Income Form Other Sources-9

Applied Direct Taxation144

Income from other sources

STUDY NOTE - 9

INCOME FROM OTHER SOURCES

This Study Note includes

• Various Provisions of the Income Tax Act for determination of income under thehead “Income from other sources”

9.1 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 specificallyfall 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 tocharge 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 ful-filled

1. There is a taxable income- Sec. 2(24) read with Sec. 4 & 52. The income is not exempt from tax under - Sec. 10 to 13A3. Income should not fall under any of the four specific heads of income viz. salaries, incomefrom House Property, Profits and gains of Business or Profession and capital gains.

9.2 CHARGEABLE INCOME [ Sec. 56(2) ]

As per Sec. 56(2), the following incomes are expressly stated to be chargeable to tax under thehead “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 whatso-ever- [Sec. 56(2)(ib)]

(iii) Any sum received by assessee from his employees as contributions to any provident fundor superannuation fund or any fund set up under the provisions of the Employees’ StateInsurance Act, 1948 or any other fund for the welfare of the employees, if such income isnot 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 busi-ness i.e. where securities are held as investments- Sec. 56(2)(id).

145Applied Direct Taxation

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

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

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

Some important items of income stated above are hereunder discussed:

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

Dividend means the sum paid to or received by a shareholder proportionate to his shareholdingin a company out of the total sum distributed. The definition of “Dividends” under section2(22) is an inclusive definition and it means dividend as normally understood and include inits connotation several other receipts set out in the definition- Kantilal Manilal v CIT 41 ITR275(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 pref-erence shareholder- Sec. 2(22)(b).

(iii) Any distribution to shareholders on liquidation of company to the extent to which thedistribution is attributable to the accumulated profits of the company, other than distribu-tion in respect of any share issued for full cash consideration where the shareholder is notentitled 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 pos-sesses accumulated profit except a distribution in respect of any share issued for full cashconsideration where the shareholder is not entitled to participate in the surplus asset inthe 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 sharesentitled 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 asubstantial interest; or

(c) a person acting on behalf or for the individual benefit of any such shareholder - Sec.2(22)(e)]



Note:-

(i) An advance or loan to a shareholder of the said concern in the ordinary course of thebusiness of the company where the lending of money is a substantial part of the company’sbusiness will not be regarded as dividend.

(ii) Any payment made by a company on purchase of its own shares from a shareholder inaccordance with sec. 77A of the Companies Act, 1956, is not treated as dividend.

(iii) Distribution of shares by the resulting company to the shareholder of the demerged com-pany is also not to be treated as dividend.

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 exemptin the hands of shareholder. However, the company has to pay dividend distribution taxon it under section 115-O [Sec. 10(34)]

(ii) any dividend : (a) on units of a Mutual Fund specified under clause (23D); or (b) inrespectof units from the Administrator of the specified undertaking; or (c) in respect of unitsfrom 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 contribu-tions to any provident fund or superannuation fund or any fund set up under the provisions ofthe Employees’ State Insurance Act, 1948 or any other fund for the welfare of such employeesis income in the hands of the assessee and is chargeable as income from other sources if notchargeable 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 fromhis employees if such sum is credited by the taxpayer to the employee’s account in the relevantfund on or before the due date. Here, the due date means the date by which the assessee isrequired as an employer to credit an employees’ contribution to the employees’ account in therelevant 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 fundas aforesaid and is not deposited or deposited belatedly to the employee’s account, it becomesincome of the assessee.

INTEREST ON SECURITIES

Interest on securities is chargeable as income from other sources if it is not chargeable as Profitsand 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 onsecurities will be chargeable on receipt basis. However, where books of account are main-tained on mercantile system or where no method of accounting is regularly employed bythe 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 isexempt 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 notifiedRelief 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 ascommission or remuneration to a banker or any other person for the purpose of real-izing interest on securities. Similarly, he will also be entitled to the deduction of inter-est on capital borrowed for investing in securities.

INCOME FROM INSEPARABLE LETTING OF MACHINERY, PLANT OR FURNITUREWITH BUILDING

If an assessee lets on hire machinery, plant or furniture and also buildings and the letting ofbuilding is inseparable from the letting of machinery, plant or furniture, the income from suchletting would be chargeable to tax under the residuary head where it is not chargeable underthe ‘Profits and gains of Business or Profession”.

What is therefore, necessary to examine is whether the letting is by way of business. Whether aparticular letting is of business has to be decided in the circumstances of each case. Each casehas to be looked at from a businessman’s point of view to find out whether the letting was thedoing of business or the exploitation of his property by the owner. A commercial asset is onlyan asset used in a business and nothing else, and business may be carried on with practicallyall things. Therefore, it is not possible to say that a particular activity is business because it isconcerned with an asset with which trade is carried on- Sultan Bros. (P) Ltd. vs. CIT (1964) ITR353 (SC).

Illustration: A lets out buildings along with air conditioning plant, tube-wells, refrigerators,etc. Though separate rent is fixed in the lease deed refers to them collectively as “demisedpremise”, it will be a case of inseparable letting and the entire rental income will be assessableas income from other sources.

