The Indian Income Tax Act provides various sections under which income, profits and gains are charged to tax. Of these, provisions like Section 59 of the Income Tax Act, 1961 are required to rectify and recover loss of profits chargeable to tax which have not been accounted for correctly in view of sale/disposal/demolition/destruction of assets.
This clause is in fact an extension to capital gains & business income provisions. It prevents taxpayers from evading liability because the property is no longer in use, or worse yet, being scrapped. It also goes to the extent of declaring undisclosed foreign asset, therefore it is a very crucial section in current era of globalisation.
What is Section 59 of the Income Tax Act?
Section 59 covers cases in which a taxpayer realized profits or gains derived from the disposition, demolition, or discarding of certain assets. These gains are considered taxable, regardless of the fact that the asset was out of active service.
It prevents any recovery, compensation or salvage value for which the taxpayer may be entitled from falling outside of taxation. The section is also connected to the wider anti-avoidance structure of the Act relating to undisclosed foreign assets. This allows them to have good visibility into both domestic & international assets.
Taxable Profits under Section 59
The policy of s. 59 is that profits liable to tax are not something that can be avoided by selling or demolishing the source of the profit. For example:
- Factories selling machinery as scrap and proceeds taxable.
- If an old structure is torn down & the developer receives compensation, the gains are taxable.
- Even if an asset is abandoned, any money or benefit received in the exchange of it may generate taxable profits.
This rule is a matter of fairness & keeps taxpayers from gifting away their actual taxable income.
Also Read: How ‘Actual Rent Received’ Affects Your Taxable Income
Income From Profits and Gains of Business or Profession on Transfer of a Capital Asset.
Section 59 covers only cases where profits & gains are by the sale, discarding, demolition or destruction of certain assets.
- Sold: The amount of the proceeds is deemed a taxable gain."
- Waste: If any salvage is recovered, it is taxable.
- Destroyed: Compensation has been received, and it is chargeable to tax.
Destroyed Amount of claim under insurance/compensation – taxable or not: Yes, taxable under Section 59.
Declaration of Undisclosed Foreign Asset
Section 59 does not stop at domestic laws; it gives prominence to an undisclosed foreign asset.
Thanks to globalization, many taxpayers have assets overseas — say, a property or shares in another country. In the absence of such disclosure, Section 59 expressly provides that this value can be included as taxable income in India when it is found out.
It is in line with the Black Money (Undisclosed Foreign Income & Assets) and Imposition of Tax Act, 2015, strengthening India’s war against black money & tax evasion.
Example to Understand Section 59
For example: A company has machinery of ₹10 lakh. After 10 years, when the machine is no longer in use, it sells as scrap for ₹1 lakh.
Without Section 59, the company could contend that if the machine wasn't in service, receipts were not taxable.
Under Section 59, ₹1 lakh is deemed to be the profits & gains chargeable to tax that have to be disclosed as business income or capital gain.
Likewise, if a taxpayer has foreign properties and he does not disclose them, then the market value of such property is subject to tax in India under this provision.
Also Read: When Your Spending Turns Into Taxable Income
Importance of Section 59
- Prevention of revenue leakage – Ensures all proceeds, salvage & compensation are taxed.
- Encourages compliance – Dissuades taxpayers from keeping foreign assets hidden.
- Covers special circumstances – Such as asset destruction or demolition.
- In sync with international anti-avoidance laws – Strengthens India’s war on Black Money.
Judicial Interpretation of Section 59
The courts have upheld Section 59 to include in its coverage:
- CIT vs. Bombay Burmah Trading Corp. – Income from scrapped assets is taxable.
- Black Money Act matters – Strong message that unaccounted foreign assets must be declared; failure leads to tax penalty.
These judgements illustrate that Section 59 is both proactive & reactive.
Link with Other Provisions
Section 59 is not isolated but connected to:
- Scientific research deductions – expenditure incurred on R&D (including capital expenses) deductible.
- Section 33B – rehabilitation allowance.
- Related benefits: Sukanya Samriddhi Yojana Income Tax Section, Section 86, Section 10(46A), Section 15H.
This balance ensures both taxation & relief for genuine taxpayers.
Practical Guidance for Taxpayers
- Record purchases and sales of assets.
- Declare all overseas assets in tax returns.
- Report sale/demolition/destruction of assets under proper Revenue Account head."
- Consult professionals for complex compliance.
Following these steps saves taxpayers from penalties & litigation under Section 59.
Also Read: Tax Relief for Foreign Retirement Accounts
Conclusion
Section 59 of Income Tax Act, 1961: Ensures chargeability to tax and prevents loss of revenue from wrong computation of profits & gains on transfer of certain assets — be it sale, discarded, demolished or destroyed. It also covers declaration of overseas assets, making it a comprehensive compliance tool.
This clause discourages misuse, enhances transparency, and aligns Indian tax law with global anti-evasion measures. Failure to comply with Section 59 is not optional for individuals or companies.
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