INCOME FROM OTHER SOURCES

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INCOME FROM OTHER SOURCES

  1. 1. INCOME FROM OTHER SOURCES<br /><ul><li>INTRODUCTION</li></ul>Income from other sources is the fifth and last head of income under which the total is computed and assessed. As the very name suggests. “Income from Other Sources” is a residuary head of income. Any item of income chargeable to tax but does not fall within the ambit of the other four specific heads of income shall be included under this head of income.<br />Section 56 lays down what incomes are taxable under this head.<br />Section 57 and 58 lays down the deductions which are allowable and not allowable respectively, while computing income under this head.<br />Section 59 deals with income chargeable to tax, corresponding to section 41, which falls under the head of “Profit and Gains of The Business”.<br />(1) Chargeability – Section 56<br />Income Chargeable only under this head<br />The following income shall be charged to tax only under the head “Income from<br />Other Sources”:<br />(1) Dividend income covered by sub-clause (a) to (e) of clause (22) of Section 2.<br />(2) Income by way of winnings from lotteries, cross word puzzles, races including horse race, card games and other games of any sort, gambling, betting, etc. It requires mention here that such winnings are chargeable to tax u/s 115BB at a flat rate of 30%.<br />(3) Any sum of money, the aggregate value of which exceeds Rs.50, 000 received from any person without consideration by an individual or Hindu Undivided Family on or after 01.04.2006.<br />However, exemption is granted in respect of any sum of money received –<br />(a) From any relative; or<br />(b) On the occasion of marriage of individual; or<br />(c) Under a Will or by way of inheritance; or<br />(d) In contemplation of death of the payer or<br />(e) From a local authority; or<br />(f) From any fund, foundation, university, other educational institution, hospital,<br />medical institution, any trust or institution referred to in Section 10(23C); or<br />(g) From charitable institutions registered u/s 12AA.<br />In respect of above gifts, there is no ceiling limit and therefore, entire amount is<br />exempt from chargeability.<br />The definition of the term ‘relative’ for this purpose is as under :<br />(a) Husband or wife of individual;<br />(b) Brother or sister of the individual;<br />(c) Brother of husband of the individual;<br />(d) Brother of wife of the individual;<br />(e) Sister of husband of the individual;<br />(f) Sister of wife of the individual;<br />(g) Brother of father of the individual;<br />(h) Brother of mother of the individual;<br />(I) Sister of father of the individual;<br />(j) Sister of mother of the individual;<br />(k) Lineal ascendant of the individual (say, grandfather)<br />(l) Lineal descendant of the individual (say, son, grandson, daughter)<br />(m) Lineal ascendant of the husband of the individual<br />(n) Lineal descendant of the husband of the individual<br />(o) Lineal ascendant of the wife of the individual (say, wife’s father)<br />(p) Lineal descendant of the wife of the individual;<br />(q) Wife or husband of the relatives listed at serial numbers (b) to (p)<br /><ul><li>Taxability of any sum received:</li></ul>The objective of taxation of any sum received by an individual or HUF, without any consideration is basically to bring into tax net the bogus transactions in the name of gifts from unknown persons. Keeping this in mind, any gift received from non-relatives, subject to exemptions listed above, has been subjected to tax u/s 56(2) (VI). Accordingly, any sum of money received by an individual or HUF during the year, the aggregate of which is exceeding Rs.50,000, shall be subject to tax in the hands of such individual or HUF.<br />It needs mention that the aggregate limit of Rs.50, 000 as provided in the Section is not in the nature of basic exemption or a threshold limit. Accordingly, in case an individual or HUF receives any sum of money exceeding Rs.50, 000, which are not covered by exemptions, the whole of such sum shall be subject to tax under the head “Income from Other Sources”. For example, in case where Mr. A receives gift of Rs.75, 000 from 3 of his friends, the entire amount of Rs.75, 000 shall be chargeable to tax. Assessee cannot claim exemption of Rs.50, 000 as the aggregate sum of money received has exceeded Rs.50, 000 and therefore, whole of such sum received as gift shall be brought to tax. On the other hand, in case the aggregate amount of gift received is Rs.45, 000, the entire sum shall be exempted as such aggregate amount does not exceed the limit of Rs.50, 000 prescribed under the law. Further, since the expression used in the laws is ‘any sum of money’.