Income from other sources

AUGUST, 2018

CHANAKYA NATIONAL LAW UNIVERSITY

PATNA, BIHAR.

SUBMITTED TO- SUBMITTED BY-

Dr. G.P.Panday CHARU PRIYADARSHI

Asst. Professor Of Law Roll No- 1317,4th Year.

CNLU, PATNA. B.A.LLB, 7 TH Semester.

 INCOME FROM OTHER SOURCES

DECLARATION
I hereby declare that the work reported in the LL.B (Hons.) Project Report entitled “Income
From Other Sources” submitted at CHANAKYA NATIONAL LAW UNIVERSITY is an
authentic record of my work carried out under the supervision of Dr.G.P.Panday. I have not
submitted this work elsewhere for any other degree or diploma. I am fully responsible for the
contents of my Project Report.

(Signature of the Candidate)

CHARU PRIYADARSHI

CHANAKYA NATIONAL LAW UNIVERSITY

24.8.18

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ACKNOWLEDGEMENT
Any accomplishment requires the effort of many people and this work is no different. I take
this opportunity to express my profound gratitude and deep regards to my guide
Dr.G.P.Panday for his exemplary guidance, monitoring and constant encouragement
throughout the course of this thesis. I am obliged to staff members of Chanakya National Law
University, for the valuable information provided by them in their respective fields. I am
grateful for their cooperation during the period of my assignment. Unfortunately, sources
were not always noted or available; hence, it became impractical to provide an accurate
acknowledgement. Regardless of the source, I wish to express my gratitude to those who may
have contributed to this work, even though anonymously.

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Contents
LIST OF ABBREVIATIONS .................................................................................................................... 5
CASES .............................................................................................................................................. 6
AIM: .................................................................................................................................................. 7
OBJECTIVE: ........................................................................................................................................ 7
HYPOTHESIS: ..................................................................................................................................... 7
LIMITATIONS: .................................................................................................................................... 7
RESEARCH QUESTIONS: ..................................................................................................................... 7
RESEARCH METHODOLOGY : ............................................................................................................. 7
SOURCES OF DATA ............................................................................................................................ 7
CH-1. INTRODUCTION........................................................................................................................ 8
CH-2. TAX DEDUCTIONS u/Sec. 57 ................................................................................................... 15
CH-3. NON DEDUCTABLE EXPENSES u/Sec. 58.................................................................................. 19
CH-4 PROFITS CHARGEABLE TO TAX U/59 ........................................................................................ 20
CH-5 CONCLUSION AND SUGGESTION ............................................................................................. 21
BIBLIOGRAPHY ................................................................................................................................ 22

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LIST OF ABBREVIATIONS

A.C Appeal Cases

AIR All India Reporter

CIT Commissioner Of Income Tax

Co. Company

Ed. Edition

ITR Income Tax Return

Ltd. Limited

No. Number

Pvt. Private

Pub. Publication

§ Section

SCC Supreme Court Cases

Vol. Volume

W.L.R Weekly Law Reports

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CASES
1. Tuticorin Alkali Chemicals and Fertilizers Ltd. v CIT., AIR 1998 SC,
315.
2. Eastern Investments Ltd vs CIT (1951) 20 ITR 1, 4 (SC).
3. CIT vs Rajendra Prasad Moody (115 ITR 519 (SC)); Ormerods (India)
Ltd vs CIT (36 ITR 329); Chhail Beharilal vs CIT (39 ITR 696); Apparao
vs CIT (46 ITR 511); Mohammed Ghouse vs CIT (49 ITR 127)).
4. CIT vs Amritaben R Shah (238 ITR 777)
5. Sarabhai Sons (P) Ltd vs CIT (201 ITR 464).
6. Chinai and Co Pvt Ltd vs CIT (206 ITR 616)

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AIM: To study and critically analyse “Income From Other Sources.”

OBJECTIVE: The researcher intends to find the following:

i. To know about the nature of income taxable as residuary income.

ii. To know about the items classified as income from other sources.
iii. To know about the tax deductions allowed for income from other sources.
iv. To know about the tax deductions which are not allowed as income from other
sources.

HYPOTHESIS: The researcher has formulated the following hypothesis, the validity of
which will be tested in the course of research work. The hypothetical statement is that Income
from other sources must be calculated by the taxpayer based on the mercantile system used
by the taxpayer, i.e cash basis or accrual basis.

LIMITATIONS: The researcher has undergone monetary limitations.

RESEARCH QUESTIONS:
i. What is the “Income from other sources under the Income Tax act”.
ii. What are the tax deductions allowed for Income from other sources..
iii. What are the tax deductions which are not allowed for income from other sources.
iv. What is the tax treatment for Income from other sources.

RESEARCH METHODOLOGY : The researcher has used only doctrinal method of

research.

SOURCES OF DATA
i. PRIMARY SOURCE :- The Income Tax Act, 1961.
ii. SECONDARY SOURCE – Books, Weblogs, Newspaper, News channels,
Magazines, Online Articles.

