Professional Documents
Culture Documents
INTRODUCTION
Income from other sources is the fifth and last head of income under which the total is
computed and assessed. As the very name suggests. Income from Other Sources is a
residuary head of income. Any item of income chargeable to tax but does not fall within
the ambit of the other four specific heads of income shall be included under this head of
income.
Section 56 lays down what incomes are taxable under this head.
Section 57 and 58 lays down the deductions which are allowable and not allowable
respectively, while computing income under this head.
Section 59 deals with income chargeable to tax, corresponding to section 41, which falls
under the head of Profit and Gains of The Business.
The following income shall be chargeable to tax under this head of income only if it is
not taxable under the head Profits and Gains of Business or Profession:
(a) Interest on securities (State and Central Government securities and debentures);
(b) Any sum collected from employees towards their share of contribution to any
Welfare Fund Account:
(c) Income from letting of machinery, plant and furniture; and
(d) Income from letting of machinery, plant and Furniture together with building, if the
letting of the building is inseparable to the letting of other assets.
INCOME CHARGEABLE UNDER THIS HEAD ONLY IF NOT CHARGEABLE
UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION OR
UNDER THE HEAD SALARIES
Any sum received under a Key man insurance policy including bonus is chargeable
under this head when it is received by any person other than the employer who took the
policy and the employee in whose name the policy was taken.
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Exempted Income
Compensation received or
receivable by an individual or
his legal heir on account of
Conditions/Remarks
(a) Such compensation is received or
receivable from the central/State
Government or a local authority.
(b) Exemption is not available to the
extent such amount has been allowed
a deduction on account of any loss or
damage caused by such disaster under
this act.
Sum received under life Following are not exemptinsurance
(1) sums u/s 80DD(3) and 80DDA(3)
policy included sum
(2) sums under key man insurance
by way of bonus allocated on policy
it.
(3) Sums received under insurance
policy issued on or after 1-4-2003 if in
any year the premium payable exceeds
20% of actual capital sum assured.
However sum received on death is
exempt.
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34
35
DIVIDEND
(a) Any distribution by a company to its shareholders to the extent of accumulated
profits whether capitalized or not resulting in the release of all or any part of the assets
of the company,
(b) Any distribution to its shareholders by a company
(i) Of debentures, debenture-stock or deposit-certificates with or without interest;
(ii) Distribution of bonus shares to the preference shareholders by the company, to the
extent of accumulated profits, whether capitalized or not,
(c) Any distribution made to the shareholders by a company on its liquidation to the
extent to which the distribution is attributable to the accumulated profits of the company,
whether capitalized or not,
Exceptions:
(1) Any advance or loan to a shareholder or the concern in which the shareholder has
substantial interest by a company will not be deemed as dividend, if the loan or advance
is given during the normal course of its business provided the lending of money is a
substantial part of the business of the company.
(2) Any payment made by a company on purchase of its own shares from a shareholder
in accordance with the provisions of Section 77A of the Companies
Act, 1956, shall not be regarded as dividend. Such buyback of shares attracts
capital gains tax liability in the hands of the shareholder u/s 46A.
(3) Any distribution of shares pursuant to a demerger by the resulting company to the
shareholders of the demerged company (whether or not there is a reduction of capital in
the demerged company) shall not be treated as dividend.
Explanation:
X Ltd. is a closely held company as it is not covered by Section 2(18) of the Income Tax
Act. Mr. A is a shareholder holding 10% voting rights in the company. He also holds
substantial interest in AB and Sons, a partnership firm, where his share of profit is not
less than 20%. In this background, Section 2(22) (e) may get attracted under 3
situations indicated above:
1 Loan or advance is given to Mr. A by the company. To the extent of accumulated
profits of the company such loan or advance shall be deemed to be dividend in the
hands of Mr. A.
2 Loan or advance is given to a concern (proprietary concern, firm, HUF company, etc.)
in which the shareholder holding 10% voting rights has substantial interest. Here, X Ltd.
gives loan to AB and Sons. A holds 10% voting rights in X Ltd. and 20% or more share
of profit in AB and Sons. As this nexus exists, the loan given by X Ltd. to AB and Sons
shall be deemed as dividend in the hands of Mr. A.
3 Where payment is made to any person for and on behalf of the shareholder holding
10% voting rights shall be deemed dividend. In this case, A owes payment to Z for any
benefit received or to be received towards which X Ltd. makes payment, such payment
shall be deemed to be dividend in the hands of Mr. A. In order to determine 10% of the
voting rights, only the interest owned by the assessee alone has to be considered.
Notes:
(i) If A holds 9% voting rights in X Ltd. and even 90% in AB and Sons, then 2(22)(e) will
not be attracted. Similarly, if A holds 90% voting rights in X Ltd. but 19% in AB and
Sons, then deemed dividend as per situation 2 above will not attract.
(ii) In order to determine 20% voting rights/share of profit of the shareholder in a firm or
AOP or company, etc., the interest held by the shareholder in such firm, AOP, Company,
etc. is alone relevant. Whenever there is a declaration of dividend or any distribution in
the nature of dividend covered by sub-clauses (a) to (d) of clause (22) of Section 2, the
company is liable to pay tax at 12.5% u/s 115-O. Such dividend income is exempt in the
hands of shareholders u/s 10(34). However, in the case of deemed dividend covered by
sub-clause (e) of Section 2(22) and dividend declared/distributed by a foreign company,
the shareholder is chargeable to tax under the head Income from Other Sources as
Section 115-O does not apply to such.
