Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Taxability – Income from Other Sources [Sections 56 to 59]

Taxability - Income from Other Sources [Sections 56 to 59]
Taxability – Income from Other Sources [Sections 56 to 59]

Table of Contents

1.   Section wise Table – Income from Other Sources

Sections Particulars
56 Income from Other Sources
56(1) Chargeability
56(2) Specific incomes included under income from other sources
56(2)(i) Taxability of dividend
56(2) (ib) Winnings from lotteries, crossword punks. etc.
56(2) (id) Interest on securities
56(2)(ii) Income from kiting out of machinery, plant and furniture
56(2)(iii) Income from composite letting out of machinery. plant. furniture and building
56(2)(x) Income of any person to include not only gift of money from any person(s) but also the gift of property (whether movable or immovable) or property acquired for inadequate consideration.
56(2) (viib) Share premium in excess of the fair market value to be treated as income
56(2)(viii) Interest on compensation or enhanced compensation
56(2)(ix) Forfeiture of advance received for transfer of a capital asset to be taxed under the head “income from other sources”
57 Deductions
57(i) Deduction in case of dividends and interest on securities
57(ii) Deduction permissible for letting out of machinery, plant. furniture and buildings
57(iia) Deduction from family pension received by legal heirs of deceased employee
57(iv) Deduction from compensation and enhanced compensation
58 Amounts not deductible
59 Deemed income chargeable to tax

2.   [Section 56(1)]- Chargeability: Income from Other Sources

As per section 56(1), income of every kind, which is not to be excluded from the total income under this Act, 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 first four heads specified in section 14.

In other words, the following conditions must be satisfied before an income can be taxed under the head “Income from Other Sources”:

(i)            there must be an income;

(ii)           such income is not exempt under the provisions of this Act;

(iii)          such income is not chargeable to tax under any first four heads viz., “Income from Salary”, “Income from House Property”, “Profits and Gains of Business or Profession” and “Income from Capital Gain”.

Income from other sources is, therefore, a residuary head of income.

Method of Accounting 

As per section 145 income, chargeable under this head, is to be computed in accordance with the method of the accounting regularly employed by the Assessee. If the books of account are maintained on mercantile system, the income is to be computed on due basis. On the other hand, if books of account are maintained on cash system, income is taxable on receipt basis and expenditure shall be allowed as a deduction on payment basis.

3.   [Section 56(2)]- Incomes Taxable under the head “Income from Other Sources”

Following conditions must be satisfied before an income can be taxed under the head “Income from Other Sources”:

(i)            there must be an income;

(ii)           such income is not exempt under the provisions of this Act;

(iii)          such income is not chargeable to tax under any first four heads viz. “Income from Salary”, “Income from House Property”, “Profits and Gains of Business or Profession” and “Income from Capital Gain”.

Income from other sources is, therefore, a residuary head of income.

Section 56(2) enlists certain Specific Incomes which shall be chargeable to Income-tax under the head ‘Income from other sources’. These are:

(i)            Dividends Received from a foreign company,

(ii)          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; and

(iii)          any sum received by the Assessee from his employees as contribution to any provident find, or any other welfare fund for the employees provided it is not taxable under the head ‘Profits and Gains of Business or Profession’.

(iv)         income by way of interest on securities provided the income is not chargeable to Income-tax under the head profits and gains of business or profession.

(v)           income from machinery, plant or furniture belonging to the Assessee and let on hire. Provided the income is not chargeable to Income-tax under the head profits and gains of business or profession.

(vi)          where the Assessee lets on hire, the machinery, plant or furniture belonging to him and also buildings, and letting of buildings, is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head profits and gains of business or profession.

(vii)        any sum received under a Keyman Insurance Policy, including the sum allocated by way of bonus on such policy, if such income is not taxable under the head “Salaries” or “Profits and gains of business or profession”.

(viii)       any sum of money, the aggregate value of which exceeds Rs. 50,000 is received without consideration or property (whether movable or immovable) is received without consideration or property is received for an inadequate consideration by any person on or after 1.4.2017, if the amount of such gift or inadequate consideration exceeds Rs. 50,000 [Section 56(2)(x)].

(ix)          where a closely held company receives in any previous year from any resident person, any consideration for issue of shares that exceeds the face value of shares, then the aggregate consideration received for such shares which is in excess of fair market value shall be taxable.

See also  Exemptions Available in Computation of Capital Gain

(x)           income by way of interest received on compensation or on enhanced compensation to be taxed in the year in which such interest is received.

