Taxation principles

1. Income under the Head ‘other
Sources’ and Clubbing of
Income
(earning from sources which does not fall into other four sources. Example:
Interest from FD, cash prize won in KBC, interest on enhanced compensation and late compensation
for compulsory acquisition of a property, subletting of a house property, letting out of a vacant land,
letting out of plant and machinery)
Very wide scope
Also called residuary head

2. • Basis of charge under S.56
1. Any income which is not charged under any other head is charged
under this head. Ex- Director’s fee (sitting fees for presence in board
meetings for a director who is not a fulltime director in the company),
MP/MLA’s salary(to attend parliament’s session), rent received from
vacant land, interest from subletting, interest (on FD, savings, deposit,
etc.), royalty, etc.
2. Following incomes are always charged under this head
Gifts, dividends, lottery income, rent of plant, income from owning and
maintaining race horses.

3. Other incomes covered under the head ‘other
sources’
• Family pension ( exemption only upto1/3rd or Rs.15, 000, whichever is lower)
Ex- family pension- Rs.2,50,000. deduction will be either 1/3rd of it or 1,500 whichever is lower
• Letting of plant and machinery (option to the assessee to either get it treated under PGBP or other sources)
• Owning and maintaining racehorses- income from studfarm (not betting on horse races)
• Lottery, gambling or any other casual income- also called windfall gains. No deduction even on expenditure to incur it. Flat 30% tax is charged on it.
• Maturity proceeds of keyman insurance policy received by legal heir. Keyman insurance policy- employees which are the most important for the
organisation are provided an insurance policy whose premium is paid by the employer. If proceeds is received by the employee then it will be treated
as income under the head salary, if to employer then treated under PGBP, if to legal heir then treated under the head other sources.
• Composite letting of building- plant and machinery (where rent is inseparable for both the assets)
Example- furnished accommodation rented @ Rs.65,000p.a. when the assets and house rent is separable then, asset will be covered either under
PGBP/other sources and house rent will be covered under the head ‘house property’. If not separable then, both will be treated under PGBP/Other
sources..
• Maturity proceeds from the Life Insurance Policy- taxability would be as follows:
Proceeds received to the legal heir on the death of the assessee- always exempted
If received to assessee- i. if premium is paid upto the specified limit then exempted; ii. If premium paid is more than the limit then maturity proceeds
would be taxable. Limit would be as follows:
a. Policy issued before 1/4/2012- premium should be 20% p.a. of capital sum assured
b. Policy issued on or after 1/4/2012- if normal assessee- premium should be 10% p.a. of capital sum issued, if assesseee with disability- 15% p.a. of
the capital sum issued.

4. Interest on securities (debentures and bonds)
• Security held as stock in trade (trading of debenture/bonds)- PGBP
• Security held as investment- other sources (saving account, FD, time deposit/recurring deposit also covered here)
• Following interest incomes are exempted U/S.10(15)
1. Interest on Post office savings bank A/C upto Rs.3,500 in case of individual A/C and upto Rs.7,000 in case of joint A/C.
(Deduction under Section 80TTA: Taxable interest on saving Account or the specified limit, whichever is less, would be raised as
deduction.
Individual, whether resident or non-resident and having an age upto 59 years, having a savings account either in bank or post office is
allowed a deduction of upto Rs. 10,000 over the interest incurred.
Ex- Mr. A has a savings account in post office from which each year he gets an interest of Rs.15,000. out of this, 3500 would be
exempted first and then residuary amount would be part of income from other sources and gross total income as well. Then, deduction
can be raised of Rs.10,000 u/S.80TTA.
Deduction under Section 80TTB: for senior citizen, age of 60 years or above resident, getting interest from Savings account, FD, Time
Deposit, Recurring Deposit. Deduction would be raised upto Rs. 50,000)
2. Interest on following post office scheme:
a. Cash certificates b. fixed deposit c. cumulative time deposit account (CTD)
3. Interest on IRFCL, NHAI, RECL, PFCL (Section 54EC bonds)
4. Interest on gold deposit bonds issued Under Gold monetisation scheme, 2015
5. Interest from “Tax-free pooled finance development Bonds”.

