INTRODUCTION TO INCOME TAX:

The Central Government has been empowered by Entry 82 of the Union List of
Schedule VII of the Constitution of India to levy tax on all income other than agricultural
income (subject to Section 10(1)). The Income Tax Law comprises The Income Tax Act 1961,
Income Tax Rules 1962, Notifications and Circulars issued byCentral Board of Direct
Taxes (CBDT), Annual Finance Acts and Judicial pronouncements by Supreme Court and
High Courts.
The government of India imposes an income tax on taxable income of all persons
including individuals, Hindu Undivided Families (HUFs), companies, firms, association of
persons, body of individuals, local authority and any other artificial judicial person. Levy of
tax is separate on each of the persons. The levy is governed by the Indian Income Tax Act,
1961. The Indian Income Tax Department is governed by CBDT and is part of the
Department of Revenue under the Ministry of Finance, Govt. of India. Income tax is a key
source of funds that the government uses to fund its activities and serve the public.
The Income Tax Department is the biggest revenue mobilizer for the Government. The
total tax revenues of the Central Government increased from Rs1392.26 billion in 1997-98 to
Rs5889.09 billion in 2007-08.

SCOPE OF TOTAL INCOME

Indian income is always taxable in India notwithstanding residential status of thetaxpayer.
Foreign income is not taxable in the hands of a non-resident in India. For resident (in case of
firm, association of persons, company and every other person) or resident & ordinarily
resident (in case of an individual or an HUF), foreign income is always taxable. For resident
but not ordinarily resident foreign income is taxable only if it is business income and business
is controlled wholly or partly in India or it is a professional income and profession is set up in
India.

Foreign income is the one which satisfies both the following conditions:

Income is not received (or not deemed to be received under section 7) in India, and
Income doesn't accrue (or doesn't deemed to be accrued under section 9) in India.

If such an income satisfies one or none the above conditions then it is an Indian income.

HEADS OF INCOME
The total income of a person is segregated into five heads:

Income from salaries (Sections 15 to 17)

Income from house property (Sections 22to 27)
Profits and gains of business or profession (Sections 28 to 44D)
Capital gains (Sections 45 to 55A)
Income from other sources (Sections 56to 59)

The current project is dealing with INCOME FROM OTHER SOURCES. Therefore, I
will only be discussing the various aspects related thereto.
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.

INCOME FROM OTHER SOURCES

BASIS FOR CHARGE:- The Following conditions must be satisfied for charging
income to tax under income under the head income from other sources:a) There must be an income.
b) It should not be an exempt income.
c) Such income should not be charged to tax under any other head of income.
Therefore this head of income is also called as residuary head of income.

INCOMES TAXABLE UNDER THIS HEAD: - The various types of incomes

taxable under this head can be classified into two parts. These are explained as follows:-

SPECIFIC
INCOMES: Dividends
Lotteries,

Any other income

crosswords, puzzles

which is not taxable

Races including

under any other head

of income.

horse races
Card game or any
other game

Income from other sources is the residual head of income. Hence, any income which is not
specifically taxed under any other head of income will be taxed under this head.

EXAMPLE OF INCOME FROM OTHER SOURCES :

Some Examples Of Certain Incomes Normally Taxed Under This Head Are Given
Below:

Interest on bank deposits, loans or company deposits,

Dividend;

Family pension (received by legal heirs of an employee),

Income from sub-letting of house property by a tenant,

Agricultural income from agricultural land situated outside India,

Interest received from IT Dept. on delayed refunds,

Remuneration received by Members of Parliament,

Casual receipts and receipts of non-recurring nature,

Insurance commission,

Examiner-ship fees received by a teacher (not from employer),

Income from royalty,

Director's commission for standing as guarantor to bankers,

Winnings from Lotteries, Crossword Puzzles, Horse Races and Card Games,

Interest on securities,

Income from letting out of machinery, plant or furniture, etc.

Any sum exceeding Rs. 50,000/- received without consideration shall be treated as
income provided that the sum of money is not received from any relative or on the
occasion of marriage of the individual or under a will or inheritance etc

Having briefly mentioned the various examples of incomes from other sources, it is pertinent
to elaborately mention about the important heads of such incomes. They are as follows :

RELEVANCE OF METHOD OF ACCOUNTING

Income chargeable to tax under the head Income from other sources is to be computed in
accordance with the method of accounting regularly employed by the assessee. Hence, if the
assessee follows mercantile system, then income will be computed on accrual basis. If
assessee follows cash system, then income will be computed on cash basis. However, method
of accounting does not affect the basis of charge in case of dividend income and income by
way of interest received on compensation or on enhanced compensation.

