Income From Other Sources | Income Tax | Study Notes | Bachelor of Commerce | 3rd Semester CBCS (Honours) | Dibrugarh University

INCOME UNDER THE HEAD “INCOME FROM OTHER SOURCES”

What is basis of charge [Sec. 56]?

-> Any income which is not chargeable to tax under any other heads of income and which is not to be excluded from the total income shall be chargeable to tax as residuary income under the head “Income from Other Sources”.

Income chargeable to tax under the head “Income from other sources” shall include following:

Relevance of Method of Accountancy

-> Income chargeable under this head is computed in accordance with the method of accounting regularly employed by the assessee. For instance, if books of account are kept on the basis of mercantile system, income is taxable and expenditure is deductible on “due” basis, whereas if books of account are kept on the basis of cash system, income is taxable on “receipt” basis and expenditure is deductible on “payment” basis. 

What is regarded as Dividend and how is it charged to Tax?

-> Dividend usually refers to the distribution of profits by a company to its shareholders. However, in view of Section 2(22) of the Income-tax Act, the dividend shall also include the following:(a)Distribution of accumulated profits to shareholders entailing release of the company’s assets;(b)Distribution of debentures or de pos it certificates to shareholders out of the accumulated profits of the company and issue of bonus shares to preference shareholders out of accumulated profits;(c)Distribution made to shareholders of the company on its liquidation out of accumulated profits;(d)Distribution to shareholders out of accumulated profits on the reduction of capital by the company; and(e)Loan or advance made by a closely he ld company to its shareholder out of accumulated profits. Taxability of dividend received on or after 01-04-2020The taxability of dividends in the hands of the company as well as shareholders from Assessment Year 2021-22 would be as under:

Obligation of the domestic companies the domestic companies shall not be liable to pay DDT on dividend distributed to shareholders on or after 01-04-2020. However, domestic companies shall be liable to deduct tax under Section 194.As per the Section 194, which shall be applicable to dividend distributed, declared or pa id on or after 01-04-2020, an Indian company shall de duct tax at the rate of 10% from dividend distributed to the resident shareholders if the aggregate amount of dividend distributed or pa id during the financial year to a shareholder exceeds Rs. 5,000. However, no tax shall be required to be deducted from the dividend pa id or payable to Life Insurance Corporation of India (LIC), Genera l Insurance Corporation of India (GIC) or any other insurer in respect of any shares owned by it or in which it has full beneficial interest. However, where the dividend is payable to a non-resident or a foreign company, the tax shall be deducted under Section 195 in accordance with relevant DTAA Taxability in hands of shareholders Section 10(34), which provides an exemption to the shareholders in respect of dividend income , is withdrawn from Assessment Year 2021-20. Thus, dividend received during the financial year 2020-21 and onwards shall now be taxable in the hands of the shareholders. Consequently, Section 115BBDA which provides for taxability of dividend in excess of Rs. 10 lakh has no relevance as the entire amount of dividend shall be taxable in the hands of the shareholder. The taxability of dividend and tax rate thereon s ha ll depend upon many factors like residential status of the shareholders, relevant head of income. In case of a non-resident shareholder, the provisions of Double Taxation Avoidance Agreements (DTAAs) and Multilateral Instrument (MLI) shall also come into play. Taxable in the hands of resident shareholder A person can deal in securities either as a trader or as an investor. The income earned by him from the trading activities is taxable under the head business income. Thus, if shares are held for trading purposes then the dividend income shall be taxable under the head business or profession. Whereas, if shares are held as an investment then income arising in nature of dividend shall be taxable under the head other sources. The income, taxable under the head PGBP, is computed in accordance with the method of accounting regularly followed by the assessee. For the purpose of computation of business income, a taxpayer can follow either mercantile system of accounting or cash basis of accounting. However, the method of accounting employed by the assessee does not affect the basis of charge of dividend income as Section 8 of the Act provides that final dividend including deemed dividend shall be taxable in the year in which it is declared, distributed or paid by the company, whichever is earlier. Whereas, interim dividend is taxable in the previous year in which the amount of such dividend is unconditionally ma de available by the company to the shareholder. In other words, interim dividend is chargeable to tax on receipt basis.

