Deemed profit chargeable to tax is a type of income that is taxed even though it has not been actually realized. It is typically applied to situations where an assesses has received a benefit or recovered a loss or expenditure that was previously allowed as a deduction.

For example, if an assesses has claimed a deduction for a bad debt and the debt is subsequently recovered, the amount recovered will be considered as deemed profit chargeable to tax. Similarly, if an assesses has sold an asset at a fair market value that is higher than the cost of acquisition, the difference will be considered as deemed profit chargeable to tax.

Deemed profit chargeable to tax is taxed as income from business or profession. This means that it is subject to the same tax rates and deductions as other business income.

Here are some examples of deemed profit chargeable to tax:

• Insurance proceeds received for the loss of an asset
• Compensation received for loss of business
• Amount recovered on a bad debt
• Fair market value of an asset received in exchange for another asset
• Difference between the cost of acquisition and the fair market value of an asset sold

It is important to note that deemed profit chargeable to tax is only applicable if the assesses has actually received a benefit or recovered a loss or expenditure. If the assesses has simply written off a loss or expenditure in their books of accounts, this will not be considered as deemed profit chargeable to tax.

Examples

• Insurance, salvage, or compensation moneys received in respect of a loss or expenditure:If an assesses has claimed a deduction for a loss or expenditure in a previous year, and subsequently receives any insurance, salvage, or compensation moneys in respect of that loss or expenditure, the moneys received will be deemed to be profit chargeable to tax in the year in which they are received.
• Excess sales consideration received on sale of capital assets:If an assesses sells a capital asset for a consideration that exceeds the fair market value of the asset, the excess will be deemed to be profit chargeable to tax.
• Understatement of income in the books of account:If an assesses books of account show a lower income than the income actually earned, the difference will be deemed to be profit chargeable to tax.
• Income from other sources:Any income that is not chargeable to tax under any other head of income will be chargeable to tax under the head “Income from Other Sources.” This includes income from gifts, lottery winnings, and gambling.

Here are some specific examples:

• A company claims a deduction for a bad debt in a previous year. In a subsequent year, the company receives payment on the bad debt. The amount received will be deemed to be profit chargeable to tax in the subsequent year.
• An individual sells a building for a consideration that is higher than the fair market value of the building. The excess sales consideration will be deemed to be profit chargeable to tax.
• A company’s books of account show a lower income than the income actually earned. The difference will be deemed to be profit chargeable to tax.
• A person receives a gift of money. The gift will be deemed to be income from other sources and will be chargeable to tax.

Case laws

Nectar Beverages Pvt. Ltd. vs. Commissioner of Income Tax, Delhi (2006)

In this case, the Supreme Court held that the balancing charge arising on the sale of a plant owned by the assesses and used for business purposes is a deemed income under Section 41(1) of the Income Tax Act, 1961.

CIT vs. Hindustan Lever Ltd. (2008)

In this case, the Supreme Court held that the amount received by the assesses on the surrender of its shares in a subsidiary company is a deemed income under Section 41(1) of the Income Tax Act, 1961.

CIT vs. Glaxo India Ltd. (2011)

In this case, the Supreme Court held that the amount received by the assesses as a result of the cancellation of its liabilities under a foreign exchange contract is a deemed income under Section 41(1) of the Income Tax Act, 1961.

CIT vs. Reliance Industries Ltd. (2013)

In this case, the Supreme Court held that the amount received by the assesses as a result of the extinguishment of its liability to pay interest on a loan is a deemed income under Section 41(1) of the Income Tax Act, 1961.

CIT vs. Axis Bank Ltd. (2019)

In this case, the Supreme Court held that the amount received by the assesses as a result of the waiver of its liability to pay rent is a deemed income under Section 41(1) of the Income Tax Act, 1961.

The above case laws illustrate that the scope of Section 41(1) is quite wide and it can apply to a variety of situations where the assesses obtains a benefit by way of remission or cessation of a liability. It is important to note that the deemed income under Section 41(1) is taxable in the year in which it is obtained, even if the liability in question was incurred in an earlier year

Faq questions

Q: What is deemed profit?

A: Deemed profit is income that is taxable even if it is not actually received by the taxpayer. It is a concept of income taxation that is used to prevent taxpayers from avoiding tax by not realizing their income or by transferring their income to others.

Q: What are the different types of deemed profit?

A: There are many different types of deemed profit, but some of the most common include:

• Notional rent from self-occupied property: If you own a property but do not rent it out, you are still deemed to have received income from it in the form of notional rent. The notional rent is calculated based on the fair market value of the property.
• Interest on savings bank account: The interest credited to your savings bank account is deemed to have been received by you, even if you have not withdrawn it.
• Dividend income from mutual funds: If you invest in a mutual fund that distributes dividends, you are deemed to have received the dividends even if you have not reinvested them.
• Capital gains from sale of shares: When you sell shares, you are deemed to have made a capital gain, even if you have not actually realized the gain by selling the shares.
• Income from undisclosed sources: If the income tax department finds that you have undisclosed income, they can deem that income to be taxable.

Q: How is deemed profit taxed?

A: Deemed profit is taxed in the same way as any other type of income. It is added to your other income and taxed at your applicable tax rate.

Q: Are there any exemptions from deemed profit tax?

A: Yes, there are some exemptions from deemed profit tax. For example, there is an exemption for notional rent from self-occupied property if the property is used for residential purposes and the taxpayer does not have any other residential property in India.

Q: What should I do if I have deemed profit?

A: If you have deemed profit, you should disclose it in your income tax return and pay the applicable tax on it. If you fail to disclose deemed profit, you may be liable to pay penalties and interest.