LEGAL ASPECT AND

TAXATION

TOPIC : INCOME FROM

OTHER SOURCES

NAME – jINEN SOLANKI

ROLL NO –
2016234

DIV - D
 CONTENTS

 Introduction

 Income from other sources – charging section

 Incomes specified in section 56

 Incomes not specified in section 56

 Dividends and interests

 Taxability of dividends

 Hiring of plant and machinery

 Winnings from lotteries / card games / crossword etc – sec 56(2)(ib)

 Grossing of lottery / race/card incomes

 Interest on securities sec 56(2)(id)

 Chargeability of interest:

 Deductions from interest on securities u/s 57

 Exempted incomes from securities: sec 10(15)

 Taxability of gifts

 Gifts on the following occasions/ sources shall not be taxable

 Shares received by a firm or company – sec 56(2)(viia)

 Deductions – section 57

 Amounts not deductible – section 58

 Judicial decisions

 Conclusion

 Bibliography
 TABLE OF CASES

 A.R. Enterprises vs ACIT

 ACIT vs Lucky Pamnani

 ACIT vs Ratan Industries (P.) Ltd

 Automann India (P.) Ltd. Vs ITO

 C.I.T. v. G.Hyatt

 CIT vs Ramnath Goenka

 CIT vs. Taj International Jewellers

 Dr. Sri. H.S. Gour v. C.I.T

 M. Venkata Subbaiah vs ITO

 Maharajadhiraj of Durbhanga v. C.I.T.

 Mc Kenna v. herlihy

 Orient Hospital Ltd. Vs DCIT

 Purvez A. Poonawalla vs ITO

 Raja Bahadur Kamakshya Narain Singh v. C.I.T

INTRODUCTION

Under the Income Tax act, income of every kind which is not to be excluded from the
total income shall be chargeable to income tax under the head 'Income from other sources', if
it is not chargeable to income tax under any of the other heads of income. Thus, income from
other sources is a residuary head of income i.e. income not chargeable under any other head
is chargeable to tax under this head. All income other than income from salary, house
property, business and profession or capital gains is covered under 'Income from other
sources'.

Income that cannot be taken to the first four heads of salary, house property, business
and profession or capital gains, is to be taken to the head, ‘other sources’. The first four
heads are specific. Salary arises only in relation to employment. Income from house property
can arise only on ownership and rental of a building and/or adjacent land. Capital gain
requires ownership and transfer of an asset. The head of income from business and
profession is the broadest of the four heads. However, this also applies only if there is
subsisting business or profession. An intended business or a business which has ceased does
not qualify under the head. Thus, most of the sources of income listed above would fall
under the head of income from other sources.

This head of income is a residual head. If an income does not fall under the four
specific heads, it would fall under this head. Section 56(1) expresses the general idea.
Section 56(2) lists the sources of income which have to be treated under this head. Section
56(2)(ii) and (iii) relate to businesses that have been discontinued. If a business is
continuing, the income from hiring out of plant and machinery will go under the head of
income from business. If a person gets into the very business of hiring out plant and
machinery, it will be a new business. The income will again go to the head of income from
business. If the business, however, has ceased, hiring of plant and machinery, with or without
the building, will be treated under the head of income from other sources.
INCOME FROM OTHER SOURCES – CHARGING SECTION

Section 56 (1) Any income which is not exempt and which does not fall under any of the
four heads of income (salaries, house property, profits and gains of business or profession
and capital gains) will be chargeable to tax as Income from Other Sources.

INCOMES SPECIFIED IN SECTION 56

Following incomes are specifically mentioned in the I .T. Act U/s 56, which are included in
the income from other sources:

 Dividends other than dividends u/s 115 O

 Winnings from lotteries, crossword, races including horse race, card games and other
games of any sort or from gambling or betting of any form
 Employee‘s contribution to provident fund received by an Employer
 Income from interest on securities
 Income from machinery, plant or furniture let on hire
 Income from letting of machinery, plant or furniture together with building and the
letting of building is inseparable.
 Compensation received from a Keyman Insurance Policy
 Any sum of money, movable / immovable property exceeding Rs 50,000 received
without consideration by an individual/HUF( please refer to explanation under Gifts)
 Shares in closely held companies received by firms and closely held companies,
either free of cost or at concessional rate
 Interest received on compensation or on enhanced compensation referred to in sec
145A.

