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Income under the head other source

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  • 1. VIKRAM BIYANI “Income fm Other Sources” 134 Income fm Other Sources CHARGEABILITY  As per sec. 56(1), any income is taxable U/H “IOS” if the following conditions are satisfied: i. There must be an income. ii. Such income is not exempted u/s 10 to 13 -A. iii. That income is neither salary income, nor rental income fm house property, nor income fm business or profession, nor capital gain.  01. Sec. 56(2) lays down the following list of incomes, which are specifically taxable under this head: i. Dividend other than dividend referred to in section 115-0 DISCUSSED IN DETAIL IN THE CHAPTER “DIVIDEND” ii. Wining fm lotteries, crossword puzzles, races (including horse races), card games, television game shows & other games, gambling or betting of any form or nature. iii. Sum received by employer as Provident Fund contribution fm employees if the income is not taxable as business income. iv. Interest on securities if held as an investment. v. Income fm letting of machinery, plant or furniture (when such letting is not incidental to business). vi. Letting of machinery, plant or furniture along with the building, where such letting of building is inseparable fm the letting of machinery, plant or furniture, if not charged to tax U/H “B&P” vii. Any sum of money aggregate of which exceeds Rs. 50,000 received without consideration by an individual or a HUF from any person (s) , subject to certain exception [sec 56(2) (vii) viii. Any sum of money aggregate value of which exceeds Rs. 50,000 or immovable property or property ] other than immovable property received by an individual or HUF w ithout consideration or at a price lower than stamp duty value or FMV [sec 56(2)(vii)] ix. Income are way of interest received on compensation or on enhanced compensation referred to in section 145A(b) x. Sum recd. under Keyman Insurance Policy, if not charged to tax U/H “B&P”. DISCUSSED IN DETAIL IN THE CHAPTER “INCOME” 02. Apart fm the above, by virtue of sec. 56(1), following incomes are also chargeable under this head: i. Agriculture income fm a place outside India. ii. Family pension received by family members of d eceased employee. iii. Income fm sub letting. iv. Interest on bank or post office deposits or loans. v. Director’s sitting fee. vi. Remuneration received for evaluation of answer scripts fm person other than employer. vii. Rent fm a vacant land. Points to be remembered
  • 2. VIKRAM BIYANI “Income fm Other Sources” 135 viii. Income fm undisclosed source. ix. Interest on Income tax refund. However, income tax refund is not taxable. x. Casual income. xi. Remuneration received by the member of parliament xii. Income received after discontinuation of business xiii. Insurance commission xiv. Mining rent and royalties xv. Director’s commission for underwriting shares of new company xvi. Annuity payable to the lender of a trade mark 03. Income is chargeable in accordance with method of accounting followed by assessee {Sec. 145}  A. Dividend has been charged as per the method s pecified in sec. 8. DISCUSSED IN DETAIL IN THE CHAPTER “DIVIDEND” Dividend {Sec. 2(22) read with sec. 56(1)}  DISCUSSED IN DETAIL IN THE CHAPTER “DIVIDEND” Winning fm lotteries, crossword puzzles, horse race and card games etc. {Sec. 56(2)(ib)}  Winning of the following nature are taxable under this head: i. Lotteries; ii. crossword puzzles; iii. races including horse races; iv. gambling & betting of any nature; v. card games, game show or entertainment program on television or electronic mode and any other game of any sort in which people compete to win prizes or any other similar game;  01. No deduction can be claimed fm such income even if such expenditure is incurred exclusively & wholly for earning such income. 02. No deduction u/s 80. 03. Winnings are taxable at the flat rate of 30% in case of all the assessee as per sec. 115-BB. 04. TDS shall be deducted @ 30% if the amount of winning exceeds Rs. 5,000 in case of winnings fm horserace while Rs 10,000 in case of other. Points to be remembered KEY POINTS