GIFT

Now gift received during the previous year shall be included in the income if the aggregate ofthe 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 fromsuch a gift, provisions relating to clubbing of income apply in certain cases e.g. gift receivedfrom spouse and father-in-law.

GIFTFROM THE FOLLOWING RELATIVES IS TAX FREE


OTHER INCOMES INCLUDIBLE UNDER THE HEAD

Apart from the incomes specified in Sec. 56(2) of the Act, as mentioned above, courts have heldthat 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 NavajbaiR.J. Tata

Interest is assessed under the head ‘Income from other sources’, if it not taxed as business orprofessional 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 CarbonLtd. v. CIT

Interest earned on short-term investment of funds borrowed for setting up of factory duringconstruction of factory before commencement of business has to be assessed as income fromother sources and it cannot be held to be non-taxable on ground that it would go to reduceinterest on borrowed amount which would be capitalized - Tuticorin Alkali Chemicals & Fer-tilizers Ltd. v. CIT .

The Institute of Chartered Accountants of India, a recognized authority on accounting prin-ciples, has suggested in its publication ‘A study on expenditure during construction period’that interest income earned during construction period by temporary investment of surplusfunds may be set off against interest expenses incurred during this period - CIT v. MaharashtraElectrosmelt Ltd.

Interest earned by a company on deposits during pre-production period is assessable as itsincome from other sources, and cannot be set off against pre-operative expenditure which isallowable under section 35D - Saraf Textile Industries v. CIT

Gross interest income is taxable - Where the assessee-HUF, carrying on business, took loanagainst fixed deposits in banks and utilised a major portion of the loan on the construction of ahouse (which was not a business asset), the gross interest from the deposits in banks is to betaxed without any set off towards interest attributable to the loan portion utilised for the con-struction of the house - Kaviraj Mahipat Singh v. CIT

Winnings from Lotteries, even if accrue or arise outside India they are part of taxable income ofa resident assessee in view of section 5(1)(c) and such income has to be treated as incomederived from other sources as provided by section 56(2)(ib) - CIT v. Chaman Lal

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 asincome 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 SugarMills 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 onbusiness 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. Sahanaand 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 beassessable as business income and not as income from other sources- CIT vs. Vikram Cot-ton 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 ischargeable as income from other sources, if it is not chargeable as Profits and gains of Businessor Profession. - Sec. 56 (2) (ii).


DEDUCTIONS [Sec. 57]

The income chargeable under the head “Income from other sources” shall be computed afterthe 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 ofrealizing 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.38and

(iv) unabsorbed depreciation - sec. 32(2).

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

(d) In the case of income specified in sec. 2(24)(x) i.e. deductions from employee salary for anyfund, expenses of nature specified in – S. 36(1)(va) i.e. contribution to such fund on orbefore the due date.

(e) Any other expenditure (not being a personal or capital expenditure) expended whollyand exclusively for the purpose of earning such income. However, this deduction is notavailable 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 sourceS.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(v) & 20%of cash payment where it exceeds Rs. 20,000 u/s. 40A(3).

Where an assessee has income from other sources no deduction of any expenditure orallowance in connection with such income shall be allowed under any other provisions ofthe 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 tothe owner of the horse maintained by him in horse race in computing his income from theactivity 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 ofloss, expenditure or trading liability incurred by the assessee and subsequently during anyprevious year he has obtained any amount or benefit in any form in respect of such loss orexpenditure or trading liability the amount or value of benefit obtained by such person shall bedeemed to be income from other sources. If any amount or benefit is obtained by a successor itshall 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 ofan assessee under the head income from other sources, as they apply in computing the incomeof 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 accor-dance with cash system of accounting or mercantile system of accounting regularly employedby 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 ofthe 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.- SnowWhite Food Products Co Ltd. v/s CIT

(ii) Where assesses is allowed to change his method of accounting from an accounting year heis entitled to claim computation of income on changed basis.- Seth Chemical Works v/sCIT

(iii) A company was regularly valuing its stock under total cost method and wanted to changethe method of valuation which excluded certain expenses which were to be included un-der former method. The company allowed to change method. CIT v/s Carborandum Uni-versal Ltd.

(iv) Mere circumstances that appellant should dividend income under head IFOS in its returncould not in law decide nature of dividend income. Brooke Bond & Co Ltd. v/s CIT– SC

Case Law:

The assessee Company was a manufacturer of zinc concentrate and was apparently an inter-mediary product which was captively consumed by the company, the company valued thesame at cost or net realizable value whichever is lower. The Supreme Court considered as to


whether the assessee was right in adopting the London Metallic Exchange price when in pastthey valued at domestic prices. The Court held that when the assessee changed the valuation ofstock, the assessee must have cogent reasons to do so and such change must be in accordancewith generally accepted accounting principles. This fact must be disclosed to the shareholdersand users of financial statements. The company appears to have failed in this aspect of thematter.

CIT vs Hindustan Zinc 291 ITR 391.

Income Form Other Sources-9

Documents

Transcript of Income Form Other Sources-9