5. Taxability of gift
• Three types of gifts:
i. In Money form/ Monetary gift (ex- cash, NEFT, RTGS, Cheque)
ii. In kind- two types here as well:
a. Movable property
• Without consideration
• Inadequate consideration
b. Immovable property (land or building)
• Without consideration
• Inadequate consideration

6. • Moveable property only notified here is taxable in the hands of recipient:
a. jewellery/bullion(raw gold)
b. Securities (shares/debentures)
c. Drawings/paintings
d. Sculpture/any work of art
e. Archaeological collection
Apart from these, no other thing is taxable in this head.
Inadequate consideration (for moveable property)= Fair Market Value
(FMV)– consideration paid, this differential amount is treated as a gift.
Inadequate consideration (for immoveable property) = Stamp Duty Value
(SDV) – consideration paid.
If Aggregate value of gift (of any type) is only upto Rs. 50,000 then, entire
gift is exempted. If it exceeds this value, then entire gift is taxable.

7. • For moveable property as gift without consideration, aggregate FMV is to be
considered for determining the taxability
Example 1- Mr. A received gifts from his two friends Mr. X and Ms. Y. Mr. X gifted
a gold ring worth Rs. 20,000 while Ms. Y gifted earrings worth Rs. 5,000. So,
aggregate FMV of entire gift is Rs. 25,000 and hence will not be taxable.
Example 2- if gold ring would have been of worth Rs.30,000 while earrings would
have been of worth Rs. 30,000. Aggregate FMV would been Rs. 60,000 which is
exceeding the limit and hence, will be 100% taxable.
• For moveable property as gift with inadequate consideration, FMV-
consideration paid is to be considered for determining the taxability.
Example- Mr. S bought a jewellery from his friend at Rs. 2,00,000. The FMV of it
was Rs.2,40,000. so, its inadequate consideration would be Rs. 30,000. Mr. S
bought shares from another friend @ Rs.1,50,000. The FMV of this was Rs.
1,60,000. Inadequate consideration is Rs. 10,000 over shares. Mr. S bought from
another friend @ Rs. 60,000 whose FMV was Rs. 65,000. So, for painting the
inadequate consideration value would be Rs.5,000. Aggregate of Inadequate
consideration would be Rs. 45,000 which is less than the exemption limit. Hence,
it will be exempted.

8. • For immoveable property as gift without consideration, SDV is to be
considered for determining the exempted limit.
• For immoveable property, aggregate of gift value is not to be considered,
rather only individual value of gift is to be considered.
Example- Ms. S gifted a land worth Rs. 30,000 to Mr. T and Mr. X gifted a
flat worth Rs. 1,00,000 to Mr. T. The gift by Ms. S will not be taxable as it
does not exceed the limit of Rs.50,000. While Mr. X’s gift would be taxable.
• For immoveable property as gift with consideration, we have to check if
SDV is 110% more than the consideration paid and SDV – Consideration
paid exceeds Rs.50,000. If both these conditions are satisfied, gift taxable
would be @ SDV- consideration paid. If any one of them is not satisfied,
then, gift is exempted.
Example- SDV = Rs. 12,00,000; Consideration paid = 11.10 Lakh. Find out
110% of consideration paid and check if SDV is 110% more than the
consideration paid.

9. • Gift when not taxable:
1. Received from any relative.
2. Received under a will or inheritance.
3. Received by the individual (not by his/her parents) on the marriage of that individual.
4. Received in contemplation of death of the payer.
5. Received from registered charitable institute (under Section 12AA, 12AB, 10, 10AA, 10AB).
Meaning of Relatives:
i. For HUF- Members of HUF are relatives
ii. For individual: following are relatives-
a. spouse/Brother/Sister of the individual
b. Brother/sister of either of parents of the individual
c. Lineal ascendant/descendant of spouse of the individual
d. Brother/ sister of spouse of individual
e. Lineal ascendant/descendant of the individual
f. Spouse of any of the persons referred earlier
(two generation up and two generation down and current generation relative)

