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TMI Blog1991 (5) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... s because no business had continued and the intention of the assessee was to close the business. In the accounting year relevant to the asst. yr. 1983-84, the assessee had earned certain capital gains with which we are not concerned. The assessee company had also earned income under s. 41(2) of the IT Act, 1961 on sale of building. The said income under s. 41(2) of the Act has been computed by the ITO at Rs. 38,378. There is no dispute about this figure. The assessee had admitted that there was no business activity in the relevant accounting year and business had closed. However, the assessee had drawn a profit and loss account in which following debit entries had been made: Rs. (1) Sundry expenses 6,000 (2) Audit fees 600 (3) Ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat income under s. 41(2) was to be treated as income of business by virtue of deeming provision in s. 41(2) r/w Explanation. However, the fiction created therein was limited for the purpose of the said section and that expenses of general nature which had nothing to do with the sale of the asset in question were not allowable as deduction. He relied on the decisions in East Asiatic Co. (India) P. Ltd. vs. CIT (1986) 161 ITR 135 (Mad) and CIT vs. Kar Valves Ltd. (1987) 66 CTR (Ker) 7 : (1987) 168 ITR 416 (Ker). 5. Shri J.P. Shah, the learned counsel for the assessee, on the other hand, submitted that under the Explanation in s. 41 a fiction had been created to the effect that business was in existence in the relevant accounting year. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be noted that neither s. 41(2) nor Explanation state that income under s. 41(2) would be deemed to be profits and gains of business and the fiction of being business would be for all purposes of the Act. In this connection, it is to be noted that the deeming provision in s. 41(1) uses the expression "profits and gains of business" while the expression used in s. 41(2) is "income of the business". Expenses under s. 37(1) are allowable as deduction only from profits and gains of business carried on by the assessee if those expenses are incurred wholly and exclusively for the purpose of said business. For example, under s. 104 of the Act, the question arises whether profit and gains distributed as dividends by any company were less than statut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10(2) (vii) of the Indian IT Act, 1922 was created to enable the Revenue to take back what it had given by way of depreciation allowance in preceding years and as such the fiction must be limited to the purpose of computation of the assessable income of the assessee under s. 10 and it cannot be extended to other provisions in the Act which are unconnected with the purpose for which the fiction was created. 8. The three decisions on which the learned counsel for the assessee has relied are in respect of allowance of deduction in respect of unabsorbed depreciation from the income under s. 41(2) of the Act. In all the three cases it has been held that the unabsorbed depreciation was allowable as deduction from income under s. 41(2) of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose. The legal fiction cannot be extended so as to permit deduction of expenses incurred during the year in which business is not in existence. In this connection, it may be noted that a special provision has been made in sub-s. (5) of s. 41 for set off of the business loss which had arisen in the business or profession in the previous year in which the business had ceased to exist and which could not be set off against any other income of that previous year. Such provision would not have been necessary if the intention was that the income under s. 41(2) should be treated as profits and gains of the business carried on by the assessee for all the purposes of the Act. The above aspect was considered by Bombay High Court in Akola Electric Sup ..... X X X X Extracts X X X X X X X X Extracts X X X X
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