  • 3. VIKRAM BIYANI “Income fm Other Sources” 136 Interest on securities  “Interest on securities” means: i. Interest on any security of the Central / State Govt.; ii. Interest on debentures or other securities for money issued by or on behalf of a local authority or a company or a corporation established by Central, State or Provincial Act.  01. Interest on securities which are held as stock -in-trade shall be taxable U/H “P&G fm B/P”. 02. Interest on securities does not accrue every day or according to the period of holding. Generally, it becomes due on due date specified for securities. 03. Interest on specified securities is exempt fm tax u/s 10(15). 04. Any reasonable sum paid by way of commission or remuneration for realising such income on behalf of the assessee shall be deducted fm interest income. 05. Rate of TDS on interest on listed debentures is 10% while in case of non -listed debentures is 10%. Interest exempt u/s 10(15):  12-Year National Savings Annual Certificate  National Defence Gold Bonds, 1980  Special Bearer Bonds, 1991  Treasury Savings Deposit Certificate (10 Years)  Post Office Cash Certificates (5 Years)  National Plan Certificates (10 Years)  National Plan Savings Certificates (12 Years)  P.O. National Plan Certificates (12 Years / 7 Years)  P.O. Savings Bank Account  P.O. Cumulative Time Deposit Account (15 Years)  Fixed Deposit Scheme governed by the Government Savings certificate (Fixed Deposit) Rules, 1968.  Fixed Deposit Scheme governed by the Post Office (Fixed Deposit) Rules, 1981.  Public Account in P.O. (upto Rs.5,000)  Gold Deposit Bonds, 1999xv. Bonds issued by local authority and specified by the Central Government.  Interest on notified bonds issued by local authority or by state pooled finance entity Points to be remembered
  • 4. VIKRAM BIYANI “Income fm Other Sources” 137 Receipt without considerations {Sec. 56(2)(vii)&(viia) }  Applicable to: Individual and HUF The following three kind of gifts received by an individual or HUF from an unrelated person (s) shall be taxable u/s 56(2)(vii) A. Gift in money B. Gift of immovable property received without consideration or acquired for inadequate consideration (w.e.f 1.04.09) C. Gift of any property , other than immovable property whether received without consideration or acquired for inadequate consideration  Conditions: A. Gift in money During the PY he or it has received any sum of money exceeding Rs 50,000/ - (in aggregate) without consideration[only applicable if gift received before 1 -10-09] B. Gift of immovable property (i) Without consideration – where any immovable property is received by an individual or HUF from any person without consideration , the stamp duty value of which exceeds Rs. 50,000 , the stamp duty value of such property shall be taxable in the hands of the recipient .[single transaction] (ii) Acquired for inadequate consideration – Where such immovable property is acquired by an individual or HUF for a considerati on which is less than the stamp duty value of the property , by an amount exceeding Rs. 50,000 , the excess of stamp duty value of such property over such consideration shall be taxable in the hands of the recipient .[single transaction] DELETED BY FINANCE BILL 2010 C. Gift of property other than immovable property (i) Without consideration – Where any property other than immovable property is received by an individual or HUF , the aggregate fair market value of which exceeds Rs. 50,000 , the whole of the aggregate ,FMV of such property shall be taxable in the hands of the recipient.[all transaction ] (ii) Acquired for the inadequate consideration – where such property other than immovable property is acquired for a consideration which is less than the aggregate FMV of such property as exceeds such consideration shall be taxable in the hands of the recipient . [all transaction]