Deductions from dividend income where dividend is assessable to tax as business income, the assessee can claim the deductions of all those expenditures which have been incurred to earn that dividend income such as collection charges, interest on loan etc. Whereas if dividend is taxable under the head other sources, the assessee can claim deduction of only interest expenditure which has been incurred to earn that dividend income to the extent of 20% of total dividend income. No deduction shall be allowed for any other expenses including commission or remuneration pa id to a banker or any other person for the purpose of realizing such dividend. Tax rate on dividend income The dividend income shall be chargeable to tax at normal tax rates as applicable in case of an assessee except where a resident individual, being an employee of an Indian company or its subsidiary engaged in Information technology, entertainment, pharmaceutical l or bio-technology industry, receives dividend in respect of GDRs issued by such company under an Employees’ Stock Option Scheme. In such a case, dividend shall be taxable at concessional l tax rate of 10% without providing for any deduction under the Income-tax Act. However, the GDRs should be purchased by the employee in foreign currency. Taxability in case of non-resident shareholders including FPIs .A non-resident generally invests in India either directly as private equity investors or as Foreign Portfolio Investors (FPIs). A non-resident person can also be a promoter of an Indian Company. A non-resident person generally hold s hares of an Indian company as an Investment and, therefore, any income derived by way of dividend is taxable under the head other sources except where such income is attributable to Permanent Establishment of such non-resident in India. As regards FPIs, securities held by the m are always treated as a capita l asset and not as stock-in-trade. Thus, in case of FPIs also, the dividend income shall always be taxable under the head other sources. Tax rate on dividend income the dividend income, in the hands of a non-resident person (including FPIs and non-resident Indian citizens (NRIs)), is taxable at the rate of 20% without providing for deduction under any provisions of the Income-tax Act. However, dividend income of an investment division of an offshore banking unit shall be taxable at the rate of 10%.Further, where the dividend is received in respect of GDRs of an Indian Company or Public Sector Company (PSU) purchased in foreign currency, the tax shall be charged at the rate of 10% without providing for any deductions. 

Winnings from Lotteries, Crossword Puzzles, Horse Races and Card Games, Etc.- How to compute [Sec. 56(2)(ib)]

-> Winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever, is taxable under section 56 under the head “Income from other sources”.

1. Only “winning” from lottery, races, gambling, etc., is chargeable to tax- Under section 56(2) (b) amounts taxable is “winning” from lotteries, crossword puzzles, races, etc. The crucial word is “winning”. Only winnings from lotteries, winnings from races, winnings from betting, etc., are chargeable to tax. If a receipt is not “winnings”, then it is not taxable under section 56(2) (ib).

The expression “lottery” includes winnings from prizes awarded to any person by draw of lots or by chance or in any other manner whatsoever, under any scheme of arrangement by whatever name called and “card game and other game of any sort” includes any game show, an entertainment programme on television or electronic mode, in which people compete to win prizes or any other similar game.

2. Tax incidence on winnings from lotteries, etc.- Gross winnings from lotteries, crossword puzzles, races including horse races (other than income from the activity of owning and maintaining race horses), card games and other games of any sort or from gambling or betting of any nature whatsoever are chargeable to income-tax ata flat rate of 30 per cent [+SC+ HEC]” on the gross winnings (without claiming any allowance or expenditure).

3. How to “gross up” if net winning is given- Under sections 1948 and 194BB, tax is deductible @30 per cent of on payments in respect of winnings from lotteries or crossword puzzle or card games or other games exceeding Rs. 10,000. In case of winnings from horse races, payments exceeding Rs. 5,000 are subject to tax deduction at source at the rate of 30 per cent.