A.

DIVIDEND
Dividend is the distribution of divisible profits by a joint stock company to its
shareholders

by way of return on investments in the shares of the company.

DIVIDEND UNDER THE INCOME TAX ACT (DEEMED DIVIDENDS)

Sec. 2 (22) gives the definition of Deemed dividend which is chargeable to tax
under the head Income from other sources, even if the receipt is not regarded as
dividend under the Companies Act.
Under section 2(22), following payments or distribution by a Company to its
shareholders is deemed as dividends to the extent of accumulated profits of the
company.

i. ACCUMULATED PROFITS
Accumulated profits should include the credit balance of the Profit and loss account,
general reserves, investment allowance, capitalized profits (Bonus shares) and profits of
the year up to the date of distribution/ liquidation.
Even Reserve created out of agriculture income, Capital redemption reserve, Dividend
equalization reserve, Workmen Compensation reserve, Debenture redemption reserve,
shipping reserve, Reserve for contingency etc. form part of Accumulated reserves.
However, provisions and reserves meant for specific liability, to the extent of the
liability shall not be included. Provision for Income tax, provision for dividend, reserve
for depreciation do not form a part of the accumulated profits.
Share premium a/c shall not form part of accumulated profits.
Accumulated profits includes tax free incomes e.g. agricultural income.

Section 2 (22) (a) - Any distribution by a company to the extent of accumulated profits
involving the release of the asset of the company:
Dividend includes any distribution by a company of accumulated profits, whether capitalized
or not, if such distribution entails the release by the company to its shareholders of all or any
part of the assets of the company. It basically includes distribution of assets whether in cash
or in kind.

Section 2(22) (b) Distribution of Debenture/ Deposit Certificates to Shareholders and

bonus shares to preference shareholders:
Dividend includes :
(i) any distribution to its both equity and preference shareholders by a company of
debentures, debenture-stock or deposit certificates in any form, whether with or without
interest, and
(ii) any distribution to its preference shareholders of shares by way of bonus to the extent to
which the company possesses accumulated profits, whether capitalized or not.

Section 2(22)(c) Distribution to shareholders on liquidation of the company

Dividend includes any distribution made to the shareholders of a company on its liquidation,
to the extent to which such distribution is attributable to the accumulated profits of the
company immediately before its liquidation, whether capitalized or not.
Section 2 (22) (d) Distribution on reduction of share capital
Dividend includes any distribution to its shareholders by a company on reduction of its
capital to the extent to which the company possesses accumulated profits, whether capitalized
or not.
Note: Section 2(22)(c) & Section 2(22)(d) above do not include distribution in respect of
preference shares issued for full cash consideration.

Section 2 (22) (e) Loans/ Advances to certain shareholders/ concerns

Dividend includes
any payment by a company not being a company in which public are substantially
interested [closely held company]
of any sum by way of loan/ advance to
(i) a shareholder being the beneficial owner of shares &holding not less than ten percent
of voting power. Or
(ii) to any concern - HUF/Firm/Company/AOP/BOI.in which such a shareholder ( i.e.
beneficial owner of 10% or more of shareholding)is a member or a partner and in which
he has a substantial interest - 20% of income/voting power at any time during P/Y. or
(iii) to any person, on behalf of or for the individual benefit of such a shareholder( i.e.
beneficial owner of 10% or more of shareholding)
to the extent to which the company possesses accumulated profits.(excluding capitalized
profits)

NOTE:

 U/S 2 (22) (e), if loan is given to a Shareholder and on date of loan, his share holding
was less than 10% and subsequently it is increased to 10% or more than Sec. 2 (22)
(e) is not attracted. Thus, 10% or more shareholding is to be seen as on the date of
loan.
Even trade deposit to a shareholder will be treated as dividend u/s 2(22)(e).
Payment on behalf of shareholder:
Section 2(22)(e) covers not only advances and loans to shareholders but any other
payments by the company on behalf of or for the benefit of individual shareholders,
such as payments of shareholders personal expenses like air tickets etc., insurance
premium, etc., to the extent of the accumulated profits of the company.
If any such loan was given to more than one such shareholders, accumulated profits
shall be reduced by the amount of the loan given to the earlier shareholder. As decided
in CIT
If loan or advance was given to any such shareholder and subsequently the loan
amount was repaid by him, even in such cases the loan or advance shall be considered
to be dividend.