10. • Dividend
• It is profit distribution by the company to its shareholders. Wider scope
under the Income Tax Act, 1961 as it covers both dividend and deemed
dividend.
• It is a normal income, taxes paid over it is per the slab rate. Also,
maximum surcharge is to be charged @ 15%.
1. Received from domestic company- fully taxable
2. Received from foreign company – fully taxable
3. Deemed dividend u/s. 2(22) (a) to (e)
Note: expenses incurred for earning dividend shall not be allowed except
interest on loan subject to maximum 20% of dividend income.
Example: Dividend income incurred of Rs. 1,00,000. exemption allowed
would be actual interest on loan or 20% of dividend income. Actual
interest is Rs. 25,000 and 20% of dividend would be Rs. 20,000.

11. • Section 2(22)(a): Distribution by company to shareholder which releases
company’s assets shall be deemed dividend to the extent of accumulated profits
including capitalised profits.
Capitalised profits means bonus share (company converts the profits to share)
Example- A Ltd., a company, have following profits:
Accumulated profits = Rs. 4,00,000
Bonus share = Rs. 1,00,000
Hence, total profit available = Rs. 5,00,000
Company, on Diwali, distributed silver coins to its shareholders of
a. Rs. 1,50,000- Deemed dividend (as profit is Rs. 5,00,000)
b. Rs. 5,00,000 – Deemed Dividend (As profit is Rs. 5,00,000)
c. Rs. 6,00,000- Deemed Dividend shall only be Rs. 5,00,000 (as profit is Rs.
5,00,000). For the rest Rs. 1,00,000 will not be having any tax implication.
It shall be taxable in the hands of shareholders.

12. • Section 2 (22)(b): if any company has distributed Debentures/Deposit certificates to shareholders (both equity
and preference shareholder) or bonus shares to preference shareholders, it will be considered to be dividend
but only to the extent of accumulated profits including capitalised profits.
Bonus share issued to equity shareholders is not considered as deemed dividend
• Section 2(22)(c): Distribution at the time of liquidation
a. Distribution to the extent of accumulated profit including capitalised profit would be deemed dividend and
taxable in hands of shareholders under the head ‘other sources’
b. Excess distribution i.e., distribution over and above accumulated profit including capitalised profit would be
considered as full value of consideration for the shares held in the company.
When company goes in liquidation, right to equity shares is relinquished. When such right is relinquished, then it
would be considered as ‘transfer’ and would be taxable in hands of the shareholder under the head ‘capital
gains’.
Ex- Mr. X holds 10% equity in Z Ltd. since 10th April, 2012. His index cost of acquisition on 10th April, 2022 is Rs.
40,000. Z Ltd. went on liquidation on 10th April, 2022. At the time of liquidation, the company had accumulated
profits of Rs. 10,00,000. The company, on liquidation, distributed Rs. 1,50,000 to Mr. X. Tax implications in the
hands of Mr. X would be as follows:
Under the head ‘other sources’
Distribution to the extent of accumulated profit including capitalised profit would be deemed dividend = 10% of
Rs. 10,00,000 = Rs. 1,00,000
Distribution at the time of liquidation = Rs. 1,50,000
Hence, Rs. 1,00,000 would be considered under the head ‘other sources’. Rest Rs. 50,000 would be considered
under the head ‘Capital gains’. Indexed cost of acquisition was Rs. 40,000. Hence, Rs. 10,000 would be long term
capital gain here and Rs.1,00,000 would be deemed dividend.

13. • Section 2 (22) (d): Any distribution to its shareholders by a company on the reduction of its capital
(share’s face value), to the extent to which the company possesses accumulated profits including
capitalised profit.
Reduction of share’s face value from Rs. 10 to Rs. 8, the difference money of Rs. 2 is distributed to the
shareholders.
• Section 2 (22) (e): Distribution of accumulated profits by closely held company (private company or
public company whose shares is not listed in stock exchange) by way of Advance/Loan to
a. Shareholders beneficially holding at least 10% equity shares in the company.
b. Any person on behalf of such shareholders/ for benefit of such shareholder;
c. Any CONCERN in which such shareholder has substantial interest
(having profit share or voting power or equity of more than or equal to 20%);
d. Any CONCERN in which such shareholder is member/partner.
To the extent of accumulated profits NOT including capitalised profit.
Exception: Money lending is substantial business of company and loan is given in ordinary course
Following are not deemed dividend:
i. Trade advances in the nature of commercial transactions
ii. Payment on buy-back of shares
iii. Distribution of shares in the scheme of demerger