If the net amount received is given, then the net amount shall be grossed up to find out the amount chargeable to tax. 

What is regarded as interest on securities [Sec. 56(2) (id)]?

-> Income, by way of interest on securities, is chargeable under the head “income from other sources”, if such income is not chargeable to income-tax under the head, “Profits and Gains of Business or Profession”. 

According to Section 2(28B) “Interest on securities” means: 

1. Interest on any security of the Central Government or a State Government; 
2. Interest on debentures or other securities for money issued by, or on behalf of a local authority or a company or a corporation established by Central, State or Provincial Act. 

Thus securities may be divided into following categories: 

1. Securities issued by Central/State Governments; 
2. Debentures/bonds issued by a local authority; 
3. Debenture/bonds issued by companies; 
4. Debenture/bonds issued by a corporation established by a Central, State or Provincial Act i.e. autonomous and statutory corporations.

2. Chargeability of Interest on Securities:

• Income by way of interest on securities is taxable on “receipt” basis, if the assessee maintains books of account on “cash basis”. 
• It is taxable on “due” basis when books of account are maintained on mercantile system. 
• Interest is taxable on “receipt” basis, if such interest had not been charged to tax on due basis for any earlier previous year.

3. Accrual of Interest on Securities:

Interest on securities does not accrue everyday or according to the period of holding of investment. For instance, if one holds 7% securities from January 1, 2019 to February 28, 2019, it cannot be said that interest of two months has accrued to the security holder. Generally, interest becomes due on due dates specified on securities. For instance…, if specified due dates of interest of particular securities are March 1 and September 1 every year, interest of six months falls due on each such date and holder of securities on these dates will be entitled to interest of six months on each such date. 

How to find out income from machinery, plant or furniture let on hire [Sec. 56(2) (ii)]?

-> Income from machinery, plant or furniture, belonging to the assessee and let on hire, is chargeable as income from other sources, if the income is not chargeable to income-tax under the head “Profits and Gains of Business or Profession”. 

(In case any such assets are hired out as a part of the business activity carried on by the assessee or as commercial assets belonging to the assessee, the income derived there from is assessable as business income under section 28 and not as Income from other sources under section 56 ) 

1. Income from Composite Letting of Machinery, Plant or Furniture and Buildings [Section 56(2)(iii)]: 

If an assessee lets on hire machinery, plant or furniture and also building and letting of building is inseparable from letting of machinery, plant or furniture, income from such letting is taxable as income from other sources, if the same is not chargeable to tax under the head “Profits and gains of business or profession”. 

On the basis of the judicial pronouncements, the following broad conclusions can be drawn: 

1. If there is letting of machinery, plant and furniture and also letting of the building and the two lettings form part and parcel of the same transaction or the two lettings are inseparable (in the sense that letting of one is not acceptable to the other party without letting of the other; for instance, letting of cinema house along with letting of furniture) then such income is taxable under section 56(2)(iii) under the head “Income from other sources” (if it is not taxable as business income). This rule is applicable even if sum receivable for the two lettings is fixed separately. 
2. If a building is let out but other assets like machinery, plant or furniture are not given on rent. However, certain amenities like lift services, air-conditioning, fire fighting facilities, etc., are provided, then section 56(2) (iii) is not applicable. The essential requirement of section 56(2) (iii) is that there should be letting of plant, machinery or furniture and also letting of building. 

For instance, if the owner of a building only undertakes to install and operate an air-conditioning plant and to install, and maintain a lift in the building for the benefit of all the tenants at specified charges (maybe on “no profit no loss basis” or some other basis), there is no letting of air-conditioning plant and lifts to the tenants. Consequently, in such case incomes from letting of building is taxable under section 22 under the head “Income from house property” and amount collected for providing different amenities shall be taxable under section 56(1). 

The aforesaid rule is applicable even if the assessee receives composite rent from his tenant towards building as well as services/amenities. The portion of rent attributable to the building should only be assessed as “Income from house property” and balance portion attributable to amenities must be assessed as “Income from other sources”. 