EXEMPTION U/S 2(22)(e)

Any advance or loan made to a shareholder or a concern by a company in the ordinary
course of it business where money lending is 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.
Any dividend paid by a company which is set off by the company against the whole or any
part of the loan which has been deemed as dividend under section 2(22)(e).
Note:

Dividend does not include any payment made by a company on purchase of its own
shares in accordance with the provisions contained in section 77A of the Companies
Act, 1956.

Dividend does not include any distribution of shares made in accordance with the
scheme of 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.

DEDUCTIONS FOR EXPENSES FROM DIVIDEND INCOME [SECTION 57(I) AND

57(III)]
The following expenses can be claimed as deductions from gross dividend income:
(a) Collection charges: e.g. commission or remuneration to a banker or any other agent/broker
for the purpose of realizing the dividend.
(b) Interest on loan:Interest on money borrowed for purchasing the shares can be claimed as
deduction. This deduction can exceed the amount received by way of dividend. It interest is
payable outside India, TDS must be done, otherwise deduction is not available.
Practically, dividend declared by Indian company is exempt, hence above deductions
cannot be claimed. But still dividend declared by foreign companies / cooperative
societies is taxable and so deductions discussed above can be claimed.

BASIS OF CHARGE
Method of accounting regularly employed by the assessee does not effect basis of charge of
dividend income fixed by Section 8:

Normal Dividend-Normal dividend declared at annual general meeting is deemed to

be the income of the previous year in which it is declared.

Deemed dividend-Notional dividend under section 2(22) is treated as the income of

the previous year in which it is so distributed or paid.

Interim dividend- Interim dividend is deemed to be the income of the previous year in
which the amount of such dividend is unconditionally made available by the company
to a shareholder.

Place of Accrual [Sec 9(1)(iv)] :Dividend paid by an Indian company is deemed to accrue or
arise in India.

B. WINNINGS FROM LOTTERIES & BETTING, CROSSWORD PUZZLES, HORSE

RACES AND CARD GAMES etc. SEC. 115 BB.

It also includes income through draw of lots, television game shows and similar
other games. Taxable at a flat rate of 30% without claiming any allowance or expenditure.
Even if income is less than Rs 2,00,000 for the financial year 2012 13, these incomes are
fully taxable. 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 or arrangement by
whatever name called. 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.

Deductions u/s 80C to 80U are not available against such incomes.
Surcharge & education cess will apply in a usual way.

Formula for grossing up: Net amount received X 100/100 (-) rate of TDS.
TDS Rate
As per section 194B the TDS rate for lottery, crossword puzzles or card games or other games

is 30% [No TDS if lottery etc. up to Rs 10,000 but if amount exceeds Rs 10,000 then TDS
on
whole amount].
As per section 194BB, the TDS rate for winning from horse races is 30% [No TDS if winning
up to Rs 5000 but if winnings exceed Rs 5000 then TDS on whole winnings].
Note: No TDS is deducted if Lottery Price is less than Rs.10,000 but still the tax is payable
by
the assessee. Similarly no TDS in case of Winning from other races, gambling or betting.

C. INTEREST ON SECURITIES:
Such income is taxable under the head Profit and gains of business or profession, if the
securities are held as stock-in-trade. And if they are held as investment, the interest will be
taxable under the head Income from other sources.

Interest on securities is taxable for the registered owner of securities, i.e. who is
registered owner on the date, on which the interest falls due, even if he is not the
owner of security for the period for which the Interest is being paid. For example, if
the due date of interest for Debentures of XYZ Ltd. is 31 st March, then who so ever is
the owner of debentures on 31st March, shall be entitled to receive the interest for the
full year, as well as he is taxable for the same, even though he might have purchased
these debentures just one or two month back.

It is the gross amount, which is taxable.

GROSSING UP OF INTEREST:
Interest is paid after TDS at following rates:

Govt. Securities: Nil (In case of 8% saving bonds, if amount of interest exceeds Rs
10,000 then there is a TDS @ 10%)
Listed / Non listed securities: 10%

Formula for grossing up: Net amount received X 100/100 (-) rate of TDS
Note: 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 2500.