  • 5. VIKRAM BIYANI “Income fm Other Sources” 138  Exceptions: i. Any sum of money which is received by way of consideration; ii. Any sum of money which is received fm any relative; “Relatives” includes: a. Spouse of the individual; b. Brother or sister of the individual; c. Brother or sister of the spouse of the individual; d. Brother or sister of either of the parents of the individual; e. Any lineal ascendant or descendant of the individual; f. Any lineal ascendant or descendant of the spouse of the individual; g. Spouse of the person referred to in (b) to (c). iii. Any sum of money which is received on the occasion of marriage of the individual; iv. Any sum of money which is received under will or by way of inheritance; v. Any sum of money which is received in contemplation of the death of the payer; vi. Any sum of money not exceeding Rs 50,000/- ; vii. Any sum of money received from any local authority u/s 10(20) ; any fund or foundation or university or other education al institute or any trust covered u/s 10(23C) or any trust institute registered u/s 12AA  Property means – Immovable property being land or building or both , Shares and securities , Jewellery, archaeological collection , Draw ing ,Painting ,Sculptures or any work of art and Bullion w.ef. 1 -06-2010 Points to be remembered
  • 6. VIKRAM BIYANI “Income fm Other Sources” 139 Different cases Tax treatment Case1- X receive a cash gift of Rs. 50,000 on September 30,2011 from his friend A. He receives another cash gift of Rs. 50,000 from his friend B on Oct 1,2011. Case 2- X receives the following house properties from his friends without any consideration Place where property situated Date of gift Stamp duty value Delhi 30-09-2011 Rs.20 crore Patna 1-10-2011 Rs.50,000 Chennai 10-10-2011 Rs. 2.3 lakh Case 3- Z purchases gold for Rs. 5 lakh (F.M.V ;Rs. 5.5 lakh) on Oct 10,2011.He further purchases a painting for Rs. 20 lakh (F.M.V 20.5 Lakh)on Dec 1,2011 Case 4- suppose in the aforesaid cases,the recipient is only one person (P) AMOUNT TAXABLE IN THE HANDS OF d WILL BE Rs.
  • 7. VIKRAM BIYANI “Income fm Other Sources” 140 Receipts of shares by a firm or a closely held company 56(2) (VIIa) Clause (viia) has been inserted in section 56(2)(viia) w.e.f 1 -06-2010 .This clause is applicable if the following condition satisfied a. Recipient is a firm or closely held company b. The assets ( which is received) is in the form of shares in a closely held company c. These shares are received from any person on or after 1 -06-2010 d. Such share are received without consideration or for an adequate consideration e. Such shares are not received by shareholder in a scheme of amalgamation or demerger If these condition satisfied , then value of such shares will be taxable I the hands of recipient.(firm or closely held co.) Different situation Taxability in the hands of recipient Shares are received without consideration and aggregate FMV of these shares received during the PY does not exceeds Rs. 50,000 Nothing is taxable Shares are received without consideration and aggregate FMV of these shares received during the PY Aggregate FMV will taxable in the hands of recipient Shares are received for a consideration which is less than FMV and the aggregate difference does not exceeds Rs. 50,000 Nothing is taxable Shares are received for a consideration which is less than FMV and the aggregate difference exceeds Rs. 50,000 Aggregate FMV minus aggregate consideration will be taxable