2. Deductions permissible from Letting out of Machinery, Plant or Furniture and Buildings [Section 57(ii) and (iii)]: 

The following deductions are allowable: 

1. Current repairs, to the premises held otherwise than as tenant. 
2. Insurance premium against risk of damage or destruction of the premises. 
3. Repairs and insurance of machinery, plant or furniture. 
4. Depreciation based upon block of assets, in the same manner as allowed under section 32 in the case of Income from Business and Profession subject to the provisions of section 38 i.e. if it is partly let and partly used for own purpose, deduction of expenses (including depreciation) shall be allowed to the extent it is let out. 
5. Any other expenditure: Any other expenditure, not being an expenditure of a capital nature, lay out or expended wholly and exclusively for the purpose of making or earning such income can be claimed as a deduction.

How to find out income from composite letting of building, machinery, plant or furniture [Sec. 56(2) (iii)]?

-> If an assessee let’s on hire machinery, plant & machinery, plant or furniture and also building (includes residential house) and letting of building is inseparable from letting of machinery, plant & machinery, plant or furniture, income from such letting is taxable as income from other sources (IFOS), if an equivalent isn’t chargeable to tax under the head ‘profits and gains of business or profession’.

On the basis of the judicial pronouncements, the following board conclusions can be drawn:

(1) If there is letting of machinery, plant and furniture and also letting of the building and the two lettings from part and parcel of the same transaction or the two lettings are inseparable (in the sense that letting of one isn’t acceptable to the other party without letting of the other; as an example , letting of cinema house along with letting of furniture) then such income is taxable under section 56(2)(iii) under the head “income from other sources” (if it’s not taxable as business income). This rule is applicable although sum receivable for the two lettings is fixed separately.

(2) If a building is let out but other assets like machinery, plant or furniture are not given on rent. However, certain amenities like lift services, air-conditioning, fire fighting facilities, etc., are provided, then section 56(2) (iii) isn’t applicable. The essential requirement of Sec. 56(2)(iii) is that there should be letting of plant, plant & machinery, machinery or furniture and also letting of building.

For instance, if the owner of a building only undertakes to install and operate an air-conditioning plant and to install, and maintain a lift in the building for the benefit of all the tenants at specified charges (may be on “no profit no loss basis” or some other basis), there is no letting of air-conditioning plant and lifts to the tenants. Consequently, in case of such incomes from letting of building (includes residential house) is taxable under section 22 under the head “Income from house property (HP)” and amount collected for providing different amenities shall be taxable U|S 56(1).

The aforesaid rule is applicable even if the assessee receives composite rent from his tenant towards building as well as services / amenities. The portion of rent due to the building should only be assessed as “Income from house property” and balance portion due to amenities must be assessed as “Income from other sources”.

Share Premium in Excess of Fair Market Value [Sec. 56(2) (viib)]

-> Section 56(2) (viib) is applicable as follows – 

1. Recipient is a company (not being a company in which the public are substantially interested). 
2. It receives consideration for issue of shares (preference shares or equity shares) from a resident person. 
3. The consideration received for issue of shares exceeds the face value of such shares. In other words, shares are issued at a premium. 

If the above conditions are satisfied, the aggregate consideration received for such shares as exceeds the fair market value of the shares, shall be chargeable to income-tax in the hands of recipient-company under section 56(2)(viib) under the head “Income from other sources”. 

The above provisions are not applicable in the following two cases – 

1. where the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund; or 
2. where the consideration for issue of shares is received by a company from a class or classes of person as notified by the Central Government. 

The fair market value of the shares shall be the higher of the value— 

1. as may be determined in accordance with the method given in rules 11U and 11UA ; or 
2. as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value of its assets, including intangible assets, being goodwill, know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature.

