Section 41(2)

Section 41(2) — the law in short

What the courts have decided on section 41(2), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Nectar Beverages Pvt Ltd v DCIT Supreme CourtHelps taxpayer
  I wrote off my bottles and crates at 100% under the old proviso to section 32(1)(ii). Years later I sold them as scrap - is the sale money taxable under section 41(1)?
  No, for the years when section 41(2) was off the statute book. The Supreme Court held that the balancing charge in section 41(2) cannot be read into section 41(1). Depreciation is by its nature neither a loss nor an expenditure nor a trading liability, which is all section 41(1) reaches. Section 41(2), which taxed the balancing charge, was deleted from assessment year 1988-89 when the block of assets concept came in, so between then and its restoration the profit on sale of such assets was not taxable. Items costing under Rs.5,000 bought before 31 March 1995 also stayed outside the block, so section 50 did not catch them either.
• PNB Finance Ltd v CIT Supreme CourtHelps taxpayer
  My whole business was taken over for one lump sum with no item-wise breakup and I cannot work out what the undertaking cost me. Can the Department still tax me on capital gains?
  No, not on those facts and not for years before section 50B. The Supreme Court held that where a business undertaking is transferred as a going concern for a composite price, the capital asset transferred is the undertaking itself, which includes intangibles such as goodwill, tenancy rights, manpower and the value of a banking licence whose cost is not determinable. Since the consideration could not be earmarked item-wise and no cost of acquisition could be found, the computation provisions failed, and on B.C. Srinivasa Setty the case fell outside section 45 altogether. Compensation of Rs 10.20 crore was not taxable.
• CIT v Artex Manufacturing Co Supreme CourtCuts both ways
  I sold my firm's business to a company as a going concern for one lump sum. Is the surplus on plant and machinery still taxable as a balancing charge?
  Yes, on these facts. The Supreme Court held that a slump sale does not by itself keep section 41(2) out. What matters is whether a price can be attributed to the depreciable assets. Here the assessee had told the Income-tax Officer that the consideration was arrived at by taking the plant, machinery and dead stock at a valuer's figure of Rs 15,87,296, so a value was attributable even though the agreement did not mention one. But the balancing charge is capped at the difference between written down value and actual cost; any excess is capital gain. That computation went back to the Tribunal.
• CIT v Electric Control Gear Mfg. Co. Supreme CourtCuts both ways
  The Assessing Officer says that because depreciation of a known amount was allowed on the assets over the years, that figure must be the excess over written down value and can be taxed. Nothing in our documents allocates the price. Can he do that?
  No. The Supreme Court held that where there is nothing to indicate the price attributable to the machinery, plant or building out of the total consideration, the balancing charge cannot be applied, and the mere fact that a particular sum had been allowed as depreciation does not make that sum the excess between price and written down value. The Revenue's appeal on that question failed.
• Vania Silk Mills (P) Ltd v CIT Supreme CourtHelps taxpayerPartly overruled — read this first
  My machinery was destroyed in a fire and I received an insurance settlement larger than what the machinery cost me. Is the excess taxable as capital gains?
  No, on the law as it then stood. The Supreme Court held that money received under an insurance claim for the destruction of a capital asset is not received on a transfer, so section 45 was not attracted. A transfer, in any of the modes then listed in section 2(47), presupposes that the asset exists; unless the asset exists in fact there can be no transfer of it. Destruction ends the owner's rights, but by the disappearance of the asset, not by transfer. An extinguishment of rights not brought about by a transfer falls outside section 45. The appeal was allowed.
• Cambay Electric Supply Industrial Co Ltd v CIT Supreme CourtCuts both ways
  The officer has disallowed a receipt on the ground that it is not 'derived from' our undertaking. Does the exact wording of the deduction section decide the point?
  It decides most of it, and this is the judgment that says so. Section 80E as it then stood used the words 'attributable to', and the Supreme Court held that expression is of wider import than 'derived from' and was chosen deliberately, wide enough to take in a balancing charge under s.41(2) on the sale of old machinery and buildings. The corollary is what bites today: s.80-IA, s.80-IB and s.80-IC all say 'derived from', so only receipts with a direct, first-degree connection to the undertaking qualify. On the second question the assessee lost: unabsorbed depreciation and development rebate of earlier years had to be deducted before the percentage relief was computed.
• Commissioner of Income-tax v. Justice R.M. Datta (Calcutta High Court, 4 July 1989) — section 176(4) deems the receipt to be income but creates no further fiction bringing it under 'Profits and gains of business, profession or vocation', so arrears received after the profession ceased escape the charge High CourtHelps taxpayer
  I was an advocate on cash basis and stopped practising when I was appointed to the Bench. Fees for old work are still coming in. The Assessing Officer says section 176(4) makes them taxable. Is there an answer?
  There is, and this is it. The Calcutta High Court held that section 176(4) creates only two fictions — that the sum received after discontinuance is deemed to be the income of the recipient, and that it is charged to tax in the year of receipt — and does not create a third fiction deeming the receipt to be income of a business or profession carried on by the assessee in that year. Because the receipt is the fruit of professional activity it falls under the head 'Profits and gains of business, profession or vocation' and cannot be taken to the residuary head; and because the assessee carried on no profession in any part of the relevant previous year, it cannot be computed under sections 28 to 43A. The question referred was answered in the affirmative and in favour of the assessee.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.