<br />Therefore, it is to be understood that gifts-in-kind, movable and immovable, are not liable to tax. They shall continue to be regarded as capital receipts not having the character of income.<br />Though the law provides for chargeability of any gifts received by individual or HUF, all the above clauses of the definition of the term ‘relative’ is confined only with reference to individuals. Therefore, an assessee, being a HUF, is not eligible to claim exemption provided by clauses dealing with ‘gifts received from relatives’ and ‘gifts received on the occasion of marriage’ as mentioned above.<br />INCOME CHARGEABLE UNDER THIS HEAD, ONLY IF NOT CHARGEABLE UNDER THE HEAD ‘PROFITS AND GAINS OF BUSINESS OR PROFESSION’<br />The following income shall be chargeable to tax under this head of income only if it is not taxable under the head “Profits and Gains of Business or Profession”:<br />(a) Interest on securities (State and Central Government securities and debentures);<br />(b) Any sum collected from employees towards their share of contribution to any Welfare Fund Account:<br />(c) Income from letting of machinery, plant and furniture; and<br />(d) Income from letting of machinery, plant and Furniture together with building, if the letting of the building is inseparable to the letting of other assets.<br />INCOME CHARGEABLE UNDER THIS HEAD ONLY IF NOT CHARGEABLE<br />UNDER THE HEAD “PROFITS AND GAINS OF BUSINESS OR PROFESSION” OR<br />UNDER THE HEAD “SALARIES”<br />Any sum received under a Key man insurance policy including bonus is chargeable under this head when it is received by any person other than the employer who took the policy and the employee in whose name the policy was taken.<br /><ul><li>Income not chargeable under other heads of income</li></ul>All other income chargeable under Income Tax, Act, but not falling under any other specific heads of income shall be chargeable to tax under the head “Income from Other Sources”.<br />INCOMES EXEMPT FROM TAX [SECTION 10]:<br />Sec 10Exempted IncomeConditions/Remarks(10BC)Compensation received orreceivable by an individual orhis legal heir on account of(a) Such compensation is received orreceivable from the central/StateGovernment or a local authority.(b) Exemption is not available to theextent such amount has been alloweda deduction on account of any loss ordamage caused by such disaster underthis act.19Sum received under life insurancepolicy included sumby way of bonus allocated on it.Following are not exempt-(1) sums u/s 80DD(3) and 80DDA(3)(2) sums under key man insurancepolicy(3) Sums received under insurancepolicy issued on or after 1-4-2003 if inany year the premium payable exceeds20% of actual capital sum assured.However sum received on death isexempt.26Family pension received bywidow/children or nominatedheir of member of Armed ForcesDeath of such member has occurred incourse of operational duties and inprescribed conditions andcircumstances.34Income by way of dividendreferred to in-section 115-OHowever, dividends under section2(22)(e) and dividends from foreigncompany are not exempt;35Income from units of UTI ornotified mutual fundsIncome from transfer of these units isnot exempt.<br /><ul><li>DIVIDEND</li></ul>(a) Any distribution by a company to its shareholders to the extent of accumulated profits whether capitalized or not resulting in the release of all or any part of the assets of the company,<br />(b) Any distribution to its shareholders by a company –<br />(i) Of debentures, debenture-stock or deposit-certificates with or without interest;<br />(ii) Distribution of bonus shares to the preference shareholders by the company, to the extent of accumulated profits, whether capitalized or not,<br />(c) Any distribution made to the shareholders by a company on its liquidation to the extent to which the distribution is attributable to the accumulated profits of the company, whether capitalized or not,<br />Note: Where the liquidation is consequent on the compulsory acquisition of the undertaking of the company by the Government or by any Corporation owned or controlled by the Government under any law in force, the accumulated profits shall not include any profits of the company prior to three consecutive previous years immediately preceding the previous year in which such acquisition took place.<br />(d) Any distribution by a company to its shareholders on account of reduction of share capital to the extent of which the company possesses accumulated profits, whether capitalized or not.