Expenses deductible from Interest income

The following expenses can be claimed as deductions from grossed up Interest income :
(a) Collection charges: e.g. commission or remuneration to a banker or any other
agent/broker
for the purpose of realizing the interest.
(b) Interest on loan: Interest on money borrowed for purchasing the securities can be
claimed as deduction. This deduction can exceed the amount received by way of interest. If
interest is payable outside India, TDS must be done, otherwise deduction is not available.
Basis of charge
Interest on securities is chargeable on receipt basis if the books of accounts of such income
are
maintained on cash basis. If, however, books of accounts are not maintained or maintained on
the basis of mercantile system of accounting, then interest on securities is taxable on accrual
basis. Deduction of collection charges, interest on borrowed capital is allowed as per the
method of accounting followed by the assessee.
Interest exempt from tax [Sec. 10(15)]
Interest on the following is exempt from tax:
1. Interest on notified securities, bonds or certificates:
a. National Defence Gold Bonds, 1980
b. Special bearer bonds, 1991
c. Post office Cash certificates
d. National Plan Certificates
e. National Plan Savings certificates
f. Post Office National Savings Certificates
g. Post Office Savings Bank Account

h. Post Office Cumulative Time Deposit Rules,1981

i. Special deposit Scheme, 1981
2. Interest on National Relief Bonds (only for individual and HUF)
3. 7% Capital Investment Bonds (only for individual and HUF)
4. Interest on notified bonds/ debentures of Public Sector companies
5. Interest on deposits in a specified scheme made by a retired govt./public sector
employee out of retirement benefits.
6. Interest on Gold Deposit bonds
7. Interest received by a non-resident Indian from notified bonds (i.e. NRI bonds).

Bond Washing transactions and Chargeability of Interest (Section 94)

Section 94(1) : The holder of securities is normally assessable on the whole interest, which
falls
due on the date of interest. But this rule is not applicable to bond washing transactions. A
bond washing transaction consists of selling of securities just on the eve of due date of
interest and buying back securities after the due date of interest is over. Thus, a high-income
group assessee may avoid or reduce his tax liability by transferring the securities before the
due date of interest to a person (generally a friend or relative) who has no taxable income or
whose rate of tax is quite low.
As a result, the whole interest is includible in the income of the transferee who holds the
securities on the due date of interest. Thus the tax liability may be wholly avoided or
substantially reduced depending upon the total income of the transferee. To prevent this, it
has been provided [under Sec. 94(1)] that the whole interest in respect of a bond washing
transaction is deemed to be the income of the transferor and not that of transferee.
Section 94(2): Another method of avoiding tax is sale of securities cum-interest. Section
94(2)
provides that if an assessee, having beneficial interest in securities during the previous year,
sells them in such a way that either no income is received or income received is less than the
sum he would have received if interest had accrued from day to day, then income from such
securities for such year would be deemed as income of such person.

Exceptions:
The assessing officer shall not apply the above rule in the following cases:
(1) If the assessee proves to the satisfaction of the Assessing Officer that there has been no
avoidance of income tax; or
(2) If the assessee proves that the avoidance of income tax is exceptional and not systematic;
and there was no avoidance of income tax in any of the three preceding years.

D. STANDARD DEDUCTION IN THE CASE OF FAMILY PENSION [SEC. 57(IIA)]

In the case of income in the nature of family pension, the amount deductible is Rs. 15,000 or
33 per cent of such income, whichever is less. For this purpose family pension means a
regular monthly amount payable by the employer to a person belonging to the family of an
employee in the event of his death.
E. INCOME FROM LETTING OUT OF MACHINERY, PLANT OR FURNITURE
[SECTION 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 u/s 28 and not as income from other source u/s 56.
F. INCOME FROM COMPOSITE LETTING OF MACHINERY, PLANT OR
FURNITURE AND BUILDINGS [SECTION 56(2)(III)]:

