Income from others sources

INCOME FROM OTHER SOURCES – BASIS OF CHARGE [Sec. 56]

This is the residual head of charge of income. Where a source of income does not specifically fall under any one of the other heads of income viz. Salaries, Income from House Property, Profits and Gains of Business or Profession, Capital gains, such income is to be brought to charge under sec. 56 under the head ‘Income from other sources’- S.G. Mercantile Corp. P. Ltd. v. CIT 83 ITR 700(SC).

This residuary head of income would be invoked only if all the following conditions are fulfilled
1. There is a taxable income- Sec. 2(24) read with Sec. 4 & 5
2. The income is not exempt from tax under – Sec. 10 to 13A
3. Income should not fall under any of the four specific heads of income viz. salaries, income from House Property, Profits and gains of Business or Profession and capital gains.

CHARGEABLE INCOME [ Sec. 56(2) ]

As per Sec. 56(2), the following incomes are expressly stated to be chargeable to tax under the head “Income from other sources”—
(i) Dividend [Sec. 56 (2) (i)]

(ii) Any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or form, gambling or betting of any form or nature whatsoever- [Sec.56(2)(ib)]

(iii) Any sum received by assessee from his employees as contributions to any provident fund or
superannuation fund or any fund set up under the provisions of the Employees’ State Insurance Act, 1948 or any other fund for the welfare of the employees, if such income is not chargeable under the head “Profits and gains of Business or Profession”- [Sec. 56(2)(ic)].

(iv) Income by way of interest on securities, if it is not chargeable as Profits and gains of business i.e. where securities are held as investments- Sec. 56(2)(id).

(v) Income from machinery, plant or furniture belonging to the assessee let on hire, if the income is not chargeable to income-tax under the head, Profits and gains of Business or Profession –      Sec. 56(2)(ii).

(vi) Income from letting of machinery, plant or furniture, if such income is not chargeable under the head “Profits and gains of Business or Profession”- Sec. 56(iii)

(vii) Any sum received under “Key man insurance policy including bonus, if not charged under the head “Profits and gains of Business or Profession”- Sec. 56(iv)

(viii) Gifts aggregating to more than ` 50,000 in a year on or after 1st Day of April, 2006 –         Sec. 56(vi)

(ix) Taxation of property acquired without consideration or for an inadequate consideration as ‘income from other sources’ (Section 56(2)(vii)) [W.e.f. 1-10-2009]

Section 56(vi) provides that any ‘sum of money’ (in excess of the prescribed limit of ` 50,000) received without consideration by an individual or HUF will be chargeable to income tax in the hands of the recipient under the head ‘income from other sources’.

DIVIDEND [Sec. 56(2)(i)]

Dividend means the sum paid to or received by a shareholder proportionate to his shareholding in a company out of the total sum distributed. The definition of “Dividends” under section 2(22) is an inclusive definition and it means dividend as normally understood and include in its connotation several other receipts set out in the definition- Kantilal Manilal vs. CIT 41 ITR 275(SC).

The term “Dividends” includes deemed dividends of the following nature :
(i) Any distribution of accumulated profits entailing the release of company’s assets- Sec. 2(22)(a).
(ii) Any distribution of debenture stock, deposit certificates to shareholders and bonus to preference shareholder- Sec. 2(22)(b).
(iii) Any distribution to shareholders on liquidation of company to the extent to which the distribution is attributable to the accumulated profits of the company, other than distribution in respect of any share issued for full cash consideration where the shareholder is not entitled to participate in the surplus assets in the event of liquidation- Sec. 2(22)(c).
(iv) Any distribution on reduction of share capital to the extent to which the company possesses accumulated profit except a distribution in respect of any share issued for full cash consideration where the shareholder is not entitled to participate in the surplus asset in the event of liquidation — Sec. 2(22)(d).
(v) Any payment by way of advance or loan by a closely held company following :
(a) a shareholder, being a person who is the beneficial owner of shares (other than shares entitled to a fixed rate of dividend) holding not less than 10% of voting power; or
(b) any concern in which such shareholder is a member or partner and in which he has a substantial interest; or
(c) a person acting on behalf or for the individual benefit of any such shareholder – Sec. 2(22)(e)]