  • 8. VIKRAM BIYANI “Income fm Other Sources” 141 AMOUNT NOT DEDUCTIBLE  As per sec. 58, the following amounts shall not be deductible in computin g the income chargeable under the head "Income from other sources": i. Personal expenses of the assessee; ii. Wealth Tax; iii. Interest or salary paid outside India on which tax has not been paid or deducted at source; iv. Any amount paid to a person specified u/s 40 -A (payment to relative in excess of requirement). ALLOWABLE DEDUCTIONS  U/s 57, the income chargeable U/H “Income fm Other Sources” shall be computed after making the following deductions: i. In respect of any sum collected fm employees towards the Welfare Fund contribution, deduction shall be allowed to the extent the amount is remitted within the relevant due date.  A. “Due date” is the date by which the assessee is required as employer to credit such contribution to the employees accou nt in the relevant fund under the provision of any law or terms of contract of service or otherwise. DISCUSSED IN DETAIL IN “P&G fm B/P: COMPUTATION” ii. In case of income fm machinery, plant and furniture let on hire, the following deductions are permissible: a. Current repairs to machinery, plant and furniture b. Insurance premium paid for machinery, plant or furniture c. Depreciation and unabsorbed depreciation as per sec. 32. iii. In case of income fm machinery, plant and furniture along with building let on hire, the following deductions are permissible: a. If the assessee owns the building, only current repairs is deducted otherwise both current as well as capital repairs are deductible. b. Rent, rates and taxes paid by the assessee for building. c. Current repairs to machinery, plant and furniture d. Insurance premium paid for machinery, plant or furniture or building. e. Depreciation and unabsorbed depreciation as per sec. 32. KEY POINTS
  • 9. VIKRAM BIYANI “Income fm Other Sources” 142 iv. Deduction of 1 /3 rd of such income or Rs 15,000/- whichever is lower, is allowed fm the income in the nature of family fund.  A. “Family Pension” means a regular monthly amount payable by the employer to a person belonging to the family in the event of his death. B. Relief u/ 89 is also available on family pension. v. Any other expenditure not being in the nature of capital expenditure, incurred wholly and exclusively for earning such income. KEY POINTS
  • 10. VIKRAM BIYANI “Income fm Other Sources” 143 a. X, a resident individual, submits the following particulars of his income for the previous year ending March 31, 2012: Dividend- Name of payer Company Is it dividend under section 2(22)(e) Date of declaration of dividend Amount of tax deducted under section 194 Rs. Net amount paid to X Rs. Interest paid by X on capital borrowed to invest in shares Rs. A Ltd., a foreign Co. B Ltd., a foreign Co. C Ltd, on Indian Co. D Ltd. on Indian Co. No No No yes July 15, 2011 April 1, 2011 Oct 31,2011 May 1, 2011 Nil Nil Nil 4,080 70,000 43,000 2,500 15,920 3,000 50,000 2,000 11,000 Rent from letting a factory along with plant and machinery (letting out of factory cannot be separated from letting out of plant and machinery): Rs. 30,600. Collection charges in respect of rent: Rs. 400. Fire insurance premium in respect of building: Rs. 600. Fire Insurance premium in respect of plant and machinery :Rs. 750. Repairs in respect of building: Rs. 4,600. Depreciation of building, plant and machinery: Rs. 18,600. Winnings from lottery on December 1, 2010: net amount: Rs. 69,400; tax deducted at source: Rs. 30,600. Winnings from card games: Rs. 13,500 (gross). Interest on securities issued by the Government of Japan: Rs. 30,670 During the previous year, X has received the following gifts - Gift from whom Data of gift Amount Rs. Gift from a friend Gift from a friend Gift from brother Gift from grandfather received by will Gift from friends at the time of marriage of X Gift from a friend August 20, 2011 September 10, 2011 September 15, 2011 september16, 2011 September 18, 2011 November 20, 2011 1,00,000 60,000 90,000 1,40,000 1,35,000 25,000 Determine the income chargeable under the head “Income from other sources” for the Assessment Year 2012-13.
