Income from Other Sources
Income from Other Sources
(Section 56 to 59)
Introduction: – Any income not taxable under the head salary, House Property, Income from Business /Profession, capital Gain, is chargeable to tax as Income from Other Sources.
Section 56 (1) General Provisions:- Income from other Sources is last and residual head of Income. It can be said that the residuary head of income can be invoked if the following conditions are satisfied.
a- Income :-There is an Income
b- Income should not be exempt u/s 10 to 13A
c- Not covered by other heads
The following are some of the examples of income generally taxable u/s 56 (1).
I. Income from sub-letting;
II. Interest on bank deposits and loans
III. Income from royalty (if it is not income from Business/ Profession);
IV. Director’s fee;
V. Ground rent;
VI. Agricultural income received from outside India;
VII. Director’s commission for standing as guarantor to bankers;
VIII. Director’s commission for underwriting shares of new Company;
IX. Remuneration received from a person other than his employer, e.g., examination remuneration received by a teacher;
X. Rent of plot of land;
XI. Insurance commission
XII. Mining rent and royalties;
XIII. Interest on foreign Government securities;
XIV. Casual income;
XV. Annuity payable under a will, contract, trust, deed(except annuity payable by employer which is chargeable under the head “salaries”;
XVI. Salaries payable to member of Parliament;
XVII. Family pension received by a family member of a deceased employee.
Deduction allowed u/s 57(iia) to the extent of Rs. 15000/- or 1/3rd of such income whichever is less.
XVIII. In case of retirement, interest on employee’s contribution if provident fund is unrecognized;
XIX. Income from undisclosed Sources;
XX. Gratuity paid to director who is not employee of the Company;
XXI. Income from racing establishment;
XXII. Compensation received for use of business assets;
Section 56 (2):- the following nine incomes are always taxable under the Head “Income from Other Sources”
1- Dividend u/s 2(22)(a) to sec. 2(22)(e)
2- Casual income in the nature of winning from lotteries, cross word puzzle, cards games, horse races and other games of any sort, gambling, betting etc. (Section 56(2)(ib). such winnings are chargeable to tax at 30%(+SC+EC+SHEC) under section 115BB.
Tax is deducted at source under section 194B and 194BB on payments in respect of winning from lotteries or cross word puzzle or card game and other game of any sort exceeding Rs. 10000/- (Rs. 5000/- in case of winning from horse races)@30%.
Case study Decision
CIT v. Manjoo & Co. (2011) 335 ITR 527 (Kerala) Even if the argument of the assessee that the winning from lottery is taken to to be received by him in the course of his business , the High Court held that the rate of 30% prescribed U/s 115BB is applicable in respect of winnings from lottery received by the distributor.
3- Gift- Any sum of money or value of property received without consideration or value of property, other than immoveable property for an inadequate consideration to be subject to tax in the hands of recipient being Individual or HUF exceeds Rs. 50000, whole of such amount is taxable in the hands of recipient as income from Other Sources.
4- Employee’s contribution towards staff welfare scheme (sec. 56(2)(id):-any sum received as contribution by assessee from his employee towards any staff welfare scheme, it becomes an income in the hand of employer under the head of ‘Income from other Sources.
5- Interest on Securities (sec.56(2)(id) interest on debentures, bonds / Government Securities provided securities are held as investment and not as stock in trade is taxable under the head “Income from other Source” (if same is not taxable under the head Income from Business/ Profession u/s 28).
6- Rent from letting out Plant & Machinery, furniture.
7- Composite Rent – combined rent from letting out Building alongwith Plant & Machinery, Furniture or other assets.
8- Sum received under Key Man Insurance Policy including Bonus thereon.
9- Interest on Compensation and enhanced Compensation is taxable in the year in which it is received applicable from the assessment year 2010-11 onwards. 50% of income by way of compensation/ enhanced compensation received is chargeable to tax in the year of receipt.
• Dividend [Sec. 56 (2)(i)]
Dividend from Indian Company is exempt u/s 10(34) in the hands of shareholders (Company declaring dividend will have to pay dividend tax u/s 115-O). However deemed dividend u/s 2(22)(e) from an Indian Company or any dividend from a foreign Company is taxable in the hands of shareholder under the head “Income from other Sources”.