(xi)          Forfeiture of advance received for transfer of a capital asset to be taxed under the head “income from other sources” [Section 56(2)(ix)].

(xii)         any compensation received or receivable, whether in the nature of revenue or capital, in connection with the termination or the modification of the terms and conditions of any contract relating to its employment shall be taxable under section 56 of the Act. [Section 56(2)(xi)]

(xiii)       Other incomes which are normally included under the head ‘Income from Other Sources’

(1)          income from sub-letting of a house property by a tenant:

(2)          casual income;

(3)          insurance commission;

(4)          family pension (payments received by the legal heirs of a deceased employees);

(5)          director’s sitting fee for attending board meetings;

(6)          interest on bank deposits/deposits with companies;

(vii)        interest on loans;

(viii)       income from undisclosed sources;

(ix)         remuneration received by Members of Parliament;

(x)           interest on securities of foreign governments;

(xi)         examinership fees received by a teacher from an institution other than his employer;

(xii)         total interest till date on employee’s contribution to an unrecognised provident fund at the time when the payment of lump sum amount from the unrecognised provident fund is due:

(xiii)       rent from a vacant piece of plot of land;

(xiv)       agricultural income from agricultural land situated outside India;

(xv)        interest received on delayed refund of income-tax;

(xvi)       income from royalty, if it is not income from business or profession;

(xvii)      Director’s commission for standing as a guarantor to bankers;

(xviii)     Director’s commission for underwriting shares of a new company;

(xix)       Gratuity received by a director who, under the relevant contract, is not an employee or servant of the company, is assessable as income from other sources;

(xx)        Income from racing establishment:

(xxi)       Income from granting of mining rights;

(xxii)      Income from markets, fisheries, rights of ferry or moorings;

(xxiii)     Income from grant of grazing rights;

(xxiv)     Interest paid by the Government on excess payment of advance tax. etc.;

(xv)        Income received after discontinuance of business.

4.   Taxability of Dividend [Section 56(2)(i)]

Dividends can be of three types:

(a)           Dividends declared by a domestic company.

(b)          Dividends or any other income distributed by Unit Trust of India.

(c)           Dividends declared by a foreign company.

Any amount declared, distributed or paid by a domestic company by way of dividends referred to in section  115-O (whether interim or otherwise) whether out of current or accumulated profits shall not be included in  computing the total income of a previous year of any person. Hence, dividends shall be exempt in the hands of the  shareholders. [Section 10(34)]

However, w.e.f. assessment year 2017-18, any income by way of dividends chargeable to tax in accordance  with the provisions of section 115BBDA shall not be exempt under section 10(34) even if the tax has been paid  on that dividends by the domestic companies under section 115-O.

Deemed dividend specified under section 2(22)(e) shall also be taxed in the hands of the company @ 30%  and hence exempt in the hands of the shareholder under section 10(34).

Since dividends other than chargeable to tax under section 115BBDA received from a domestic company  shall be exempt, no deduction of any expense shall be allowed from such dividends.

Dividend from a foreign company shall, however, be taxable under the head “Income from Other Sources”.

Since dividend is exempt in the hands of the recipient, the domestic company shall be liable to pay additional  income-tax on the amount declared, distributed or paid by such company by way of dividends, whether interim or  otherwise, whether out of current or accumulated profits.

Dividends not to include the following:

(i)            any distribution made in accordance with clause (c) or clause (d) of 2(22) in respect of any share issued  for full cash consideration if the holder of such share is not entitled to participate in the surplus assets in  the event of liquidation.

(ii)           any advance or loan to a shareholder or specified concern by a company in the ordinary course of its  business, where the lending of money is a substantial part of the business of the company. ‘Ordinary  course of business’ shall mean that the loan or advance should be given to such shareholder at the same  rate and terms as it is given to other borrowers.

(iii)          any dividend paid by a company which is set off by the company against the whole or any part of loan or  advance previously paid by it and which has been treated as deemed dividend under section 2(22)(e). In  this case the dividend so set off shall not be treated as dividend in the hands of shareholder.

Example:

R Pvt. Ltd., gave a loan of ₹2,00,000 to G who had 12% shares in the company. The loan is  still outstanding. Thereafter the company declared dividend and has to pay a dividend of ₹40,000 to G  and the same is set off against such loan. In this case ₹2,00,000 shall be deemed dividend in the hands of  G. However, dividend of ₹40,000 which has been set off against such loan would not be liable to tax in  the hands of G. But if such dividend has been declared after the loan is refunded by G, then the company  would be liable to pay dividend distribution tax on ₹40,000 and in the hands of G the dividend would be  exempt.

