxable as profits of business even if business or profession may not be in existence in the year of receipts. These receipts are listed below.

1.1. Recovery against loss or expenditure [Section 38(1)(a)]

Main article: Recovery against deduction

If deduction has been allowed to the assessee in any tax year in respect of loss, expenditure or trading liability and subsequently he obtains any amount or benefit towards such loss, expenditure or trading liability by way of remission or cessation, the amount or benefit so obtained shall be taxable as business profits. It is chargeable to tax as the income of that tax year in which such amount or benefit is obtained. This taxability arises regardless of the fact whether the business is in existence in that year or not.

1.2. Balancing Charge [Section 38(1)(b)]

The scheme of balancing charge applies to tangible assets of an electricity undertaking, claiming depreciation under straight line method.

If tangible asset is sold, discarded, demolished or destroyed by an electricity undertaking in the tax year, and the money payable (plus scrap value of the asset) exceeds its written-down value such excess amount, to the extent of depreciation allowed in earlier years, is taxable as balancing charge in the tax year in which the money payable became due. If such excess amount is more than depreciation allowed, the amount in excess of aggregate of written down value and depreciation already allowed shall be taxable as short-term capital gain.

This taxability arises regardless of the fact whether the business is in existence in that year or not.

Exception 1: In case of intangible assets

Intangible assets of an electricity undertaking are not covered under the scheme of balancing charge. Thus, any gain arising from sale of intangible asset shall be taxable as capital gains under Section 74.

Exception 2: In case asset is sold in year of acquisition

The aforesaid provisions of balancing charge do not apply if any tangible asset is sold in the tax year itself in which it was first brought to use. In that event, the surplus is taxable as short-term capital gain.

1.3. Sale of an asset used for scientific research [Section 38(1)(c)]

If asset, acquired for scientific research, is transferred without having been used for any other purposes, lower of following amounts shall be chargeable to tax as business income of the tax year in which the sale takes place:

(a) Sale proceeds received from transfer of asset; or

(b) Deduction already allowed under this provision.

If the sale proceeds realised from transfer of such asset exceeds the cost of acquisition, such excess amount shall be chargeable to tax under the head Capital Gains.

This provision is applicable only if an asset is sold without using it for any other purposes. If an asset, purchased for purpose of scientific research, is utilized for other business purposes on completion of scientific research, the actual cost of such asset to the assessee is taken to be the actual cost to the assessee as reduced by the amount of any deduction allowed under this provision.

This taxability arises regardless of the fact whether the business is in existence in that year or not.

For the purpose of this clause sold includes a transfer by way of exchange or compulsory acquisition under any law for the time being in force. However it does not include any transfer in scheme of amalgamation, where amalgamated company is an Indian company. Further, sale proceeds include insurance, salvage or compensation money payable in respect thereof.

1.4. Recovery against Bad Debt [Section 38(1)(d)]

Deduction on account of bad-debt is allowed under Section 31(2). If subsequently any amount is recovered in respect of such debt and the amount of recovery together with the amount of bad debt allowed as deduction, exceeds the amount of such debt, such excess amount is chargeable to tax as business income of the tax year in which such recovery is made. This taxability arises regardless of the fact whether the business is in existence in that year or not.

1.5. Withdrawal from Special Reserve [Section 38(1)(e)]

Main article: Deduction for sum transferred in Special Reserve

Banks, housing finance companies and financial institutions can claim deduction under Section 36(1)(viii) for the sum deposited in special reserve account. Where any amount is withdrawn from the special reserve account, it will be chargeable to tax in the year in which amount is withdrawn. Such withdrawal shall be taxable only if deduction had been allowed under Section 32(e) in the year of deposit. This taxability arises regardless of the fact whether the business is in existence in that year or not.

1.6. Adjustment of losses lying unabsorbed [Section 38(3)]

Where business of the assessee is no longer in existence and he has sustained the business losses, not being a loss sustained in speculation business, during the year in which business ceased to exist, such loss can be adjusted against the income taxable, other than the income taxable as balancing charge, under this provision as  deemed business profit.

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.