Provision of sec. 115-O:- Indian Company should pay dividend tax within 14 days from the date of its declaration, distribution or payment whichever is earliest.
Penalty: – if Dividend Tax is not paid within above specified time the Company would be in default and penalty U/s 271C a sum equal to the amount of tax which the principal officer of the Company failed to pay. The penalty is however, not applicable, if the assessee proves that there was a reasonable cause for failure.
Dividend Tax rate U/s 115-O
Dividend Distribution Tax -u/s 115-O 15%
Surcharge 10%
Education Cess & SHEC 3%
Note: – Dividend tax is an additional tax i.e. other than Income Tax.
Under section 2(22) the following payments or distributions by the Company to its shareholders are deemed as dividend to the extent of accumulated profits of the Company (these payments may not be “dividend” under the Companies Act):
a- Any distribution entailing the release of Companies assets:-
When bonus shares are issued to equity shareholders out of accumulated profit whether capitalized or not, it will be deemed dividend when bonus shares are redeemed (paid) there should be release of assets.
b- Any distribution by a Company to its shareholders (whether equity shareholders or preference shareholders) of debenture, debenture stock, deposit certificates and bonus to preference shareholders out of its accumulated profit.
c- Distribution by a Company on liquidation of a Company:- to its shareholders is treated as dividend to the extent to which such distribution is attributable to the accumulated profits (whether capitalized or not) of the Company immediately before its liquidation.
However the following are not treated as dividend
1- Any distribution in respect of preference share issued for full cash consideration; and
2- Any distribution insofar as such distribution is attributable to the capitalized profits of the Company representing bonus shares allotted to its equity shareholders during 1964-65.
d- Distribution of accumulated profits on reduction of a Company’s capital is treated as dividend to the extent the Company possesses accumulated profits (whether capitalized or not).
However the following are not treated as dividend
1- Any distribution in respect of preference share issued for full cash consideration; and
2- Any distribution insofar as such distribution is attributable to the capitalized profits of the Company representing bonus shares allotted to its equity shareholders during 1964-65.
3- Any distribution out of accumulated profits which arose upto the previous year ending during 1932-33.
e- Any payment by way of loans and advances by a closely-held Company to a shareholder holding substantial interest provided the loan should not have been made in the ordinary course of business and money lending should not be a substantial part of the company’s business.
This section is applicable to a closely held Company i.e. Private Company in which public is not substantial interested.
For applicability of section 2(22)(e):- Conditions:-
1- It should be a closely held company
2- It should not be banking or money landing Company.
3- The person to whom loans and advances has been granted should have substantial interest in that Company at that time.
Meaning of Substantial interest: – the shareholder substantially holds 10% or more of equity shares at the time of getting the loan.
Proportionate holding does not matter for deemed dividend. Deemed dividend will be accumulated profit or amount of loan whichever is lower.
Repayment of loan: – Sect. 2(22)(e) is applicable even if loan is repaid before the end of the previous year.
Case name Result
CIT v. Parle Plastics Ltd. (2011) 332 ITR 63 (Bom.) if the income earned by way of interest is excluded, the other business had resulted in net loss. These factors were considered in concluding that lending of money was a substantial part of the business of the Company. The money given by it by way of advance or loan to the assessee could not be regarded as a dividend, as it had to be excluded from the definition of “dividend” by virtue of specific exclusion in sec. 2(22)
Pradip Kumar Malhotra v. CIT 2011 338 ITR 538(cal.) It was decided by the Calcutta High Court that the advance given to the assessee by the Company was not in the nature of a gratuitous advance; instead it was given to protect the interest of the Company. Therefore, the said advance cannot be treated as deemed dividend in the hands of shareholders u/s 2(22)(e).
• Receipt without consideration to be treated as income [Sec. 56 (2)(Vii)/(Viia)/(Viib)]:- if satisfies the following four condition:-
1- It is received by individual or HUF.
2- It is received on or after October 1st, 2009.
3- It does not fall in the exempted category.