Advance Money Received in Course of Negotiations for Transfer of a Capital Asset- When Chargeable to Tax [Sec. 56(2) (ix)]

-> ADVANCE MONEY RECEIVED IN COURSE OF NEGOTIATIONS FOR TRANSFER OF A CAPITAL ASSET – WHEN CHARGEABLE TO TAX [SEC. 56(2) (ix)]:-

 Where any sum of money, received as an advance or otherwise in the course of the negotiations for transfer a capital asset, is forfeited and the negotiations do not result in transfer of such capital asset, then, such sum shall be chargeable to income-tax under the head “Income from other sources”. The following points should be noted – 

1. The above rule is applicable only when advance money is forfeited during the previous year 2015-16 (or any subsequent year). If advance money is forfeited during the previous year 2014-15 (or earlier), then such advance money is deducted from cost of acquisition (by virtue of section 51) for calculating capital gain whenever the asset is transferred.

2. Advance money received in the course of negotiation for transfer and later on forfeited by the recipient is taxable (as stated above) under the head “Income from other sources” only if the asset involved is a “capital asset”. If the asset is not a “capital asset” [as per section 2(14)], forfeiture of advance money will not be taxable under section 56(2) (ix). For instance, X receives Rs. 2, 00,000 as advance money in the course of negotiation for transfer of rural agricultural land situated in India. Agricultural land is not transferred and advance money is forfeited by X. In this case, section 56(2) (ix) is not applicable as rural agricultural land in India is not a “capital asset” under section 2(14). Consequently, in the hands of X, Rs. 2, 00,000 is not chargeable to tax at all.

How to find out Interest on Deep Discount Bonds?

-> Vide Circular No. 2/2002; dated February 15, 2002, the Board has issued certain clarifications.

1. Position before issue of Circular No. 2/2002 – The Board had earlier clarified that the difference between the bid price (subscription price) and the redemption price (face value) of such bonds will be treated as interest income assessable under the Income-tax Act. On transfer of the bonds before maturity, the difference between the sale consideration and the cost of acquisition would be taxed as income from capital gains where the bonds were held as investment and as business income where the bonds were held as trading assets. On final redemption, however, no capital gains will arise.

2. Position after issue of Circular No. 2/2002- Substantial changes has been made vide Circular No. 2/2002 which is given below. These are applicable only in respect of bonds issued after February 15, 2002

1. Every person holding a Deep Discount Bond will make a market valuation of the bond as on March 31 of each financial year.

2. The difference between the market valuations as on two successive valuation dates will represent the accretion to the value of the bond during the relevant financial year and will be taxable as interest income (where the bonds are held as investments) or business income (where the bonds are held as trading assets).

3. Where the bond is transferred at any time before the maturity date, the difference between the sale price and the cost of the bond will be taxable as short-term capital gains in the hands of an investor or as business income in the hands of a trader. For computing such gains, the cost of the bond will be taken to be the aggregate of the cost for which the bond was acquired by the transferor and the income, if any, already offered to tax by such transferor up to the date of transfer.

4. Where the bond is redeemed by the original subscriber, the difference between the redemption price and the value as on the last valuation date immediately preceding the maturity date will be taxed as interest income in the case of investors, or business income in the case of traders.

5. Investors holding Deep Discount Bonds up to an aggregate face value of Rs. 1,00,000 may, at their option, continue to offer income for tax in accordance with the earlier clarifications issued by the Board.

What Deductions are Permissible from Income from Other Sources?

-> The income chargeable to tax under this head ‘Income from Other Sources’ is computed after making the following deductions: 

1. In the case of dividend income (and interest on securities: any reasonable sum paid by way of remuneration or commission for the purpose of realizing dividend or interest. 

2. In the case of income in the nature of family pension: 

• Rs. 15,000 or 
• 33 1/3  % (33.33%) of such income, 

whichever is lower.

3. In the case of income from machinery, plant or furniture let on hire: 

• repairs to building [section 30(a)(ii)]; 
• current repairs to machinery, plant or furniture and insurance premium [section 31]; 
• depreciation on building, machinery, plant or furniture [section 32]; and 
• unabsorbed depreciation [section 32(2)]. 