Dividend is the share of profit, which is distributed by the company to its

shareholders; this is an income for shareholders. Interest on securities means interest on
debentures, bonds etc. which is an income of the person receiving this interest. Letting
machine, plant, furniture generates the rental income.

INCOMES NOT SPECIFIED IN SECTION 56

Following incomes are not mentioned in the Income Tax Act but are to be charged to tax.
Therefore, these incomes are also included in the head of income from other sources.
 Income from subletting
 Interest on bank deposits and loans and securities.
 Income from grazing rights1
 Income from market, fisheries, rights of ferry or moorings2
 Income from grant of mining rights3
 Income from royalty4.
 Fees received by a professional man as an examiner at a university examination5
 Casual income under a will, contract, trust deed.
 Salary payable to a member of parliament.
 Interest on own contributions to an unrecognized provident fund6
 Gratuity paid to a director who is not an employee of a company.
 Any casual income exceeding Rs. 5,000.

DIVIDENDS AND INTERESTS

Dividend received by a person is necessarily chargeable under the head. It has been
argued that taxing dividend in the hands of the shareholder amounts to double taxation. The
company pays tax on its profits. The dividend is then declared from the taxed profits. When
the shareholder pays tax on the dividend income, he pays tax on the same income, for the
second time. A counter argument is that a company and a shareholder are different legal
persons. Their properties and incomes are different and thus, it is appropriate to tax the
income at both the levels. A compromise has been struck between the two positions in
relation to Indian public companies. The company pays a dividend distribution tax on the
total amount it distributes as dividend. This rate is lower than the income tax rate. The
dividend, in the hands of the recipients, is exempt from taxation under Section 10. Income
from securities may, in some situations, fall under the head of income from business. For
example, if the working capital of a business is invested in securities, the interest earned fom
it would be business income. However, if the capital does not belong to business, the interest
will be taken to the head of income from other sources.

1
Mc Kenna v. herlihy., 7 Tax Cas 620
2
Maharajadhiraj of Durbhanga v. C.I.T., (1926) 1 I.T.C. 303
3
Raja Bahadur Kamakshya Narain Singh v. C.I.T., (1943) 11 I.T.R 513 (P.C.)
4
ibid
5
Dr. Sri. H.S. Gour v. C.I.T., (1928) 3 I.T.C. 350
6
C.I.T. v. G.Hyatt, (1971) 80 I.T.R. 177 (S.C.)
 Any kind of interest on money, for example, interest paid on a bank account, if it
does not fall under the head of business, would fall under income from other sources. If a
bank or a moneylender receives interest from a customer, it is an interest on money, but it
would fall under business income. Similarly, interest earned on the working capital of a
business belongs to the business. Thus, this would also be business income. However, if the
interest cannot be taken to the head of business, it would be treated under the head of other
sources.

TAXABILITY OF DIVIDENDS

Dividends is taxable, irrespective of the fact, whether it is paid in cash or in kind or it

is paid out of taxable income or tax free income whether it is paid out of revenue profits or
capital gains. Dividend includes deemed dividend mentioned u/s 2(22). Normally, dividend
is taxable on the basis of its declaration while deemed dividend and interim dividend is
taxable on the basis of payment.
A company at the end of the year after calculating its profit recommends the
distribution of some part of its profit to its shareholders. The profit distributed among
shareholders is called dividend. Generally, dividend is given at the end of financial year. But
some high profit company also gives the dividend in between of the year without calculating
its year-end profits. This dividend is called interim dividend.
Dividends from Indian Company are exempt from tax since 1.6.97. But dividend
from any other company is taxable. Similarly any deemed dividends U/S 2(22) are also
taxable.
Deduction of expenses on collection and interest on loan, taken for investment in shares, is
available against dividend income.
If the dividend is more than the specified limit under section then the dividend
actually received will be after deducting a specified percentage of tax of TDS (Tax Deducted
at Source). In these cases, some tax is deducted and the balance amount of Dividend is paid
to the shareholder. The balance amount paid to shareholder is called net dividend or dividend
received and the total dividend is called the gross dividend.

HIRING OF PLANT AND MACHINERY

A hiring of plant and machinery can be with or without the building. If the hiring can
be separated in two different contracts, one for the building and the other for the plant and
machinery, the building part would be taken under the head of income from house property.
Where letting of the buildings is inseparable from the letting of the said machinery, plant or
furniture, the income from letting, if it is not chargeable to income tax under the head of
‘Profit and gains of business or profession’, shall be chargeable under the head of ‘income
from other sources’. From the income, expenses falling under this head, like repairs,
insurance and depreciation can be claimed. The basis for claiming the deduction and
depreciation is the same as in the case of income from business and profession.