4- The sum of money or property falls in the following categories:-
Different catagories Tax treatment For ceiling of Rs. 50000/- whether a single transaction is to be examined or all transactions of the previous year will be considered
Category 1- Any sum of money (gift in cash, cheque or draft) Exceeding Rs. 50000/- received from individual or HUF without any consideration from one or more persons on or after 1st October 2009 All transactions
Category 2- Immoveable property without consideration
Or for inadequate consideration Being land or building or both, the stamp duty value of such property exceeds Rs. 50000/-. W.e.f. Assessment year 2014-15 where any immovable property is received for a consideration which is less than the stamp duty value of the property by Rs. 50000/- , the difference between stamp duty value and consideration is taxable under the head “Income from other Sources” in the hands of individual and HUF
Note:- 1- stamp duty value shall be taken as on the date of
agreement not on the date of registration.
2-if the stamp duty value is disputed by the assessee
the assessing officer may refer the valuation of such
property to the valuation officer. Single transaction
Category 3- moveable property without consideration
Or for inadequate consideration Moveable property means share and securities, jewellery, archaeological collections, drawing, paintings, sculptures, any work of art.
The aggregate fair market value of such property on the date of receipt would be taxed as income of the recipient, if it is exceeds Rs. 50000/-
If the Moveable property is received for inadequate consideration and the difference between fair market value and such consideration exceeds Rs. 50000/- , such difference would be taxed as income of the recipient. All transactions
Note:- the provision of section 56(2)(vii) would apply only to a property which is the nature of capital assets of the recipient not as stock in trade, raw material, or consumable stores of any business of the recipient.
Exempted Categories:- Any sum of money or property received from
1- Relative; or
2- On the occasion of the marriage of individual; or
3- By way of will/inheritance; or
4- In contemplation or death of payer/donor; or
5- From any local authority; or
6- From any trust or institute registered u/s 12AA; or
7- From any fund, foundation, university, other educational institution, hospital, medical institution, any trust or institution referred to in sec. 10(23C);
Would be outside the ambit of section 56(2)(vii)
The term relative for the purpose of sec. 56(2)(vii)
a) In case of individual-
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 individual;
v- Any lineal ascendant or descendent of the individual;
vi- Any lineal ascendant or descendent of the spouse of individual;
vii- Spouse of any of the persons referred above.
b) In case of the Hindu Undivided family, any member thereof.
Rules for determining the fair market value of moveable properties
a- Valuation of jewellery, archaeological collections, drawing, paintings, sculptures, any work of art.
i- Estimated price would be fetch if sold in the open market on the valuation date.
ii- In case if received by way of purchase on the valuation date from the registered dealer, the invoice value shall be the fair market value.
iii- If received in any other mode and the value exceeds Rs. 50000/- the assessee may obtain the report from registered valuer in respect of price it would fetch if sold in the open market.
b- Valuation of shares and Securities
A- The fair market value of quoted shares and securities shall be determined in the following manner:-
i- The fair market value of such shares and securities shall be the transaction value as recorded in the stock exchange.
ii- If shares and securities are received by way of transaction carried out other than recognized stock exchange, the fair market value shall be-
1- lowest price of such shares and securities quoted on any recognized stock exchange on the valuation date, and
2- if shares are not traded on the valuation date, the lowest price of such shares and securities on a date immediately preceding the valuation date (when such shares and securities are traded) shall be the fair market value.
B- The Fair market value of unquoted equity shares shall be:-
Adjusted book value of assets-adjusted book value of liabilities
= ————————————————————————————- x paid up value of such equity share
amount of paid up equity shares as per balance sheet
1- Adjusted book value of assets = book value of assets as per balancesheet as reduced by TDS/TCS, advance payment of tax after adjustment of refund, deferred expenditure.
2- Adjusted book value of liabilities = book value of liabilities as shown in the balance sheet but not including the following amounts-
a- Paid up capital in respect of equity shares;
b- The amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company;
c- Reserves, by whatever name called, other than those set apart towards depreciation;
d- Credit balance of the profit and loss account;
e- Provision for taxation , other than amount paid as advance income tax, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;
f- Provision for meeting unascertained liabilities;
g- Contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares.
C- The fair market value of unquoted shares and securities other than equity shares in a Company shall be estimated to be price it would fetch if sold in the open market on the valuation date and the assessee may obtain report from a merchant banker or an accountant in respect of such valuation.