DIVIDEND EXEMPT
(i) Dividend declared/distributed/paid by domestic company including deemed dividend (i.e. other than the dividend u/s. 2(22)(e) or dividend from a foreign company) is exempt in the hands of shareholder.
However, the company has to pay dividend distribution tax on it under section 115-O [Sec. 10(34)]
(ii) any dividend : (a) on units of a Mutual Fund specified under clause (23D); or (b) inrespect of units from the Administrator of the specified undertaking; or (c) in respect of units from the specified company [Sec. 10(35)]

EMPLOYEES’ CONTRIBUTIONS TO PROVIDENT FUND ETC, [Sec. 56(2)(ic)]

It has to be remembered that any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees’ State Insurance Act, 1948 or any other fund for the welfare of such employees is income in the hands of the assessee and is chargeable as income from other sources if not chargeable as Profits and gains on Business or Profession [Sec. 2(24)(x)]

However, the tax payer is entitled to deduction of the sum of such contributions received from his employees if such sum is credited by the taxpayer to the employee’s account in the relevant fund on or before the due date.
Here, the due date means the date by which the assessee is required as an employer to credit an employees’ contribution to the employees’ account in the relevant fund under an Act, rule, etc. issued in that behalf [Sec. 36(1)(va)].
Therefore, any sum received by the assessee from his employees as contributions to any fund as aforesaid and is not deposited or deposited belatedly to the employee’s account, it becomes income of the assessee.

INTEREST ON SECURITIES

Interest on securities is chargeable as income from other sources if it is not chargeable as Profits and gains of Business or Profession, i.e. when the securities are held as investment.
(a) Basis of Charge – If the books of account are maintained on cash basis the interest on securities will be chargeable on receipt basis. However, where books of account are maintained on mercantile system or where no method of accounting is regularly employed by the assessee, such interest will be chargeable on “accrual basis” i.e. as the income of the Previous Year in which such interest is due to the assessee – second proviso to sec. 145(1).

(b) Interest on securities exempt – The interest on securities of the following description is exempt from tax –
(i) interest on notified securities, bonds or certificates issued by the Central Govt.
(ii) interest to an individual or a HUF on 7% Capital investment Bond or on notified Relief Bonds.
(iii) interest to non-resident Indians on notified bonds.
(iv) interest on securities held by issue Department of the Central Bank of Ceylon.
(v) Tax planning – Taxpayer is entitled to the deduction of any reasonable sum paid as commission or remuneration to a banker or any other person for the purpose of realizing interest on securities.
Similarly, he will also be entitled to the deduction of interest on capital borrowed for investing in
securities.

INCOME FROM INSEPARABLE LETTING OF MACHINERY, PLANT OR FURNITURE WITH BUILDING

If an assessee lets on hire machinery, plant or furniture and also buildings and the letting of building is inseparable from the letting of machinery, plant or furniture, the income from such letting would be chargeable to tax under the residuary head where it is not chargeable under the ‘Profits and gains of Business or Profession”. What is therefore, necessary to examine is whether the letting is by way of business. Whether a particular letting is of business has to be decided in the circumstances of each case. Each case has to be looked at from a businessman’s point of view to find out whether the letting was the doing of business or the exploitation of his may be carried on with practically all things. Therefore, it is not possible to say that a particular activity is
business because it is concerned with an asset with which trade is carried on- Sultan Bros. (P) Ltd. vs. CIT (1964) ITR 353 (SC).

GIFT

Now gift received during the previous year shall be included in the income if the aggregate of the gifts received exceeds Rs.50,000.

However, the following gifts are not included in taxable income, viz.
(a) from any relative; or
(b) on the occasion of the marriage of the individual; or
(c) under a will or by way of inheritance; or
(d) in contemplation of death of the payer; or
(e) from any local authority as defined in the Explanation to clause (20) of section 10; or
(f) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10; or
(g) from any trust or institution registered under section 12AA.

