Section 38 — Certain sums deemed as profits and gains of business or profession. Successor to s.41 of the 1961 Act.
Section 38 is in Chapter IV — Computation of Total Income, which runs from section 13 to section 95.
Sub-section (1) lists five sums deemed to be profits and gains of business or profession, each charged in a stated year and subject to sub-section (2). Clause (a) applies where an allowance or deduction was allowed for a loss, expenditure or trading liability: sub-clause (i) charges the value of any benefit accruing by cessation or remission of that trading liability, including a unilateral write-off in the assessee's own accounts, in the subsequent year the benefit accrues; sub-clause (ii) charges any amount obtained, in cash or otherwise, in respect of that loss or expenditure, in the year it is obtained — both whether or not the business still exists in that later year.
Clause (b) is the balancing charge on a tangible asset referred to in section 33(12)(a)(i) owned by the assessee that is sold, discarded, demolished or destroyed, where the moneys payable together with scrap value [A] exceed the written down value [C]. If [A] is less than the actual cost [B], the sum charged is [A] – [C]; in any other case it is [B] – [C], in the year the moneys payable become due.
Clause (c) charges, on sale of an asset representing capital expenditure on scientific research under section 45(1)(a)(i) without its having been used for other purposes, the excess of sale proceeds plus deductions allowed over the capital expenditure, or the amount of deduction made, whichever is less. Clause (d) charges recovery of a bad debt allowed under section 31(2), to the extent recovered exceeds the difference between the debt and the amount allowed. Clause (e) charges any amount withdrawn from a special reserve created and maintained under section 32(e).
Sub-section (2) imposes the gateway conditions: for clause (a), that an allowance or deduction was actually made in an assessment; for clause (b), that the asset was used for the business or profession and depreciation was claimed and allowed on it under section 33(2); for clause (c), that the asset was not used for other purposes.
Sub-section (3) allows a loss of the discontinued business — other than a speculation loss — that arose in the year it ceased and could not be set off against other income of that year, to be set off against income charged under sub-section (1)(a), (c), (d) or (e). Sub-section (4) charges the clause (a) benefit or amount in the hands of a successor in business. Sub-section (5) keeps clauses (b) to (e) alive even if the business no longer exists. Sub-section (6) defines "sold" to include exchange and compulsory acquisition but not a transfer of an asset by an amalgamating company to an amalgamated Indian company in a scheme of amalgamation, and defines "successor in business" as the amalgamated company, the resulting company on a demerger, any other person succeeding the assessee, or a successor firm.
Every limb recaptures a deduction the assessee has already enjoyed, once the assumption behind it is reversed. A remitted trading liability, a depreciated asset sold above its written down value, a research asset realised, a bad debt recovered, a reserve withdrawn — in each case money allowed out of the tax base comes back into it. Sub-sections (4) and (5) close the escape route, following the recapture into a successor's hands and keeping it alive after the business has stopped.
The charge is capped by the deduction allowed, not by the profit realised. In clause (b) the cap is explicit: where the moneys payable plus scrap value exceed the actual cost, the sum charged is only [B] – [C], so the recovered depreciation and nothing beyond it comes back under this section. Each limb has a gateway in sub-section (2) — most sharply clause (b), where the asset must have been used for the business and depreciation must have been both claimed and allowed under section 33(2), so an asset never depreciated produces no balancing charge here. Closing the business is no defence, given sub-sections (4) and (5). The relief is sub-section (3), which lets the year-of-cessation loss, other than a speculation loss, be set off against income under clauses (a), (c), (d) and (e) — clause (b) is not in that list.
A firm bought a machine for Rs. 10 lakh, used it in its business and was allowed depreciation under section 33(2) that brought its written down value down to Rs. 4 lakh. It sells the machine for Rs. 12 lakh, with no separate scrap value. Since [A] of Rs. 12 lakh exceeds [B] of Rs. 10 lakh, sub-section (1)(b)(ii) applies and the sum deemed to be profits and gains of business or profession is [B] – [C], that is Rs. 10 lakh less Rs. 4 lakh, or Rs. 6 lakh, charged in the tax year in which the moneys payable become due. Had it sold the machine for Rs. 7 lakh instead, sub-clause (i) would apply and the charge would be [A] – [C], or Rs. 3 lakh.
In the computation of business income in the return, where a written-back creditor balance, a recovered bad debt, a reserve withdrawal or a profit on sale of a depreciated asset has to be offered; and in a scrutiny assessment order adding back a credit balance written off in the accounts.
including a unilateral act of write-off of such liability in his accounts, in a subsequent tax year in which such benefit accrues
only when the asset owned by the assessee, has been used for the purpose of business or profession, and depreciation has been claimed and allowed thereon under section 33(2)
See the full 1961 to 2025 concordance.
See the circulars index.