<br />(e) Any payment to the extent of accumulated profits by a company, not being a company in which public are substantially interested, of any sum by way of :<br />(i) Loan or advance to a shareholder who holds the beneficial ownership of equity shares carrying not less than 10% voting power,<br />(ii) loan or advance to any concern (HUF, firm, AOP, Body of Individuals or a company) in which such shareholder is a member or partner holding substantial interest (20% or more beneficial interest at any time during the previous year),<br />(iii) Any payment on behalf of or for the individual benefit of any such<br />shareholder made to any person.<br /><ul><li>Exceptions:</li></ul>(1) Any advance or loan to a shareholder or the concern in which the shareholder has substantial interest by a company will not be deemed as dividend, if the loan or advance is given during the normal course of its business provided the lending of money is a substantial part of the business of the company.<br />(2) Any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of Section 77A of the Companies<br />Act, 1956, shall not be regarded as dividend. Such buyback of shares attracts<br />capital gains tax liability in the hands of the shareholder u/s 46A.<br />(3) Any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company) shall not be treated as dividend.<br /><ul><li>Explanation:</li></ul>X Ltd. is a closely held company as it is not covered by Section 2(18) of the Income Tax Act. Mr. A is a shareholder holding 10% voting rights in the company. He also holds substantial interest in AB and Sons, a partnership firm, where his share of profit is not less than 20%. In this background, Section 2(22) (e) may get attracted under 3 situations indicated above:<br />1 Loan or advance is given to Mr. A by the company. To the extent of accumulated profits of the company such loan or advance shall be deemed to be dividend in the hands of Mr. A.<br />2 Loan or advance is given to a concern (proprietary concern, firm, HUF company, etc.) in which the shareholder holding 10% voting rights has substantial interest. Here, X Ltd. gives loan to AB and Sons. A holds 10% voting rights in X Ltd. and 20% or more share of profit in AB and Sons. As this nexus exists, the loan given by X Ltd. to AB and Sons shall be deemed as dividend in the hands of Mr. A.<br />3 Where payment is made to any person for and on behalf of the shareholder holding 10% voting rights shall be deemed dividend. In this case, A owes payment to Z for any benefit received or to be received towards which X Ltd. makes payment, such payment shall be deemed to be dividend in the hands of Mr. A. In order to determine 10% of the voting rights, only the interest owned by the assessee alone has to be considered.<br />Notes:<br />(i) If A holds 9% voting rights in X Ltd. and even 90% in AB and Sons, then 2(22)(e) will not be attracted. Similarly, if A holds 90% voting rights in X Ltd. but 19% in AB and Sons, then deemed dividend as per situation 2 above will not attract.<br />(ii) In order to determine 20% voting rights/share of profit of the shareholder in a firm or AOP or company, etc., the interest held by the shareholder in such firm, AOP, Company, etc. is alone relevant. Whenever there is a declaration of dividend or any distribution in the nature of dividend covered by sub-clauses (a) to (d) of clause (22) of Section 2, the company is liable to pay tax at 12.5% u/s 115-O. Such dividend income is exempt in the hands of shareholders u/s 10(34). However, in the case of deemed dividend covered by sub-clause (e) of Section 2(22) and dividend declared/distributed by a foreign company, the shareholder is chargeable to tax under the head “Income from Other Sources” as Section 115-O does not apply to such.<br /><ul><li>WINNINGS FROM LOTTERY, ETC. – Section 115BB</li></ul>Where the total income of an assessee includes any income by way of winnings from any lottery or crossword puzzle or race including horse race or card game and other game of any sort or from gabling or betting of any form, tax shall be calculated at the rate of 30% of such income plus surcharge. The taxability of income in the nature of winnings from any lotteries, crossword puzzles, race, etc. are subject to the following:<br />(a) No expenditure or allowance can be allowed against such income;<br />(b) No deduction under Chapter VI-A can be allowed;<br />(c) No benefit of carry forward and set off of loss/unabsorbed depreciation allowance is available against such income; and<br />(d) No basic exemption limit is available.<br />This provision does not apply to income derived from owning and maintaining race horses in respect of which normal rates of tax shall apply. Loss derived from this source shall be governed by the provisions of Section 74A.<br />‘Lottery’ includes winnings from prizes awarded to any person by draw of lots or by chance or in any other manner whatsoever, under any scheme or arrangement by whatever name called.