For this purposes of this clause, “relative” means—
(i) spouse of the individual;
(ii) brother or sister of the individual;
(iii) brother or sister of the spouse of the individual;
(iv) brother or sister of either of the parents of the individual;
(v) any lineal ascendant or descendant of the individual;
(vi) any lineal ascendant or descendant of the spouse of the individual;
(vii) spouse of the person referred to in clauses (ii) to (vi).
In respect of gifts from relatives, although exempt from tax, in respect of income earned from such a gift, provisions relating to clubbing of income apply in certain cases e.g. gift received from spouse and father-in-law.

OTHER INCOMES INCLUDIBLE UNDER THE HEAD

• Apart from the incomes specified in Sec. 56(2) of the Act, as mentioned above, courts have held that incomes of the following nature will be chargeable as income from other sources:
• Income of company in winding-up. Vijay Laxmi Sugar Mills Ltd. v. CIT
• Gratuity received by a director who is not an employee of the company. CIT v. Lady Navajbai R.J. Tata
• Interest is assessed under the head ‘Income from other sources’, if it not taxed as business or professional income. CIT v. Govinda Choudhury & Sons .
• Interest on tax refunds Smt. B. Seshamma v. CIT
• Interest earned prior to commencement of business – CIT v. Modi Rubber Ltd. / Goa Carbon Ltd. v. CIT
• Interest earned on short-term investment of funds borrowed for setting up of factory during construction of factory before commencement of business has to be assessed as income from other sources and it cannot be held to be non-taxable on ground that it would go to reduce interest on borrowed amount which would be capitalized – Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT.
• Tax on salary of assessee borne by payer, for whom assessee was working under a contract, under a legal obligation – Emil Webber v. CIT
• Sale receipts prior to commencement of business CIT v. Rassi Cement Ltd.
• If the business as a whole is let out the income i.e. the rent, would not be liable to be assessed as income from business. If only the commercial assets are leased out the income would continue to be income from business- CIT Vs. Biswanath Roy, CIT Vs. Kuya & Khas Kuya Colliery Co.
• Reimbursement of taxes on salary – Z. Zizlaw Skakuz Vs. CIT
• Interest on employee’s contribution to unrecognised provident fund- CIT vs. Hyatt
• Interest on bank deposits of idle business funds – Collis Line P. Ltd. Vs. ITO
• Interest deposit of share capital in bank before commencement of business Traco Cable Co. Ltd. vs. CIT
• Interest on realizations put by liquidator of company in fixed deposits- Vijay Lakshmi Sugar Mills Ltd. vs. CIT
• Interest received from Government u/s. 214/243/244/244A of the Income Tax Act, 1961- Smt. B. Seshmma vs. CIT
• Income from subletting of a House Property by a tenant.
• Insurance commission, if it is not assessable as income from business.
• Family Pension
• Director’s Sitting Fees for attending board meeting
• Income from undisclosed sources
• Income received after discontinuance of business
• Examinorship fee received by a teacher.

INCOME NOT CHARGEABLE UNDER RESIDUARY HEAD

Income of the following nature will not be chargeable as income from other sources but on business income –
I. Interest on short-term deposit with State Bank received by a cooperative society carrying on banking business- Bihar State Cooperative Bank Ltd. Vs. CIT
II. Income to the principal from business carried on through an agent- CIT vs. S.K. Sahana and Sons Ltd.
III. Portion of business received by beneficiary from trust or wakf-CIT vs. P. Krishna Warier.
IV. Income from temporary letting out of business assets as a part of exploitation is to be assessable as business income and not as income from other sources- CIT vs. Vikram Cotton Mills Ltd.

INCOME FROM LETTING OF MACHINERY, PLANT OR FURNITURE

The income from machinery, plant or furniture belonging to the assessee and let out on hire is chargeable as income from other sources, if it is not chargeable as Profits and gains of Business or Profession. – Sec. 56 (2) (ii).