5.   [Section 56(2) (ib)]- Income Tax in case of Winnings from Lotteries, Crossword Puzzles, Horse Races and Card Games

Any winnings from:

(i)            lotteries,

(ii)           crossword puzzles,

(iii)          races including horse races,

(iv)          card games and other games of any sort,

(v)           gambling or betting of any form or nature whatsoever,

are chargeable to tax as “income from other sources”.

(1).  [Section 115BB]- Special Rate of Income-tax in case of Winnings from Lotteries, Crossword Puzzles, Races, etc.

Although. winnings from lotteries, etc. is part of total income of the Assessee, such income is taxable at a special rate of Income-tax, which at present, is 30% + surcharge, if applicable + health and education cess @ 4%.

Deduction of any Expenses, Allowance or Loss Not Allowed from such Winnings:

According to section 58(4), no deduction in respect of cmv expenditure or allowance, in connection with such income, shall be allowed under any provision of the Income-tax Act.

 However, expenses relating to the activity of owning and maintaining race horses are allowable.

See also  Needs with Benefit of Goods and Service Tax (GST)

In other words, the entire income of winnings, without any expenditure or allowance, will be taxable. In fact, deduction under sections 80C to 80U on Deductions from Gross Total Income will also not be available from such income although such income is a part of the total income.

As lottery income is taxed at flat rate, the basic exemption of income (say Rs. 2,50,000) is not available to the Assessee.

(2).  Grossing up of Lottery Income, etc. for calculating income tax:

As in the case of some other incomes, there is also a provision for tax to be deducted at source from income from winning of lotteries, horse races and crossword puzzles. The rate of TDS in the case of such incomes is 30% if the income exceeds l0,000. Such tax deducted at source is income and the amount received is net income after deduction of tax at source. In this case, such net income will have to be grossed up as under:

If a person wins a lottery of Rs. 1,00,000, tax must have been deducted @ 30% and net amount received by the Assessee would be Rs. 70,000 (1,00,000 — 30,000). Grossing up would be done as:

(Rs. 70,000 x 100) / (100-30) = Rs. 1,00,000

6.   [Section 56(2) (id)]- Income Tax in case ‘Interest on Securities’

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:

(i)            interest on any security of the Central Government or a State Government;

(ii)           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.

(i) Types of Securities:

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.

(ii) Chargeability of Interest on Securities:

Interest on securities may be taxed on receipt basis or on due basis, depending upon the system of accounting if any, adopted by the Assessee. If the Assessee follows the cash system of accounting, interest is taxable on receipt basis otherwise it shall be taxable on due basis. If no system of accounting is followed, ii will always be taxable on ‘due’ basis.

(iii) Accrual of Interest on Securities:

Interest on securities accrues or becomes due on a specified date and not on a day-to-day basis. The date on which the interest shall become due is specified by the issuing authority. Interest may become due on quarterly basis, half yearly basis or annual basis, depending upon the term of the issue.

For example, if a company issues 12% debentures and specifies that interest shall become due on 31st of December every year, the due date is 31st of December and the interest for the entire year shall become due only on 31st of December every year. The person, who is the registered owner of the debentures as on 31st December, shall be entitled to receive the interest of the full year irrespective of his period of holding.

(iv)    Grossing up of Interest on Securities:

Tax is also to be deducted at source on interest on securities at the prescribed rates of tax. For Income-tax purposes what is to be charged to tax is the gross amount of interest. Therefore, if net-interest is given, it has to be grossed up to arrive at the taxable amount.

In the case of government securities other than 8% Saving (Taxable) Bonds, grossing up is not required as there is no deduction of tax at source.

Grossing up is required in the case of the following securities: —

(1)          8% Saving (Taxable) Bonds if the amount of interest payable exceeds l0,000;

(2)          securities issued by a statutory corporation or a local authority or by any company.

Net Interest can be Grossed Up as under:

(Net interest x 100) / (100 – Rate of TDS)

The rates of T.D.S. are as under:

(a)           In case of 8% saving bonds— 10%

(b)          Non-government securities whether or not listed or recognized stock exchange — I 0%.