  • 11. VIKRAM BIYANI “Income fm Other Sources” 144
  • 12. VIKRAM BIYANI “Income fm Other Sources” 145 Dividends  “Dividend” hasn’t been defined under I.T.Act. In layman language, dividend refers to distribution of profit.  Dividend is taxable U/H “Income fm Other Sources (IOS)” u/s 56(2)(i).  “Interim Dividend” refers to dividend paid by Director prior to shareholders approval at any time during the FY and upto the time of Annual General Meeting.  A. Interim dividend can be paid only if Articles of Association permit the company to pay. B. It can be rescinded by the Board any time before the actual payment.  Company can pay dividend only out of profits, current or accumulated. Dividend can also be paid out of money provided by the Government.  Dividend generally be paid in cash or equivalent to cash.  A. In I.T. Act, distribution of dividend in kind may also be deemed as dividend.  Dividend’s to be paid only to the registered shareholders or to their order or to their bankers.  A. In case of joint holders, the dividend shall be sent to the first name appearing in the Register of Members to such address as the shareholders provided.  Preference shareholders enjoy a preferential right over the equity shareholders (ESH) in the matter of dividend. They are entitled to receive dividend at the fixed rate before any dividend is paid to equity shareholder.  A. If company issues cumulative preference share, the holders of such shares are entitled to receive all arrears of dividend in addition to dividend for the current year before any dividend is paid to equity share holder.  Dividend shall be deemed to accrue or arise in India, if it is declared by an Indian company.  Judicial Citation ☞ B.V.VENKATESAM CHETTY The date of receipt of dividend is relevant and not the date of declaration where cash method of accounting is followed. KEY POINTS KEY POINTS KEY POINTS KEY POINTS Fundamentals
  • 13. VIKRAM BIYANI “Income fm Other Sources” 146 DEEMED DIVIDEND Distribution of accumulated profit entailing release of co. asset {Sec. 2(22)(a)}  Any distribution by a company to its shareholder resulting in the release of all or any part of the assets of the company is deemed dividen d.  01. To the extent to which company possess accumulated profit, whether capitalised or not. 02. Such accumulated profits are distributed in cash or in kind. W here the distribution is in kind, market value of the asset (and not in the book value) on the date on which the shareholder becomes entitled to receive dividend, shall be deemed dividend in the hands of shareholder.  Judicial Citation ☞ SHASHBALA NAVNITLAL Issue of bonus share does not entail release of any assets of the company as the assets sides remains intact. Distribution of accumulated profits in the form of debentures, debentures stock etc. {Sec. 2(22)(b)}  As per sec. 2(22)(b), any distribution to its shareholder by a company of i. debentures, debenture-stock or deposit-certificates with or without interest to its (equity as well as preference shareholder); ii. bonus share to preference shareholder; is deemed dividend.  01. Under the aforesaid circumstances, distribution amounts to dividend in the hands of the recipient even if there is no release of assets at the time of distribution. Distribution of accumulated profit at the time of liquidation {Sec. 2(22)(c) read with sec. 46}  Any distribution made to its equity shareholder on the liquidation of company is deemed dividend.  01. To the extent to which such distribution is attributable to the accumulated profit of the company immediately before its liquidation, whether capitalised or not; 02. Where the liquidation is consequent on the c ompulsory acquisition of the undertaking of the company by the Govt. or by any Corporation owned or controlled by the Govt. under any law in force, the accumulated profit shall not Points to be remembered Points to be remembered Points to be remembered
  • 14. VIKRAM BIYANI “Income fm Other Sources” 147 include any profit of the company prior to three consecutive PY immediately preceding the PY in which such acquisition takes place. 03. Implication of taxation of Capital Gain at the time of liquidation. DISCUSSED IN “CAPITAL GAIN : UNTOUCHED ISSUES” Distribution of accumulated profits on the reduction of its capital {Sec. 2(22)(d)}  Any distribution by co. to its shareholder on a/c of reduction of share capital is deemed dividend.  01. To the extent to which company possess accumulated profit, whether capitalised or not. Distribution of accumulated profit by way of advance or loan {Sec. 2(22)(e)}  Any payment by a closely held company, of any sum: i. by way of loan or advance to a. a shareholder being the beneficial owner of equity shares holding not less than 10% voting power; or b. any concern in which such shareholder is a member or partner and in which s/he has substantial interest. ii. to any person on behalf of or for the individual benefit of such shareholder; is deemed dividend.  