Section 38: certain sums deemed as profits and gains of business or profession

What is deemed taxable under Section 38(1)

• (a) Waiver of a trading liability: where a deduction was earlier allowed for a loss, expenditure or trading liability, and that liability is subsequently waived or written off (including a unilateral write-off by the assessee), the value of the benefit is taxed in the year it arises. Similarly, any amount later obtained by the assessee in respect of the earlier loss/expenditure is taxable - whether or not the business is still in existence.
• (b) Balancing charge on sale of a depreciated tangible asset: where the moneys payable (plus scrap value) for a sold/discarded/demolished/destroyed asset exceed its written down value, the excess (capped at the difference between actual cost and written down value) is taxable in the year the moneys payable become due.
• (c) Sale of a scientific-research capital asset: where an asset representing capital expenditure on scientific research (never used for other purposes) is sold, and the sale proceeds plus deductions already allowed exceed the capital expenditure, the lower of the excess or the deduction already allowed is taxed in the year of sale.
• (d) Recovery of a written-off bad debt: where a bad debt deduction was allowed under Section 31(2) and the amount later recovered exceeds the difference between the debt and the amount allowed, the excess is taxed in the year of recovery.
• (e) Withdrawal from a special reserve: any amount withdrawn from a special reserve created under Section 32(e) is taxed in the year of withdrawal.

Conditions that must be met

Section 38(2) makes clear these deeming provisions apply only where the underlying deduction/depreciation was actually allowed in an earlier assessment - for example, the balancing-charge rule in (b) applies only if the asset was used for business/profession and depreciation was claimed and allowed under Section 33(2).

Applies even after the business has closed

Section 38(3) allows a loss that arose in the year the business ceased to exist (not a speculation-business loss) to be set off against income taxable under this section for that closure year, where such loss could not otherwise be set off.

Section 38(5) confirms that items (b), (c), (d) and (e) apply even if the business is no longer in existence in the year the income arises.

Section 38(4) taxes the successor in business (as defined) where the benefit under (a) accrues to, or the amount is obtained by, that successor rather than the original assessee.

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