<br />‘Card game and other game of any sort’ includes any game show, an<br />Entertainment programme on television or electronic mode, in which people<br />compete to win prizes or any other similar game.<br /><ul><li>INADMISSIBLE EXPENSES – Section 58</li></ul>(i) Personal expenses<br />(ii) Interest and salary payable outside India, if tax has not been paid or deducted<br />at source<br />(iii) Wealth-tax<br />(iv) Expenses of the nature described in Section 10A<br />(v) No deduction shall be allowed in respect of winnings from lotteries, cross word puzzles, card games, races including horse race, gambling, betting, etc. However, in respect of the activity of owning and maintaining racehorses, expenses incurred shall be allowed even in the absence of any stake money earned. Such loss shall be allowed to be carried forward in accordance with the provisions of Section 74A.<br />Students may not that in addition to the above, section 14A read with the rule 8D prescribes disallowance of any expenditure incurred in relation to exempt income. In a case where dividend, interest or any other income which are exempt by virtue any of the sub-sections of section 10 and whereas) the assessing officer, having regard to the accounts, is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to<br />exempt income; or<br />b) The assessee claims that no expenditure has been incurred by him in relation to the exempt income.<br />In the above circumstances, the assessing officer shall determine the correct amount of expenditure incurred in relation to exempt income in accordance with the manner prescribed under rule 8D for disallowance of such expenditure.<br />Illustration:<br />Mr. Jagdish is a chartered accountant in practice. The income & expenditure account for the year ended March 31, 2009 read as follows:-<br />ExpensesRs.IncomeRs.To Employees cost1,50,000By Professional Earnings.12,00,000To Traveling andConveyance50,000By Dividend income from shares1,00,000To Administration & officeexpenses4,00,000To Interest1,50,000To De-mat Charges10,000To Net Profit7,40,000Total15,00,000Total15,00,000<br /><ul><li>Deemed Income – Section 59:</li></ul>Any amount received or benefit derived in respect of expenditure incurred or loss or trading liability allowed as deduction shall be deemed as income in the year in which the amount is received or the benefit is accrued. This provision is similar to that of Section 41(1) under the head “Profits and Gains of Business or Profession”.<br />.<br /><ul><li>Method of Accounting – Section 145</li></ul>Income chargeable under the head “Income from Other Sources” shall be computed in accordance with cash system of accounting or mercantile system of accounting regularly employed by the assessee. The only exception to this general rule is deemed dividend income covered by sub-clause (e) of clause (22) of Section 2 which is chargeable to tax on payment basis as prescribed u/s 8 of the Income Tax Act and not on the basis of method of accounting followed.<br />Income during construction period<br />Interest income earned on deposits made out of surplus funds before commencement of business is taxable as “income from other sources”. The interest income so derived from out of investment in the nature of deposit cannot be reduced from the cost of construction as it has no nexus with the construction of the plants - Tuticorin Alkali Chemicals and Fertilizers Ltd. Vs. CIT (SC), 227 ITR 172; CIT vs. Coromandel cements Ltd., (SC) 234 ITR 412; similarly, where loan is borrowed from bank and placed in short-term deposits till the money is paid to supplier of plant and machinery, the interest earned thereon cannot go to reduce the cost of plant and machinery but will be charged under “Income from other sources” - CIT vs. Autokast Ltd., 248 ITR 110 (SC). On the contrary, if the receipts during construction period have close nexus with such construction, the amount shall go to reduce the construction cost of the plant. The Supreme Court, in the case of CIT vs. Buckaroo Steel Ltd., 236 ITR 315, held that the following income of the assessee-company derived during construction period is not taxable:<br />i) Rent charged from its contractors for housing workers and staff employed by contractor for construction work of assessee;<br />ii) hire charges for plant and machinery given to contractors for use in construction work;<br />iii) Interest from advances made to contractors for the purpose of facilitating the work of construction; and<br />iv) Royalty for excavation and use of stones lying on assessee’s land for construction work.