Section 41 of ITA, 1961 : Section 41: Profits Chargeable To Tax

Explanation using Example

Imagine a company, XYZ Pvt. Ltd., which had incurred a trading liability of INR 500,000 in the financial year 2018-19. The company claimed this as a deduction while computing its taxable income for that year. In the financial year 2021-22, the creditor to whom the liability was owed forgives the debt due to XYZ Pvt. Ltd.'s financial difficulties.

According to Section 41(1)(a) of the Income-tax Act, 1961, the amount of INR 500,000 that was forgiven by the creditor will be treated as income for XYZ Pvt. Ltd. in the financial year 2021-22. This is because the company obtained a benefit in respect of the trading liability through its remission. Therefore, XYZ Pvt. Ltd. must include this amount in its income for the year 2021-22 and pay taxes on it, even though the business may not be in existence anymore.