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 from Business or profession,
shall be chargeable as income from other sources.
Deductions permissible from letting out of machinery, plant or furniture and buildings
[Section 57(ii) and (iii)]:
The following deductions are allowable:
(a) Current repairs, rates and taxes of the building if given to others on composite rent. {Rent
and taxes, however, shall be subject to Section 43B as in the case of Business or Profession}.
(b) Insurance premium against risk of damage or destruction of the premises.
(c) Repairs and insurance of machinery, plant or furniture.
(d) Depreciation as per section 32
(e) Any other expenditure, expanded wholly and exclusively for the purpose of making or
earning such income.
G. TAXATION OF GIFT [SECTION 56(2)(vii)]
1. Gift of Cash / Cheque / Draft : If, through one or more transactions, gift received is up to
Rs 50,000 per financial year, then nothing is taxable. If gift is Rs 50,001 or above, then it is
fully taxable.
2. Gift of immovable property : In this case, if Stamp duty value is up to Rs 50,000 then
nothing is taxable. If it is above Rs 50,000, then fully taxable. It is applicable for each
individual transaction. Unlike above, if more than one transaction of Gift, below Rs 50,000,
than they shall not be aggregated. Similarly, if there is consideration, may be less or say if
difference between the actual selling price and Stamp duty value is more than 50,000, then
the above law is not applicable. It is applicable only in case of gift i.e. when property is
transferred without consideration.
3. Gift of movable property (one or more transactions) : If fair market value of all movable
properties gifted in one financial year is up to Rs 50,000, then nothing is taxable. But if it is
more than Rs 50,000, then it is fully taxable.

4. Movable property transferred for inadequate consideration : If difference between actual

consideration and fair market value is more than Rs 50,000, all transactions of one financial
year combined together, then the difference is fully taxable. If difference is up to Rs 50,000,
than nothing is taxable.
Exempted Gifts :
1.Money / property received from a relative or by HUF from its members
2. Money / property received on the occasion of the marriage of the individual
3. Money / property received by way of will/inheritance
4. Money / property received in contemplation of death of the payer.
5. Money / property received from a local authority
6. Money / property received from any fund,foundation, university, other educational
institution, hospital, medical institution, any trust, or institution referred to in the section
10(23C).
7. Money / property received from a charitable institute registered u/s 12AA

H. PERMISSIBLE DEDUCTIONS FROM INCOME FROM OTHER SOURCES

[SECTION 57]
I. Commission or Remuneration for realizing Dividend or Interest on Securities:
Any reasonable sum paid to a Banker or by any other person for the purpose of
realizing dividend or Interest on securities on behalf of assessee is deductible
II. Deduction in respect of Employees contribution towards Staff welfare
scheme:
Such sum is allowable as deduction only of the sum received by the taxpayer as
contribution from his employees towards any welfare fund of such employees is

allowable only if such sum is credited by the taxpayer to the employees account in the
relevant fund before the due date.
III. Repairs, Depreciation in the case of letting out of Plant, machinery,
Furniture, Building:
Following expenses are allowable under this provision:

Current repairs in respect of Building;

Insurance premium in respect of Insurance against Risk of damage or destruction of

the premises;

Repairs and Insurance of machinery, plant and furniture;

Depreciation.

IV. Standard Deduction in case of Family pension

The deduction allowable is Rs. 15,000/- or 33.33% of such Pension received
whichever is less
V. Any other expenses for earning Income : Any other expenses related to earning of
Income from other sources should satisfy the following basic conditions to qualify as a
deductible expenditure:

The expenditure must be laid out or expended wholly and exclusively for the
purpose of making or earning the Income;

The expenditure must not be in the nature of Capital expenditure;

It must not be in the nature of Capital expenditure;

It must not be in the nature of personal expenses of the assessee;

It must be laid out or expended in the relevant previous year and not in any prior or
subsequent year.

I. AMOUNT EXPRESSLY DISALLOWED [Sec.58] :The following expenses are not

allowed to be deducted form such income :
1. Personal Expenses : Any personal expenses of the assessee is not deductible.
2. Interest : Any Interest chargeable under this Act which is payable outside India on which
tax has not been paid or deducted at source.
3. Salary : Any payment chargeable under head Salaries and payable outside India not
deductible if tax has not been paid or deducted therefrom.
4. Wealth Tax : Any sum paid on account of Wealth tax is not deductible.
5. Expenditure in respect of Royalty and Technical Fees received by a foreign
company.
6. Expenditure in respect of winning from Lotteries etc. : In case an assess has income
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, such assessee
shall not be allowed any deduction in respect of any expenditure or allowance in
connection with such incomes.1