Important topics of taxation


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Important topics of taxation

  1. 1. Pakistan Air Force – Karachi Institute Of Economics and TechnologyTaxation AssignmentTopic: Note on income from SourcesMaria. Abdul. Rehman Pirwani (5183)Course Instructor: Mr. Husain LakhaniDated: 8th April 2013
  2. 2. “Income from Other Sources”NoteIntroduction:Income from other sources is the fifth and last head of income under which the total income iscomputed and assessed. As the very name suggests. “Income from Other Sources” is aresiduary head of income. Any item of income chargeable to tax but does not fall within thedomain of the other four specific heads of income shall be included under this head of income.Section 56 lays down what incomes are taxable under this head.Section 57 and 58 lays down the deductions which are allowable and not allowablerespectively, while computing income under this head.Section 59 deals with income chargeable to tax, corresponding to section 41, which falls underthe head of “Profit and Gains of The Business”.Chargeability – Section 56Income Chargeable only under this head:The following income shall be charged to tax only under the head “Income from Othersources”:Income by way of winnings from lotteries, cross word puzzles, races includingHorse race, card games and other games of any sort, gambling, betting, etc. It requires mentionhere that such winnings are chargeable to tax at a flat rate of 30%.Any sum of money, the aggregate value of which exceeds Rs.50, 000 receivedfrom anyperson without consideration by an individual or Hindu UndividedFamily on or after01.04.2006.Exemption is granted in respect of any sum of money received –(a) From any relative; or(b) On the occasion of marriage of individual; or(c) Under a Will or by way of inheritance; or(d) In contemplation of death of the payer or(e) From a local authority; or
  3. 3. (f) From any fund, foundation, university, other educational institution, hospital, medicalinstitution, any trust or institution.In respect of above gifts, there is no ceiling limit and therefore, entire amount isexempt fromchargeability.The definition of the term ‘relative’ for this purpose is as under:(a) Husband or wife of individual;(b) Brother or sister of the individual;(c) Brother of husband of the individual;(d) Brother of wife of the individual;(e) Sister of husband of the individual;(f) Sister of wife of the individual;(g) Brother of father of the individual;(h) Brother of mother of the individual;(i) Sister of father of the individual;(j) Sister of mother of the individual;(k) Lineal ascendant of the individual (say,grandfather)(l) Lineal descendant of the individual (say,son, grandson, daughter)(m) Lineal dominant of the husband of theindividual(n) Linealinheritor of the husband of theindividual(o) Lineal ascendant of the wife of theindividual (say, wife’s father)(p) Lineal descendant of the wife of theindividual;(q) Wife or husband of the relatives listed atserial numbers (b) to (p)Taxability of any sum received:The objective of taxation of any sum received by an individual or HUF, without any consideration isbasically to bring into tax net the fake transactions in the name of gifts from unknown persons.Keeping this in mind, any gift received from non-relatives, subject to exemptions listed above, hasbeen subjected to tax. Accordingly, any sum of money received by an individual or HUF duringtheyear, the aggregate of which is exceeding Rs.50,000, shall be subject to tax in the hands of suchindividual or HUF. It needs mention that the aggregate limit of Rs.50, 000 as provided in theSection is not in the nature of basic exemption or anedge limit. Accordingly, in case an individualor 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”.It is to be understood that gifts-in-kind, movable and immovable, are not liable to tax. They shallcontinue to be regarded as capital receipts not having the character of income.Though the law provides for chargeability of any gifts received by individual or HUF, all the aboveclauses of the definition of the term ‘relative’ is confined only with reference to individuals.Therefore, an assessed, being a HUF, is not eligible to claim exemption provided by clauses dealingwith ‘gifts received from relatives’ and ‘gifts received on the occasion of marriage’ as mentionedabove.