01. To the extent to which company possess accumulated prof it. (Capitalised profits not included). 02. “Closely held companies” is a company in which public are not substantially interested. DISCUSSED IN “INCOME TAX - JARGON” 03. “Concern” means a HUF, firm, an AOP, BOI or a company. 04. A person shall be deemed to have as “substantial interest” in a concern if s/he is, at any time during the PY, beneficially entitled to not less than 20% of the income of such concern. (20% of voting power in case of a company); ALSO DISCUSSED IN THE CHAPTER “CLUBBINNG OF INCOME” / “P&G f m B/P- COMPUTATION” / “SALARY” / “ASSESSMENT OF TRUST”. Relevant Chapter Relevant Section Clubbing of Income 64(1)(ii) Salary 17(2) P&G fm B/P- Computation 40-A(2) Points to be remembered Points to be remembered
  • 15. VIKRAM BIYANI “Income fm Other Sources” 148 05. If the loan is given to a concern in which such shareholder has 20% shares in profit / voting power at any time during the PY, BOTH the following conditions are to be satisfied: i. Shareholder should have 10% voting power in the closely held company on the date when the loan is given to the concern. ii. Shareholder should be a member / partner on the date loan is given to such concern. 06. Sec. 2(22)(e) covers not only loan and advances to shareholder but any other payment on behalf of or for the individual benefit of shareholders. For example: Payment of shareholder’s personal expenses, insurance premium etc. 07. Loan is deemed dividend, even if refunded before the end of PY, either in full or in part. 08. Any advance or loan to a shareholder or the concern in which the shareholder has substantial interest by a company will not be tr eated as dividend: i. if the loan or advance is given during the normal course of its business provided the lending of money is substantial part of the business of the company; ii. Any dividend paid by the company which is set off by the company against the whole or any pert of the loan which has been deemed as divided u/s 2(22)(e);  As per sec. 2(22), dividend shall not includes: i. Any payment made by a company on purchase of its own shares fm a shareholder in accordance with the provi sion of sec. 77-A of Companies Act, 1956.  A. Such buy back of shares attracts capital gain tax in the hands of the shareholder. DISCUSSED IN “CAPITAL GAIN: UNTOUCHED ISSUES” ii. Any distribution of assets pursuant to a demerger by the resulting co. to the shareholders of the demerged co. (whether or not there is reduction of capital in the demerged company). iii. Any distribution made in accordance with sec. 2(22)(c)/(d) in respect of preference shareholder issued for full cash consideration as they aren’t entitled to participate in surplus assets. CAUTION KEY POINTS
  • 16. VIKRAM BIYANI “Income fm Other Sources” 149  Accumulated Profit: If reserve is created out of the profit of the company, then it forms part of the accumulated profit. It includes the credit balance of P&L A/c, general reserves, tax free income i.e. agriculture income, development rebate reserve, development allowance reserve, investment allowance reserve, addition made by the Assessing Officer on a/c of concealed income, etc. However, it doesn’t include provision and reserve meant for specific liability i.e. provision of depreciation / taxation / dividend, addition made by the AO on a/c of disallowance of expenditure etc.  A. “Accumulated profit” includes capitalised profit except for sec. 2(22)(e). B. Accumulated profit for the purpose of sec. 2(22) include Company which is not in liquidation : Upto the day of distribution or payment; Company in liquidation : Upto the day of liquidation Liquidation due to compulsory acquisition : Any profit of company just preceding 3 years immediately preceding the PY in which such acquisition took place. Divided u/s 2(22)(e) : Upto the day of grant of such loan.  Taxability: Dividend received fm Taxable in the hands of Domestic company Dividend excluding deemed dividend u/s 2(22)(e) : Exempted u/s 10(34). Deemed dividend u/s 2(22)(e) other than loan to a concern : Shareholder. loan to a concern : Recipient. Foreign company : Shareholder. Co-operative society : Recipient.  A. Dividend as specified u/s 2(22)(a) / (b) / (c) / (d) is exempted in the hands of shareholder. On which company is required to pay dividend tax @ 15% plus surcharge @ 5% plus education cess @ 3% . However dividend as per sec. 2(22)(e) is taxable in the hands of shareholder on which TDS is required to be deducted. KEY POINTS KEY POINTS