Receipt of shares by a firm or a closely held Company [Sec. 56(2)(viia)]-
w.e.f june 1, 2010. This clause is applicable if the following conditions are satisfied-
1. Recipient is a firm or closely held Company (i.e. Company in which public is not substantially interested).
2. The asset (which is received) is in the form of shares in a closely held Company.
3. These shares are received from any person on or after june1, 2010.
4. without consideration or inadequate consideration.
5. such shares are not received by way of transaction in a scheme of amalgamation, demerger.
If the above conditions are satisfied, then the value of such shares will be taxable in the hands of recipient as follows:-
1- If such shares are received without consideration , the aggregate fair market value on the date of transfer would be taxed as income of the recipient firm, Company, if it is exceeds Rs. 50000/-
2- If shares are received for inadequate consideration, the difference between the aggregate fair market value and consideration would be taxed as income of the recipient firm or the Company, if such difference exceeds Rs. 50000/-.
Share premium in excess of fair market value [sec.56(2)(viib)], applicable from the aseessment year 2013-14
It is applicable as follows:-
1- Recipient is a private limited Company.
2- It receives consideration for issue of shares (preference shares or equity shares) from a resident.
3- Shares are issued at a premium.
If the above conditions are satisfied, the aggregate consideration received for such shares exceeds the fair market value of shares, shall be chargeable to tax as income from other sources in the hands of recipient Company.
The above provisions are not applicable:-
a- where consideration for issue of shares are received by venture capital undertaking from a venture capital Company or venture capital fund; or
b- where consideration for issue of shares are received from a class or classes of person as notified by the Central Government.
The Fair market value shall be higher of the value:-
a- As may be determined in accordance with the method as may be prescribed.
b- As may be substantiated by the Company to the satisfaction of the Assessing Officer based on the value of assets, including intangible assets (being goodwil, patent, copy right, know-how, trade mark, licenses, franchise or any other business or commercial right of similar nature.
PERMISSIBLE DEDUCTION U/S 57 FROM INCOME FROM OTHER SOURCES
1- Commission or remuneration for realizing dividend or interest on securities [sec.57(i)
2- Deduction in respect of employees’ contribution towards staff welfare schemes [sec. 57 (ia)]
3- Repair, depreciation, insurance premium in the case of letting out of plant, machinery, furniture, building.
4- Standard deduction allowed u/s 57(iia) in case of income in the nature of family pension to the extent of Rs. 15000/- or 1/3rd of such income whichever is less.
5- any other expenses for earning the income [se. 57(iii)] provided that such expenditure is not in the nature of Capital expenditure, personal expenses of the assessee. It must laid out or expended wholly or exclusively for the purpose of making or earning the income. It must be related to the previous year not prior to previous year.
Bond washing transactions and dividend stripping [Se. 94]
a- Sec. 94(1) provides that where a security owner transfers the securities before the due date of interest and re-acquires the same after the due date is over. Such interest income will be deemed to be the income of the transferor and would be taxable in his hands.
b- In order to prevent the practice of sale of securities cum interest sec. 94(2) provides that if an assessee who has a beneficial interest in the securities sells such securities in such a manner that either no income is received or income received is less than the sum he would have received if such interest had accrued from day to day, then the income from such securities for the whole year would be deemed to be the income of the assessee.
• Dividend stripping [sec. 94(7)]
1- If any person buys or acquires any security or units at any time within a period of Three months prior to the record date; and
2- Sells or transfers such:-
a- Securities within three months from such Record date; or
b- Units within nine months from such Record date; and
3- Dividend or income from such securities or units are exempt from tax; and
4- There are no bonus units (only bonus units not bonus securities) are allotted to such person
5- Loss arising from transfer of such securities or units shall be ignored to the extent of income there from claimed to be exempt.• Bonus stripping [sec. 94(8)]
1- If any person buys or acquires any units at any time within a period of Three months prior to the record date; and
2- He is being allotted Bonus units (whether dividend is declared on record date or not)
3- Sells or transfers all or any of such Units within nine months from such Record date, while continuing to hold all or any of the bonus units; then
4- Loss arising on transfer of original units shall be completely ignored;
5- The loss ignored shall be deemed to be the Cost of acquisition of those Bonus units, which are left out as on the date of transfer of original units.
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Prepared by Nandani Mishra
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