(iii) Wealth-tax
(iv) Expenses of the nature described in Section 10A
(v) No deduction shall be allowed in respect of winnings from lotteries, cross word
puzzles, card games, races including horse race, gambling, betting, etc. However, in
respect of the activity of owning and maintaining racehorses, expenses incurred shall be
allowed even in the absence of any stake money earned. Such loss shall be allowed to
be carried forward in accordance with the provisions of Section 74A.
Students may not that in addition to the above, section 14A read with the rule 8D
prescribes disallowance of any expenditure incurred in relation to exempt income. In a
case where dividend, interest or any other income which are exempt by virtue any of the
sub-sections of section 10 and whereas) the assessing officer, having regard to the
accounts, is not satisfied with the correctness of the claim of the assessee in respect of
expenditure in relation to
exempt income; or
b) The assessee claims that no expenditure has been incurred by him in relation to the
exempt income.
In the above circumstances, the assessing officer shall determine the correct amount of
expenditure incurred in relation to exempt income in accordance with the manner
prescribed under rule 8D for disallowance of such expenditure.
Illustration:
Mr. Jagdish is a chartered accountant in practice. The income & expenditure account for
the year ended March 31, 2009 read as follows:Expenses
Rs.
Income
Rs.
To Employees cost
1,50,000
By Professional Earnings.
12,00,000
To Traveling and
50,000
By Dividend income from 1,00,000
Conveyance
shares
To Administration & office
4,00,000
expenses
To Interest
1,50,000
To De-mat Charges
10,000
To Net Profit
7,40,000
Total
15,00,000
Total
15,00,000
amount is received or the benefit is accrued. This provision is similar to that of Section
41(1) under the head Profits and Gains of Business or Profession.
.
letter of credit for purchase of plant and machinery required for setting up a plant,
interest of such amount is directly connected and incidental to construction of plant.
Therefore, interest receipt is capital in nature and it would go to reduce the cost of
asset. CIT vs. Karnal Co-operative Sugar Mills Ltd., 243 ITR 2 (SC). Similar view has
been upheld in CIT vs. Karnataka Power Corporation, 247 ITR 268 (SC) and
Bongaigaon Refinery and Petrochemicals Ltd. vs. CIT 251 ITR 329 (SC).
COMPUTATION SEQUENCE TO BE REMEMBERED
(1) Identify income chargeable under this head of income and include them. In respect
of dividend income, year of chargeability should be decided by applying Section 8.
(2) If net amount after tax deducted at source is given, include the gross amount.
(3) If the income so identified is eligible for exemption u/s 10, avail the exemption and
include only the balance amount. E.g. in respect of interest on certain notified securities,
deposits and bonds qualify for exemption u/s 10(15).
(4) If income is clubbed from minor children, claim exemption u/s 10(32) in respect of
such income up to a maximum of Rs.1, 500 per child.
(5) Expenses and deductions qualifying u/s 57 should be claimed.
(6) Claim deductions, if any, available under Chapter VI-A to the extent applicable after
arriving at the gross total income and not under this head of income. Deductions cannot
exceed the amount of such income included in the gross total income.
(7) If the total income includes winnings from lotteries, crossword puzzles, gambling,
betting, etc., apply flat rate of 30% for calculating the income tax payable on such
income
Illustration:
Shri Ratanlal, a businessman, presents to you the following statements of account
relating to the year ending 31.3.2007 for computation of his gross total income.
Capital Account
Particulars
To Entertainment Exps.
To Gift to Son
To Shares purchased
To Drawings
To Balance c/f
Rs.
12000
3000
50000
130000
193120
Total
388120
Particulars
By Balance b/f
By Profit
By Race Winnings
By LIC Policy matured
By Bad Debts recovered
By Loan for Investment
Total
Rs.
32000
131200
12000
157920
5000
50000
388120
Rs.
26000
10800
1200
5000
By Gross Profit
By Discounts received from
wholesalers
By Interest on Deposits
Rs.
193000
2500
To Drawings
To Conveyance
To Bad Debts
To Advertisement
To Travelling
To Profit transferred to
Capital A/c
Total
11000
7500
3000
16000
15500
131200
(TDS Rs.1,000)
By Income Tax Refund
By Interest on Income Tax
Refund
By Profit on Sale of Personal
Motor car
9000
227200
Total
227200
5000
1200
Additional Information:
(a) Entertainment Expenses relate to business.
(b) Bad Debts recovered relate to deduction allowed in 2003-04.
(c) The LIC policy is for a assured sum of Rs.1, 50,000. Annual premium @
Rs.47, 000 each for 3 years.
Rs.
Rs.
131200
11000
5000
16000
147200
9000
1200
16500
12000
43700
103500
Rs.
10000
1200
12000
16920
40120
Note 3:
out of the gross total income of Rs.1, 43,620, a sum of Rs.12, 000 being race winnings
is taxable at a flat rate of 30% u/s 115BB.
Note 4:
The exemption u/s 10(10D) is not available in respect of maturity of LIC policy where
the premium payable on such policy for any year exceeds 20% of the capital sum
assured. In the given case, premium payable for one year is Rs.47, 000 being 31% of
capital sum assured. Therefore, exemption u/s 10(10D) is not available. The amount
taxable under the head Income from Other Sources is Rs.16, 920 being maturity
proceeds of Rs.1, 57,920 less premium paid for 3 years Rs.1, 41,000.