<br />Thus, the above items should go to reduce the cost of the plant. However, in the same decision the Supreme Court held that interest on bank deposits is taxable under income from other sources as the same has no nexus to the construction of the plant. It may be appreciated that Buckaroo Steels Ltd. Decision affirms and distinguishes the decision in Tuticorin Alkali case but does not over rule the same. Any amount deposited to open letter of credit for purchase of plant and machinery required for setting up a plant, interest of such amount is directly connected and incidental to construction of plant. Therefore, interest receipt is capital in nature and it would go to reduce the cost of asset. CIT vs. Karnal Co-operative Sugar Mills Ltd., 243 ITR 2 (SC). Similar view has been upheld in CIT vs. Karnataka Power Corporation, 247 ITR 268 (SC) and Bongaigaon Refinery and Petrochemicals Ltd. vs. CIT 251 ITR 329 (SC).<br /><ul><li>COMPUTATION SEQUENCE TO BE REMEMBERED</li></ul>(1) Identify income chargeable under this head of income and include them. In respect of dividend income, year of chargeability should be decided by applying Section 8.<br />(2) If net amount after tax deducted at source is given, include the gross amount.<br />(3) If the income so identified is eligible for exemption u/s 10, avail the exemption and include only the balance amount. E.g. in respect of interest on certain notified securities, deposits and bonds qualify for exemption u/s 10(15).<br />(4) If income is clubbed from minor children, claim exemption u/s 10(32) in respect of such income up to a maximum of Rs.1, 500 per child.<br />(5) Expenses and deductions qualifying u/s 57 should be claimed.<br />(6) Claim deductions, if any, available under Chapter VI-A to the extent applicable after arriving at the gross total income and not under this head of income. Deductions cannot exceed the amount of such income included in the gross total income.<br />(7) If the total income includes winnings from lotteries, crossword puzzles, gambling, betting, etc., apply flat rate of 30% for calculating the income tax payable on such income<br />Illustration:<br />Shri Ratanlal, a businessman, presents to you the following statements of account relating to the year ending 31.3.2007 for computation of his gross total income.<br />Capital Account<br />ParticularsRs.ParticularsRs.To Entertainment Exps.To Gift to SonTo Shares purchasedTo DrawingsTo Balance c/f12000300050000130000193120By Balance b/fBy ProfitBy Race WinningsBy LIC Policy maturedBy Bad Debts recoveredBy Loan for Investment3200013120012000157920500050000Total388120Total388120<br />Profit & Loss A/c<br />Rs.Rs.To SalariesTo RentTo BonusTo SubscriptionsTo DrawingsTo ConveyanceTo Bad DebtsTo AdvertisementTo TravellingTo Profit transferred toCapital A/c26000108001200500011000750030001600015500131200By Gross ProfitBy Discounts received fromwholesalersBy Interest on Deposits(TDS Rs.1,000)By Income Tax RefundBy Interest on Income TaxRefundBy Profit on Sale of PersonalMotor car1930002500900050001200Total227200Total227200<br />Additional Information:<br />(a) Entertainment Expenses relate to business.<br />(b) Bad Debts recovered relate to deduction allowed in 2003-04.<br />(c) The LIC policy is for a assured sum of Rs.1, 50,000. Annual premium @<br />Rs.47, 000 each for 3 years.<br />Ans: Computation of Gross Total Income for the assessment year 2007-08<br />Rs.I. Profits and gains of business or profession – Note 1II. Income from Other Sources – Note 2Gross Total Income Rs.10350040120143620<br />Note 1 : Computation of Business IncomeRs.Rs.Net Profit as per Profit & Loss A/cAdd : 1. Inadmissible expenses – Drawings2. Income not credited but taxable- Bad Debts recovered11000500013120016000Less : 1. Income credited to be considered separatelya) Interest on Depositsb) Income-tax Refund (not an income)c) Interest on I.T. Refundd) Profit on sale of personal motor car (not taxable)2. Expenses deductible but not debited -Entertainment ExpensesTaxable Business Income90001200165001200014720043700103500<br />Note 2 : Income from Other SourcesRs.(i) Interest (including TDS) on deposits(ii) Interest on I.T. Refund(iii) Race Winnings(iv) Maturity proceeds of LIC (Refer Note 4)Taxable Income from Other Sources100001200120001692040120<br />Note 3:<br />out of the gross total income of Rs.1, 43,620, a sum of Rs.12, 000 being race winnings is taxable at a flat rate of 30% u/s 115BB.<br />Note 4:<br />The exemption u/s 10(10D) is not available in respect of maturity of LIC policy where the premium payable on such policy for any year exceeds 20% of the capital sum assured. In the given case, premium payable for one year is Rs.47, 000 being 31% of capital sum assured. Therefore, exemption u/s 10(10D) is not available. The amount taxable under the head “Income from Other Sources” is Rs.16, 920 being maturity proceeds of Rs.1, 57,920 less premium paid for 3 years Rs.1, 41,000.<br />

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