DEDUCTIONS [Sec. 57]

The income chargeable under the head “Income from other sources” shall be computed after the following deductions, namely –
(a) In the case of dividend income and interest on securities—
(i) Any reasonable sum paid by way of remuneration or commission for the purpose of realizing dividend or interest, and
(ii) interest on borrowed capital if required for investment in shares or securities.

(b) In the case of income from machinery, plant or furniture let on hire
(i) current repairs to building – sec. 30(a)(ii)
(ii) current repairs to machinery, plant or furniture and insurance premium -sec.(31)
(iii) depreciation on building, machinery, plant or furniture – sec. (32) subject to sec.38 and
(iv) unabsorbed depreciation – sec. 32(2).

(c) In the case of income in the nature of family pension- ` 15,000 or 33.33% of such income whichever is less.

(d) In the case of income specified in sec. 2(24)(x) i.e. deductions from employee salary for any fund, expenses of nature specified in – S. 36(1)(va) i.e. contribution to such fund on or before the due date.
(e) Any other expenditure (not being a personal or capital expenditure) expended wholly and exclusively for the purpose of earning such income. However, this deduction is not available to a foreign company in respect of dividend income.

AMOUNTS NOT DEDUCTIBLE [Sec. 58]
The following amounts are not deductible while computing income from other sources—
• Personal expenses of the assessee – Sec. 58(1)(a)(i)
• Interest payable outside India on which tax has not been paid or deducted at source S.58(1)(a)(ii)
• Salary payable outside India on which no tax has been paid or deducted at source – Sec. 58(1)(a)(iii)
• Any sum paid on account of wealth tax- sec. 58(1A).
• any expenditure referred to sec. 40A i.e. excessive payment to relatives u/s. 40A(2) & 20% of cash payment where it exceeds Rs.20,000 u/s. 40A(3).
Enhancement of limit for disallowance of expenditure made otherwise than by an account payee cheque or account payee bank draft for plying, hiring or leasing goods carriages in the case of transporters to Rs.35,000 from the existing limit of ` 20,000 (Section 40A(3) and (3A)| (applicable to transactions effected on or after 1-10-2009)
The existing limit for other categories of payments will remain at Rs.20,000 subject to the exceptions declared in Rule 6DD of the Income-tax Rules.
• Where an assessee has income from other sources no deduction of any expenditure or allowance in connection with such income shall be allowed under any other provisions of the Act in computing the income by way of any winnings from lotteries, crossword puzzles, races including horse races, and games – S.58(4). However, this prohibition will not apply to the owner of the horse maintained by him in horse race in computing his income from the activity of owning and maintaining such horses – Proviso to Sec. 58(4).

PROFITS CHARGEABLE TO TAX [Sec. 59]

Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee and subsequently during any previous year he has obtained any amount or benefit in any form in respect of such loss or expenditure or trading liability the amount or value of benefit obtained by such person shall be deemed to be income from other sources. If any amount or benefit is obtained by a successor it shall be chargeable to income-tax as income of such a successor.

In short, provision of sec. 41(1) of the Act are made applicable while computing the income of an assessee under the head income from other sources, as they apply in computing the income of an assessee under the head ‘Profits and gains of Business or Profession”.

METHOD OF ACCOUNTING [Sec. 145]

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.
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 under section 8 of the Income-tax and not on the basis of method of accounting followed.

Points to be noted:
(i) An assessee is entitled to change his regular method of accounting by another regular method and such change can be effected in respect of apart of assesses income.- Snow White Food Products Co Ltd. v/s CIT
(ii) Where assesses is allowed to change his method of accounting from an accounting year he is entitled to claim computation of income on changed basis.- Seth Chemical Works v/s CIT
(iii) A company was regularly valuing its stock under total cost method and wanted to change the method of valuation which excluded certain expenses which were to be included under former method. The company allowed to change method. CIT v/s Carborandum Universal Ltd.
(iv) Mere circumstances that appellant should dividend income under this head in its return could not in law decide nature of dividend income. Brooke Bond & Co Ltd. v/s CIT– SC.

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