WINNINGS FROM LOTTERIES / CARD GAMES / CROSSWORD ETC –

SEC 56(2)(IB)

Any winnings from

 Lottery7
 Crossword
 Races including horse race
 Card games or other games of any sort8
 Gambling or betting of any form or nature whatsoever are chargeable as Income from
Other Sources.

GROSSING OF LOTTERY / RACE/CARD INCOMES


Where income from
i. Lottery / card games etc exceeds Rs 10,000
ii. Horse races exceed Rs 5,000
The entire income shall be subject to TDS @ 30% (Sec 115 BB). Hence where the net
income from Lottery / Horse race is given, the same needs to be Grossed to arrive at the
Gross income from other sources
 Grossing up of Casual Income = Net Income received * 100 (100 – TDS %)

INTEREST ON SECURITIES SEC 56(2)(ID)

Interest received from securities is chargeable under Income from Other Sources if such
interest is not charged to taxation as Profits and Gains of Business or Profession. Interest on
securities 2(28B), refers to interest income received from the following:

7
Lottery includes winnings from prizes awarded to any person by draw of lots or by chance or in any other
similar arrangement.
8
Card Game and any other game of any sor t includes any game show, an enter tainment program on TV
or electronic mode, in which people compete to win prizes or any other similar game.
  Securities issued by Central / State Govt
 Debentures/ Bonds of a local authority
 Debentures/ Bonds of companies
 Debentures/ Bonds by a Corporation established by a Central or State or Provincial
Act.

CHARGEABILITY OF INTEREST

Interest is charged on due or receipt based on the method adopted by the assessee.
However if no method of accounting is adopted then interest shall be chargeable on due
basis.

DEDUCTIONS FROM INTEREST ON SECURITIES U/S 57

 Any reasonable sum of commission or remuneration paid for realization.

 Interest on loan borrowed for earning dividend/interest.
 Any other expenditure not being capital in nature and incurred wholly and
exclusively for the purpose.

EXEMPTED INCOMES FROM SECURITIES: Sec 10(15)

Income from the following securities shall be exempt from taxation u/s 10(15)
 12 year National Savings Annuity Certificates
 Treasury Savings Deposit Certificates
 Post Office cash certificates
 National Plan savings certificates
 Post Office savings bank accounts
 Post Office cumulative time deposits
 Specified NRI bonds issued by SBI
 Interest in notified bonds of public sector company/local authority
 Interest on notified relief bonds

TAXABILITY OF GIFTS

Nature of asset Particulars Taxable Value

1 Money Without The whole amount if the same exceeds Rs.

consideration 50,000

2 Immovable Without The stamp value of the property, if it exceeds

 property consideration Rs.50,000

3 Movable property Without The aggregate FMV of the property, if it

consideration exceeds Rs. 50,000

4 Movable property Inadequate The difference between the aggregate FMV

consideration and the consideration, if such difference
exceeds Rs. 50,000

GIFTS ON THE FOLLOWING OCCASIONS/ SOURCES SHALL NOT BE

TAXABLE

i. from any relative

ii. on the occasion of the marriage of the individual
iii. under a will or by way of inheritance
iv. in contemplation of death of the payer or donor, as the case may be
v. from any local authority as defined u/s 10(20)
vi. from any fund or foundation or university or other educational institution or hospital
or other medical institution or any trust or institution referred u/s 10(23C)
vii. from any trust or institution registered under section 12AA.

Relative for this purpose shall mean

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);

SHARES RECEIVED BY A FIRM OR COMPANY – SEC 56(2)(VIIA)

Taxable Assessee: Firm or a company in which public are not substantially interested
Taxable asset: Shares of a company in which public are not substantially interested Amount
taxable

Situation When taxable Amount taxable

Shares received free of When the aggregate fair market Entire fair market value of
cost value of shares received exceed Rs shares received shall be fully
 50,000 taxable

Shares received at When the aggregate fair market Entire excess of fair market
concessional rate value of shares received exceed the value over consideration
consideration by Rs 50,000

DEDUCTIONS – SECTION 57
Nature of Income Deduction

 Dividends [other  Any reasonable sum of commission or remuneration paid for

than dividends u/s realization
115 O as they are  Interest on loan borrowed for earning dividend/interest.
exempt u/s 10(34)]  Any other expenditure not being capital in nature and incurred
 Interest on securities wholly and exclusively for the purpose
 Employees  Deduction as per Sec 36(1)(va) i.e. the amount paid to the credit
contribution to of the employee‘s account within the due date specified under
provident fund the Relevant Act.