14. • Interest on enhanced compensation:
a. Taxable in Previous year of Receipt
b. 50% of receipt is deductible U/S. 57
c. Hence, only 50% shall be chargeable to tax
• Casual Incomes:
a. Taxable @ 30% + Cess on tax u/S. 115BB.
b. No deduction for any expenditure incurred shall be allowed.
c. No deduction under Chapter VI-A (Section 80C to 80U) shall be allowed and also, no loss is
allowed to be adjusted with this income.
d. Adjustment of unexhausted Basic Exemption Limit is also NOT Allowed.
T.D.S. on casual income is 30%
Grossing Up of winning from Lottery/Interest on securities:
1. If Net amount is given, it shall be grossed up. Tax will be levied on Gross income.
2. Gross amount = Net Amount/100- T.D.S. rate
Ex- Lottery (Net) = Rs. 70,000; gross up = Rs.(100* 70,000/100-30)= 1,00,000 would be taxable
under ‘other sources’. T.D.S. of Rs.30,000 would be reduced from tax liability.
Tax payable = Tax liability – (T.D.S.+T.C.S.+ Advance Tax paid)

15. • Section 57: Amount expressly allowed as deduction
Expenditure(Revenue) should be incurred wholly and exclusively for earning
income u/S. 56 , e.g. (a) Interest on loan taken for purchase of bond; (b)
Collection charges; (c) Contribution towards PF etc.
Capital expenditure with respect to depreciation along with revenue
expenditure is also allowed. Example: Mr. A bought plant and machinery and
let it out. So, his expenditure with respect to its repair and maintenance as
well as depreciation of them is also allowed as deduction.
• Section 58: Inadmissible deductions (same as PGBP u/S. 40 and 40A)
a. Personal expenses
b. Excessive payment (more than FMV) to relative
c. Cash Payment > Rs. 10,000 other than through specified mode
d. Payment on which TDS provisions applicable but TDS not deducted on time
or deducted but not deposited on time.

16. Clubbing of Income
Meaning: Income of other person included in assessee’s total income.
Example- Husband gifted 10% debentures of Rs. 2,00,000 to his wife. Company gave interest to wife
over it of Rs. 20,000. This interest of Rs. 20,000 would be taxable in the hands of husband. This is
because income tax department believes that husband has shifted his interest income to wife taking
due advantage of the provisions of gift.
Section 60: Transfer of income without transferring the asset
Ex- Mr. A bought shares in Z ltd. and instructed to transfer the dividend amount in his nephew’s
account. That dividend income would still be chargeable in hands of Mr. A himself.
Section 61: Transfer of asset through revocable transfer
A transfer shall be deemed to be revocable if it contains any provision for the re-transfer directly or
indirectly of the whole or any part of the income or asset to the transferor, or it, in any way, gives the
transferor a right to re-assume power directly or indirectly over the whole or any part of the income or
assets. Income earned by the transferee shall be taxable in hands of the transferor.
Example- Mr. X transferred a house property to Mr. Y with a condition that if he fails to whitewash the
property in every six months, the property shall revert back to Mr. X himself.
Section 62: If any person has transferred any asset through a transfer which is not revocable during the
life time of the beneficiary, in this case, clubbing shall not apply.
Ex- Mr. A transfers his house property to his friend with a clause in the transfer deed that his friend
shall be the owner of the property and after him, this property shall be going back to Mr. A or Mr. A’s
legal representative.