  4. 4. Income chargeable under this head, only if not chargeable under thehead “Profits And Gains of Business or Profession:The following income shall be chargeable to tax under this head of income onlyif it is not taxableunder the head “Profits and Gains of Business or Profession”:(a) Interest on securities (State and Central Government securities and debentures)(b) Any sum collected from employees towards their share of contribution to any Welfare FundAccount.(c) Income from letting of machinery, plant and furniture; and(d) Income from letting of machinery, plant and Furniture together with building, if the letting ofthe building is inseparable to the letting of other assets.Income chargeable under this head only if not chargeable Under thehead “profits and gains of business or profession” or Under the head“salaries”:Any sum received under an insurance policy including bonus is chargeable under this head when itis received by any person other than the employer who took the policy and the employee inwhose name the policy was taken.Income not chargeable under other heads of income:All other income chargeable under Income Tax, Act, but not falling under anyother specific headsof income shall be chargeable to tax under the head “Income from Other Sources”.Dividends:Dividends include:(a) Any distribution by a company to its shareholders to the extent of accumulatedprofits whethercapitalized or not resulting in the release of all or any part ofthe assets of the company,(b) Any distribution to its shareholders by a company –Of debentures, debenture-stock or deposit-certificates with or withoutinterest;Distribution of bonus shares to the preference shareholders by thecompany, to the extentof accumulated profits, whether capitalized or not,(c) Any distribution made to the shareholders by a company on its liquidation to the extent towhich the distribution is attributable to the accumulated profits of the company, whethercapitalized or not(d) Any distribution by a company to its shareholders on account of reduction ofshare capital tothe extent of which the company possesses accumulated profits, whether capitalized or not.(e) Any payment to the extent of accumulated profits by a company, not being a company inwhich public are substantially interested, of any sum by way of :
  5. 5. Loan or advance to a shareholder who holds the beneficial ownership ofequity sharescarrying not less than 10% voting power,loan or advance to any concern (HUF, firm, AOP, Body of Individuals or acompany) in whichsuch shareholder is a member or partner holdingsubstantial interest (20% or morebeneficial interest at any time duringthe previous year),Any payment on behalf of or for the individual benefit of any suchshareholder made to anypersonExceptions:1) Any advance or loan to a shareholder or the concern in which the shareholderhassubstantial interest by a company will not be deemed as dividend, if the loan or advance isgiven during the normal course of its business provided the lending of money is asubstantial part of the business of the company.2) Any payment made by a company on purchase of its own shares from a shareholder inaccordance with the provisions of Section 77A of the Companies Act, 1956, shall not beregarded as dividend. Such buyback of shares attracts capital gains tax liability in the handsof the shareholder u/s 46A.3) Any distribution of shares pursuant to a demerger by the resulting company to theshareholders of the demerged company (whether or not there is a reduction of capital inthe demerged company) shall not be treated as dividend.Winnings from lottery, etc:Where the total income of an assessed includes any income by way of winningsfrom any lottery orcrossword puzzle or race including horse race or card game and other game of any sort or fromgabling or betting of any form, tax shall be calculated at the rate of 30% of such income plussurcharge. The taxability of income in the nature of winnings from any lotteries, crosswordpuzzles, race, etc. is subject to the following:a) No expenditure or allowance can be allowed against such income.b) No deduction under Chapter VI-A can be allowed;c) No benefit of carry forward and set off of loss/unabsorbed depreciationallowance isavailable against such income; andd) No basic exemption limit is available.This provision does not apply to income derived from owning and maintaining race horses inrespect of which normal rates of tax shall apply. Loss derived from this source shall be governedby the provisions of Section 74A.
  6. 6. ‘Lottery’ includes winnings from prizes awarded to any person by draw of lotsor by chance or inany other manner whatsoever, under any scheme or arrangement by whatever name called.‘Card game and other game of any sort’ includes any game show, an entertainment program ontelevision or electronic mode; in which people compete to win prizes or any other similar game.Deductions Admissible In Computing Income From Other Sources[Sec. 57];General deduction [section 57: Any other expenditure (not being capitalexpenditure), which islaid out or expanded wholly and exclusively for the purpose of making or earning such income isdeductible.Expenditure deductible even if income not actually earned: the expenditure satisfying theconditions under section 57(iii) is allowed as a deduction even if the income for which it is incurredis not actually earned. Thus interest on loan borrowed to purchase investments, is deductible evenif there is no income derived from the investments in a particular year.Deductions admissible in computing income from other sources:section 57Income included and the section 561) Dividends, other than exempt dividends, or interest on securities.Sum received by employer from employees as contribution to certain funds.2) Letting on hire of machinery, plants,furniture or buildings as given under section 56(2) (ii)/(iii).Family pension i.e. regular monthlyamount payable by employer to a familymember of anemployee on his death.Inadmissible Expenses – Section 581) Personal expenses2) Interest and salary payable outside India, if tax has not been paid or deductedat source3) Wealth-tax4) Expenses of the nature described in Section 10A5) No deduction shall be allowed in respect of winnings from lotteries, cross wordpuzzles,card games, races including horse race, gambling, betting, etc.
  7. 7. However, in respect of the activity of owning and maintaining racehorses, expenses incurred shallbe allowed even in the absence of any stake money earned. Such loss shall be allowed to becarried forward in accordance with the provisions of Section 74A.Deemed Income – Section 59:Any amount received or benefit derived in respect of expenditure incurred orloss or tradingliability allowed as deduction shall be deemed as income in the year in which the amount isreceived 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”.Method of Accounting – Section 145:Income chargeable under the head “Income from Other Sources” shall becomputed in accordancewith cash system of accounting or mercantile system of accounting regularly employed by theassesse.Computation Sequence To Be Remembered:1) Identify income chargeable under this head of income and include them. Inrespect ofdividend income, year of chargeability should be decided by applyingSection 8.2) If net amount after tax deducted at source is given, include the gross amount.3) If the income so identified is eligible for exemption u/s 10, avail the exemptionand includeonly the balance amount. E.g. in respect of interest on certainnotified securities, depositsand bonds qualify for exemption u/s 10(15).4) If income is clubbed from minor children, claim exemption u/s 10(32) inrespect of suchincome up to a maximum of Rs.1, 500 per child.5) Expenses and deductions qualifying u/s 57 should be claimed.6) Claim deductions, if any, available under Chapter VI-A to the extent applicableafter arrivingat the gross total income and not under this head of income.Deductions cannot exceed theamount of such income included in the grosstotal income.7) If the total income includes winnings from lotteries, crossword puzzles,gambling, betting,etc., apply flat rate of 30% for calculating the income taxpayable on such income u/s115BB.Conclusion:Above mention sections give you the brief explanation of income which comes in the last ofhead of incomes.