4. Any other expenditure (not being a capital expenditure) expended wholly and exclusively for the purpose of earning of such income. 

5. In the case of interest on compensation or enhanced compensation: 50 per cent of such interest (applicable from the assessment year 2010-11).

1. Deductions for expenses from dividend income [Section 57(i) and 57(iii)]: 

The following expenses can be claimed as deductions from gross dividend income other than the dividends referred to in section 115-O: 

1. Collection charges: any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of realizing the dividend. 
2. Interest on loan: Interest on money borrowed for purchasing the shares can be claimed as a deduction. The interest can be claimed even if no income is earned by way of dividend on such shares. It has been held by the Supreme Court that if the expenditure has been laid out for the purpose of earning the dividend income then whether income is actually earned or not is immaterial and deduction on account of interest can be claimed.
   Since dividends referred to in section 115-O (i.e. dividends covered under section 2(22)(a), (b), (c) and (d) are exempt in the hands of the shareholders, no deduction of any expense referred to in section 57 shall be allowed.

What are Other Provisions?

-> The following propositions should be noted-

 1. Amount not deductible under section 58- The following expenses are not deductible by virtue of section 58:

i. PERSONAL EXPENSES (SEC. 58(1) (a)(i)- Any personal expenses of the assessee is not deductible. 

ii. INTEREST (SEC. 58(1) (a)(ii))- Any interest (which is chargeable under the Act in the hands of recipient) which is payable outside India on which tax has not been paid or deducted at source, is not deductible. 

3. SALARY /SEC. 58(1)(a)(ii)]- Any payment (which is chargeable under the head “Salaries” in the hands of recipient and payable outside India), is not deductible if tax has not been paid or deducted therefrom.
4. WEALTH TAX ISEC 58(1)] – Any sum paid on account of wealth-tax is not deductible.
5. TDS DEFAULT (SEC. 58(1A)]- Disallowance provisions pertaining to TDS defaults covered by section 40(a)(ia) are applicable.
6. AMOUNT SPECIFIED BY SECTION 40A (SEC. 58(2))- Any amount specified by section 40A is not deductible while calculating income under the head “Income from other sources” [see paras 82.5 to 82.8].
7. EXPENDITURE IN RESPECT OF ROYALTY AND TECHNICAL FEES RECEIVED BY A FOREIGN COMPANY (SEC 58(3)]- In the case of foreign companies, expenditure in respect of royalties and technical service fees as specified by section 44D is not deductible.
8. EXPENDITURE IN RESPECT OF WINNINGS FROM LOTTERY (SEC. 58(4))- No deduction shall be allowed under any provision of the Act in computing the income by way of any winnings from lotteries, crossword puzzles, races including horse races”, card games and other games of any sort or from gambling or betting of any form or nature Consequently, while computing the aforesaid incomes the following are not deductible: 

1. No deduction is permissible under section 57.

2. Losses cannot be set off under sections 70, 71 and 72 against the aforesaid incomes. Under section 58(4), n allowance in connection with income under the head “Income from other sources” is not deductible under am provision of the Act including sections 70, 71 and 72 in computing income by way of winnings from lotteries crossword puzzles, etc.; an allowance is an appropriation for any purpose De Roche v. De Roche 94 NW 767, 770.

3. No deduction is permissible under sections 80C to 80U. 

Where, however, a certain percentage has to be foregone by the winner to the Government/agency conducting the lotteries, it is deductible (as it amounts to diversion by overriding title)-Circular No. 461, dated July 9, 1986

2. Amounts not deductible by virtue of sections 115A, 115AB, 115AC, 115AD, 115BBA and 115D- No deduction is available under section 57 in the case of income referred to in sections 115A, 115AB, 115AC 115AD, 115BBA and 115D. 

3. Deemed profit chargeable to tax-The provisions of section 41(1) is applicable for computing income under the head “Income from other sources”