17. • Section 64(1): Transfer of assets to Spouse/Son’s wife without adequate consideration- Income
clubbed in hands of transferor
Note:
a. If there is inadequate consideration, clubbing provisions shall be applicable only with regard to the
income relating to inadequate consideration. Ex- Mr. J sold 10% debenture for Rs. 5,00,000 to his
wife which was worth Rs. 8,00,000. Mrs. J got an interest of Rs. 75,000 from the company.
Clubbing in hands of Mr. J would be interest with respect to Rs. 3,00,000 i.e., 75,000/8,00,000 *
3,00,000 = 28,125.
b. Relationship of husband and wife must exist on the date of transfer of the asset and also on the
date of accrual of income. Mr. A gifted Mrs. A jewellery. Later they got separated and Mrs. A sold
that jewellery. The capital gain will be taxable in hands of Mrs. A herself.
c. Income from accretion shall not be clubbed. Income generated from income will not be clubbed.
Ex- Mr. X gifted Rs. 12,00,000 to Mrs. X which she lent out to Mr. Y @ 12% interest rate. The interest
rate from Mr. Y will be clubbed in the hands of Mr. X. Mrs. X does a FD of this interest amount. The
interest earned on this FD would be income on income and will be taxable in hands of Mrs. X herself.
• Section 64(1): Transfer of assets to any other person for the benefit of wife or son’s wife- clubbing is
done in the hands of transferor.
Ex- Mr. A transferred a house property to a Trust (third person) and instructed the trust to pay Rs.
50,000 p.m. to his wife and Rs. 50,000 to his son’s wife. Both of these amount shall be clubbed in
hands of Mr. A himself.

18. • Salary/Commission/fee etc. from a concern in which spouse has substantial
interest – Section 64(1)
a. If any person receives remuneration without any proper
qualification/experience/skill etc. from any concern where spouse have
substantial interest- such remuneration is included in the income of spouse
having substantial interest.
b. If both husband and wife receive remuneration without any proper
qualification/experience/skill etc. from any concern where both have
substantial interest- such remuneration is included in the income of spouse
whose total income excluding this remuneration is higher.
c. If spouse receiving remuneration is having requisite
qualification/experience/ skill, then there will be no clubbing.
d. Substantial interest- individual along with his relative beneficially holding
20% or more equity shares at any time during the previous year.
Relative- Husband, wife, brother, sister or lineal ascendant/descendant of
individual. In-laws of individual not considered here.

19. • Asset held by Minor child – Section 64(1A)
1. Income which accrues to minor child- clubbed in the hands of parent whose
total income (excluding the income to be clubbed) is higher.
2. If the marriage of the parent does not subsist- clubbing is done in the hands
of parent who maintains the minor child.
3. As per Section 10(32)- Parent shall be entitled to an exemption of maximum
of Rs. 1,500 in respect of each minor child.
4. No clubbing shall be done in following cases-
a. Minor child is suffering with disability mentioned U/S. 80 U
b. Earned income from manual labour or through activity involving application
of his skill, talent or specialised knowledge and experience.
Child include step child, adopted child and minor married daughter.

20. • Conversion of self-acquired property into common property of HUF
Before Partition of HUF- Income derived by HUF from such property shall be clubbed in hands of
transferor.
After Partition of HUF- Income from that part of asset which ahs been received by the spouse and
minor child of such person, shall be clubbed in the income of such member.
5000 shares was there with HUF through self-acquired property. Until HUF is together, the dividend on
5000 shares shall be taxable in hands of Mr.S himself. On HUF’s split, Mr. S, his wife, his minor son got
1000 shares each which shall be clubbed in Mr. S’s income while his major son’s income shall not be
clubbed.
Points to remember:
1. Income on income shall not be clubbed
2. Income includes loss and hence, losses are also clubbed
3. Income is clubbed with the respective head to which it belongs
Cross- Transfer: If there are two transactions and they are interconnected and they are part of same
transaction, it shall be considered to be a tool for tax evasion and hence, clubbing provision shall be
applicable.
Example- Mr. A and Mr. B are brothers. Mr. B transfers debenture of Rs. 10lakh to Mrs. A (interest of Rs.
1Lakh) and Mr. A transferred preference shares to Mrs. B (dividend of Rs. 1,06,000. such transfer is
consideration for another transfer and clubbing would attract for the matching amount of asset. So, Rs.
9Lakh shall be clubbed in the hands of the spouse (Mrs. A’s income clubbed in income of Mr. A in
proportion of Rs. 9lakh and Mrs. B’s would be clubbed in Mr. B’s income)