Section 38 — Certain sums deemed as profits and gains of business or profession

(1) The following sums shall be deemed to be profits and gains of business or
profession and shall be chargeable to income-tax, in the manner specified
below, subject to the provisions of sub-section (2):—
( a) where an allowance or deduction has been allowed in respect of any loss,
expenditure or trading liability incurred by the assessee during any tax
year, then,—
( i) the value of any benefit accruing to the assessee by way of cessation
or remission of such trading liability, including a unilateral act of
write-off of such liability in his accounts, in a subsequent tax year
in which such benefit accrues; or
( ii) any amount obtained by the assessee, whether in cash or other-
wise, in respect of such loss or expenditure incurred, in subse-
quent tax year in which the amount is obtained,
whether the business or profession in respect of which the allowance or
deduction was made is in existence in such subsequent tax year or not;
( b) in a case where any tangible asset [as referred to in section 33(12)( a)
(i)], which is owned by assessee, is sold, discarded, demolished or
destroyed, and the moneys payable for such asset, together with the
scrap value [A] exceeds the written down value of such assets [C], the
sum as computed below, in the tax year in which the moneys payable
for such asset becomes due—
( i) where the moneys payable for such asset together with the scrap
value [A] is less than the actual cost of such asset [B], then—
[A] – [C]; or
( ii) in any other case,—
[B] – [C];
( c) in a case where an asset representing expenditure of a capital nature
on scientific research, referred to in section 45(1)( a)(i) is sold, without
having been used for other purposes, and the sale proceeds together
with the total deductions allowed under that section exceed the amount
of capital expenditure, the excess or the amount of deduction so made,
whichever is less, in the tax year in which the asset was sold;
( d) in a case where a deduction has been allowed for a bad debt (or part of
it) under the provisions of section 31(2), and any amount subsequently
recovered exceeds the difference between such debt and the amount
allowed, then the amount in excess, in the tax year in which recovery is
made;
( e) in a case where a deduction has been allowed for any special reserve
created and maintained under the provisions of section 32( e), any
amount subsequently withdrawn from such reserve, in the tax year in
which the amount is withdrawn.
(2) The provisions of sub-section (1) shall apply subject to fulfilment of the following
conditions:—
( a) in respect of sub-section (1)(a), only when an allowance or deduction has
been made in assessment for any tax year towards the trading liability,
loss or expenditure incurred;
( b) in respect of sub-section (1)(b), 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);
( c) in respect of sub-section (1)( c), only when the asset has not been used
for other purposes.
(3) Where the business or profession referred to in this section is no longer in exis-
tence and there is income chargeable to tax under sub-section (1)( a), (c), (d) or
(e), 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 tax year
in which it ceased to exist and which could not be set off against any other income
of that tax year shall, so far as may be, be set off against the income chargeable to
tax under the said clauses of that sub-section.
(4) In respect of sums referred to in sub-section (1)(a), if the benefit referred therein
accrues to, or amount referred therein is obtained, by the successor in business, the
value of the benefit or the amount shall be chargeable to income-tax as income in
the hands of successor in business.
(5) The provisions of sub-section (1)(b), (c), (d) and (e) shall apply in a tax year even
if the business is no longer in existence.
(6) For the purposes of this section,—
( a) “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;
( b) “successor in business” means—
( i) the amalgamated company, where there has been an amalgamation;
( ii) the resulting company, where there has been a demerger;
( iii) where the assessee is succeeded by any other person in that business
or profession, that other person;
( iv) where a firm carrying on a business or profession is succeeded by
another firm, that other firm.