Income Tax Act 2025: Section 38 for Tax Year 2026-27

Certain sums deemed as profits and gains of business or profession

[As per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]

Section 38(1) of Income Tax Act 2025

38(1) The following sums shall be deemed to be profit 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 the tax year in which such benefit accrues; or
  • (ii) any amount obtained by the assessee, whether in cash or otherwise, in respect of such loss or expenditure incurred, in the 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 that year or not;
• (b) in a case where any tangible asset, which is owned by assessee, is sold, discarded, demolished or destroyed, and the money payable for the asset, together with the scrap value [A] exceeds the written down value of the assets [C], the sum as computed below, in the tax year in which the money payable for the tangible asset becomes due––
  • (i) where the money payable for the asset together with the scrap value [A] is less than the actual cost of the 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) or (c) 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.

Section 38(2) of Income Tax Act 2025

38(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 earlier 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, and depreciation has been claimed and allowed thereon under section 33;
• (c) in respect of sub-section (1)(c) of the said sub-section, only when the assets has not been used for other purposes.

Section 38(3) of Income Tax Act 2025

38(3) Where the business or profession referred to in this section is no longer in existence and there is income chargeable to tax under of sub-section (1)(a), (c), (d) and (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.

Section 38(4) of Income Tax Act 2025

38(4) In respect of sums referred to in sub-section (1)(a), if the benefit accrues to, or amount is obtained, by the successor in business, the value of benefit or the amount shall be chargeable to income-tax as income in the hands of successor in business.

Section 38(5) of Income Tax Act 2025

38(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.

Section 38(6) of Income Tax Act 2025

38(6) In 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 and includes––
  • (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.

FAQs on Section 38 of Income Tax Act 2025

Q1. What does Section 38 deal with under the Income Tax Act, 2025?
Section 38 lists specific situations where certain receipts or benefits are deemed to be profits and gains of business or profession, even if they are not income in the usual sense.

Q2. Does Section 38 apply even if the business has ceased to exist?
Yes, several provisions under Section 38 (especially subsections 1(a), (c), (d), and (e)) continue to apply even if the business or profession is no longer in existence.

Q3. What happens if a trading liability is remitted or ceased to exist?
If a deduction was previously allowed for a trading liability, and it is later remitted or ceases (including unilateral write-off), the benefit is treated as income in the year it arises.

Q4. Is income taxable if a business asset is sold for more than its WDV?
Yes, if the amount received plus scrap value exceeds the Written Down Value (WDV), the excess is taxable as deemed business income under Section 38(1)(b).

Q5. What if capital expenditure on scientific research is recovered on sale of the asset?
If the sale proceeds plus past deductions exceed the capital expenditure, the excess (or deduction amount, whichever is lower) is taxable.

Q6. Is recovered bad debt taxable under Section 38?
Yes, if a previously allowed bad debt is recovered and the recovered amount exceeds what was written off, the excess is taxable.

Q7. What if an amount is withdrawn from a special reserve created under Section 32(e)?
Such withdrawal is deemed income in the year it is withdrawn.

Q8. Is there a condition for taxing cessation of liability?
Yes, deduction for such liability must have been allowed in an earlier assessment year.

Q9. Is depreciation necessary for taxation on asset disposal under Section 38(1)(b)?
Yes, the asset must have been used for business purposes and depreciation must have been claimed under Section 33.

Q10. Are these provisions applicable to successor businesses?
Yes, if the benefit or amount arises to a successor in business (e.g., after amalgamation), it is taxable in the hands of the successor.

Q11. What does “sold” mean under Section 38?
It includes transfers by exchange or compulsory acquisition but excludes transfers in schemes of amalgamation to Indian companies.

Q12. Who is considered a “successor in business”?
Includes amalgamated or resulting companies, new persons taking over business, or succeeding firms.

Q13. What if an asset is sold but has not been used for any other purpose?
Then the capital recovery (Section 38(1)(c)) is taxable, provided it meets the conditions under Section 45(1)(a) or (c).

Q14. What happens to unabsorbed business loss when business is closed?
It can be set off against income deemed under Section 38(1)(a), (c), (d), or (e) in the year of recovery or benefit.

Section 38 of the Income Tax Act, 2025 ensures that specific receipts—such as recovery of earlier claimed deductions, sale proceeds of depreciated assets, or remission of liabilities—are treated as taxable business income.

These provisions apply regardless of whether the business is ongoing or discontinued and extend to successors as well. The section upholds tax neutrality by aligning past tax benefits with corresponding future income realizations, ensuring fairness and accuracy in income computation.