Note:

1.-           Interest on saving account with Post Office in case of an individual is exempt upto Rs.3,500 under section 10(15)(i). Hence, such interest will be included in the gross total income of the individual to the extent it exceeds Rs. 3,500 and thereafter deduction shall be allowed under section 80TTA

2.            No tax is deductible on debentures issued by a widely held company if interest is paid / payable to an individual, resident in India and the aggregate amount of such interest paid or payable during the financial year does not exceed Rs. 2,500.

(1)   [(Section 57(1) and (iii)]- Deductions for Expenses from Interest on Securities

As discussed in the case of dividends, the following deductions will also be allowed from the gross interest on securities:

(a) Collection Charges [Section 57(1)]:

Any reasonable sum paid by way of commission or remuneration to a banker, or any other person for the purpose of realising the interest.

(b)    Interest on Loan [Section 57(111)]:

 Interest on money borrowed for investment in securities can be claimed as a deduction.

(c)     Any other Expenditure [Section 57(111)]:

Any other expenditure, not being an expenditure of a capital nature, expended wholly and exclusively for the purpose of making or earning such income can be claimed as a deduction.

7.   [Section 56(2)(ii)]- Tax on Income from Letting Out of Machinery, Plant or Furniture

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 therefrom is assessable as business income under section 28 and not as Income from other sources under section 56.

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

Where an Assessee lets on hire the machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, known as composite rent, if it is not chargeable to income-tax under the head “Profits and Gains of Business or Profession”, shall be chargeable as income from other sources.

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

The following deductions are allowable:

(a)           Current repairs, to the premises held otherwise than as tenant.

(b)          Insurance premium against risk of damage or destruction of the premises.

(c)           Repairs and insurance of machinery, plant or furniture.

(d)          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.

(e)           Any other expenditure:

Any other expenditure, not being an expenditure of a capital nature, laid out or expended wholly and exclusively for the purpose of making or earning such income can be claimed as a deduction.

8.   Section 56(2)(x)] – Taxation in case of Gift of Money, Gift of property or Property Acquired for Inadequate Consideration

Where any person receives, in any previous year, from any person or persons on or after 1.4.2017 the following income, it shall be chargeable to income tax under the head “income from other sources” as per Section 56(2)(x)]:

Particulars of income Amount taxable under the head ‘income from other sources ‘
(A) Any sum of money, —
— without consideration, the aggregate value of which exceeds Rs. 50,000
the whole of the of aggregate value of such sum
(B) Any immovable property, —

(i) without consideration, the stamp duty value of which exceeds Rs. 50,000;

 

the stamp duty value of property

(ii)  for a consideration, the stamp duty value of such property as exceeds such consideration, if the amount of such excess is more than the higher of the following amounts namely –

(i)                  The amount of Rs. 50,000; and

(ii)                The amount equal to 5% (10% w.e.f. A.Y. 2021-22)

the stamp duty value of such property as exceeds the consideration received
(C) Any property, other than immovable property, —  
(i)            without consideration, the aggregate fair market value of which exceeds Rs. 50,000 the whole of the aggregate fair market value of such property
(ii)           for a consideration which is less than the aggregate fair market value of the property by an amount exceeding Rs. 50,000 the aggregate fair market value of such property as exceeds such consideration
Note:

“Property” means the following Capital Asset of the Assessee, namely: –

i.                     Immovable property being land or building or both

ii.                   Shares and Securities

iii.                 Jewellery

iv.                 Archaeological Collections

v.                   Drawings

vi.                 Paintings

vii.                Sculptures

viii.              Any work or art, or

ix.                  Bullion

Section 56(2)(x) – Does not apply in following cases

Section 56(2)(x), shall not apply to any sum of money or any property received—

(i)            from any relative; or

(ii)           on the occasion of the marriage of the individual; or

(iii)          under a will or by way of inheritance; or

(iv)          in contemplation of death of the payer or donor, as the case may be; or

(v)           from any local authority as defined in the Explanation to section 10(20); or

(vi)          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 section 10(23C); or

(vii)        from or by any trust or institution registered under section 12A or section 12AA (or section 12AB, w.e.f. 1.6.2020); or

(viii)       by any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in section 10(23C) (iv) or (v) or (vi) or (via); or

(ix)          by way of transaction not regarded as transfer under section 47(i) or (iv) or (v) or (vi) or (via) or (viaa) or (vib) or (vic) or (vica) or (vicb) or (vid) or (vii); or

(x)           from an individual by a trust created or established solely for the benefit of relative of the individual; or

(xi)          from such class of persons and subject to such conditions, as may be prescribed.

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