 Letting of plant and  Current repairs

 Insurance Premium
machinery either
 Depreciation
with or without  Any other expenditure not being capital in nature and incurred
building wholly and exclusively for the purpose

 Family pension  1/3 % of such income or Rs 15000 whichever is less

 Interest on enhanced  50% of such interest income – Sec 57(iv)

compensation from
compulsory
acquisition

 Any income Any Expenditure:

 Not being capital and
 Incurred wholly and exclusively for the purpose of earning such
income

AMOUNTS NOT DEDUCTIBLE – SECTION 58

 i. Personal expenses
ii. Interest paid outside India without TDS
iii. Salary paid outside India without TDS
iv. Expenditure u/s 40A (eg: unreasonable payments to relatives, cash payments in
excess of Rs 20,000 etc)
v. Income tax and wealth tax paid
vi. Expenditure or allowance in connection with winning of lottery, crossword etc.
However, expenditure incurred on owning and maintenance of horses shall be
allowed as a deduction while computing income from that activity.

JUDICIAL DECISIONS

 Interest earned on deposit given for the purpose of opening a letter of credit is taxable
as income from other sources9
 In the case of C.I.T v. Sandu bros10, the court has reiterated that if the income is
included under any of the heads of section 14, it cannot be brought to tax under the
residuary provisions of section 56.
 Income in respect of deficiency in inventory found during course of survey has to be
assessed as income from other sources, and not under the head ―income from
business or profession ACIT vs Ratan Industries (P.) Ltd
 In C.I.T v. Govinda Choudhary11, the SC has held that income by way of interest can
be assessed as income from other sources only if it does not fall under any other head
of income. Interest parties same character as payment on which it is awarded.
 Remunerations received by MLAs & MPs are to be taxed under head ‘Income from
other sources’12
 Where the assessee let out a hospital on lease, lease income shall be assessed as
income from other sources and not as business income. However past business losses

9
A.R. Enterprises vs ACIT
10
A.I.R 2005 S.C. 796
11
(1993) 203 ITR 881 (SC)
12
- M. Venkata Subbaiah vs ITO
 through the hospital shall be allowed to be set off from such lease income13 A similar
position was taken by the Madras High Court in CIT vs Ramnath Goenka
 Where assessee-company handed over its business to other companies with a view to
earn a fixed monthly income and the intention of reviving that business was not
dominant, income earned by assessee therefrom shall be assessable to tax under head
‘income from other sources’ and not as business income14
 Where amount was borrowed from bank taking advantage of Exim Policy as well as
lower libor interest rate and interest was paid the same should be allowed u/s 57(iii) -
CIT vs. Taj International Jewellers
 Sum received by assessee for giving up his rights to contest a Will cannot be treated
as income u/s. 56(2)(v)- Purvez A. Poonawalla vs ITO
 For the purpose of charging a receipt as gift, it is immaterial to prove whether a gift is
genuine or otherwise. Once the transaction is regarded as gift, it shall be chargeable
u/s 56 - ACIT vs Lucky Pamnani

13
Orient Hospital Ltd. Vs DCIT
14
Automann India (P.) Ltd. Vs ITO
CONCLUSION

Therefore it is clear from the above that only those incomes which do not fall within
the other four heads of income are included under this category. With the proliferation of
economic activity, certain incomes started falling under this head with regularity. That is the
reason why this head is also known as residual head. It is also clear that this income is
comprised in 4 sections of the Income Tax Act that is., sections 56 to 59. These sections give
a clear picture of the head ‘income from other sources’ and also the rate of tax can be
comprised from the same Act. Section 56 of this Act is the charging section whereas section
57 provides the deductions available for income from other sources. Section 58 provides the
deductions which are not admissible for the income from other sources.
BIBLIOGRAPHY

 BOOKS REFERRED:

 Direct Taxes – B. B. Lal and N. Vashisht

 Income Tax – B. B. Lal

 Law of Taxation – S.R. Myneni

 Taxation Laws – Kailash Rai

 NET SOURCES:

 www.indiankanoon.org

 www.business.gov.in

 www.commercehub.webs.com