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CH-1. INTRODUCTION
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”. In other words it includes within its ambit all those
taxable income which do not fall within the heads of salaries, interest on securities, income
from house property, profits and gains of business or profession and capital gains. However,
it is to be noted that section 56 does not apply to income which is not includable in the total
income of the assessee at all. 1 According to section 56 of the income tax act any income,
profits, or gains which come within the purview of “income”, but otherwise cannot be
included into any other head as prescribed in the income tax act,1961 will be charged under
the head of “income from other sources.”2

This section deals with the residuary head of income and sweeps in all such taxable income,
profits and gains that fall outside the presiding specific heads, but this section does not apply
to income which is not includible in the total income of the assessee at all, for e.g., the class
of income which under section 10 are exempted from tax. 3 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
heads specified in section 14. 4 The supreme court has made it cleat that the practice of
accountancy cannot override section 56 or any provision of the act. 5Section 56 provides that
following incomes, shall be chargeable to income-tax under the head "Income from other
sources", namely, dividends; winning from lotteries, betting, gambling; 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 whatsoever. 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 ; any sum
received by the assessee from his employees as contributions to any provident fund or

1
KAILASH RAI, TAXATION LAWS, 223(9TH ed, Allahabad Law Agency Publications, Haryana, 2016).
2
GIRJESH SHUKLA AND MAHIMA V. TIWARI, TAX LAW-1,211(1ST ed., Lexis Nexis Publications,
Haryana, India, 2015).
3
KANGA, PALIKHIVALA AND VYAS, THE LAW AND PRACTICE OF INCOME TAX, Vol. II, 1199(9 TH
ed.,Lexis Nexis, Butterworths Publications, New Delhi, India, 2004).
4
Id.
5
Tuticorin Alkali Chemicals and Fertilizers Ltd. v CIT., AIR 1998 SC, 315.

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superannuation fund or any fund set up under the provisions of the Employees' State
Insurance Act, 1948, or any other fund for the welfare of such employees. Income by way of
interest on securities, if the income is not chargeable to income-tax under the head "Profits
and gains of business or profession. Income from machinery, plant or furniture belonging to
the assessee and let on hire, if the income is not chargeable to income-tax under the head
"Profits and gains of business or profession";where an assessee lets on hire 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, if it is not chargeable to income-tax under the head "Profits and gains of business or
profession"; any sum received under a Keyman insurance policy including the sum allocated
by way of bonus on such policy. where any sum of money exceeding twenty-five thousand
rupees is received without consideration by an individual or a Hindu undivided family from
any person on or after the 1st day of September, 2004 but before the 1st day of April, 2006,
the whole of such sum. Provided that this clause shall not apply to any sum of money
received from any relative; or on the occasion of the marriage of the individual; or under a
will or by way of inheritance; or in contemplation of death of the payer; or from any local
authority or from any fund or foundation or university or other educational institution or
hospital or other medical institution or any trust or institution or from any trust or institution
registered under section 12AA. 6

Relative" means spouse of the individual; brother or sister of the individual; brother or sister
of the spouse of the individual; brother or sister of either of the parents of the individual; any
lineal ascendant or descendant of the individual; any lineal ascendant or descendant of the
spouse of the individual; spouse of the person where any sum of money, the aggregate value
of which exceeds fifty thousand rupees, is received without consideration, by an individual or
a Hindu undivided family, in any previous year from any person or persons on or after the 1st
day of April, 2006 but before the 1st day of October, 2009, the whole of the aggregate value
of such sum any sum of money, without consideration, the aggregate value of which exceeds
fifty thousand rupees, the whole of the aggregate value of such sum, any immovable
property, without consideration, the stamp duty value of which exceeds fifty thousand rupees,
the stamp duty value of such property; for a consideration which is less than the stamp duty
value of the property by an amount exceeding fifty thousand rupees, the stamp duty value of
such property as exceeds such consideration.

6
Id.

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Provided that where the date of the agreement fixing the amount of consideration for the
transfer of immovable property and the date of registration are not the same, the stamp duty
value on the date of the agreement may be taken for the purposes of this sub-clause: Provided
further that the said proviso shall apply only in a case where the amount of consideration
referred to therein, or a part thereof, has been paid by any mode other than cash on or before
the date of the agreement for the transfer of such immovable property any property, other
than immovable property, without consideration, the aggregate fair market value of which
exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property;
for a consideration which is less than the aggregate fair market value of the property by an
amount exceeding fifty thousand rupees, the aggregate fair market value of such property as
exceeds such consideration. 7

Provided that where the stamp duty value of immovable property is disputed by the assessee
on grounds mentioned the Assessing Officer may refer the valuation of such property to a
Valuation Officer, and the provisions of section 50C and sub-section (15) of section 155
shall, as far as may be, apply in relation to the stamp duty value of such property for the
purpose of sub-clause (b) as they apply for valuation of capital asset under those sections.
Provided further that this clause shall not apply to any sum of money or any property
received from any relative; or on the occasion of the marriage of the individual; or under a
will or by way of inheritance; or in contemplation of death of the payer or donor, as the case
may be; or from any local authority as defined in the Explanation to clause (20) of section 10;
or 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 clause (23C) of section 10; or
from any trust or institution registered under section 12AA or by way of transaction not
regarded as transfer under any transfer, in a demerger, of a capital asset by the demerged
company to the resulting company, if the resulting company is an Indian company; any
transfer by a shareholder, in a business reorganisation, of a capital asset being a share or
shares held by him in the predecessor co-operative bank if the transfer is made in
consideration of the allotment to him of any share or shares in the successor co-operative
bank. any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a
share or shares held by him in the amalgamating company, if the transfer is made in
consideration of the allotment to him of any share or shares in the amalgamated company
except where the shareholder itself is the amalgamated company, and the amalgamated
7
Supra note 1 at 224.

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company is an Indian company; For the purposes of this clause, "assessable" shall have the
meaning assigned to it in the Explanation 2 to sub-section (2) of section 50C; "fair market
value" of a property, other than an immovable property, means the value determined in
accordance with the method as may be prescribed7 ; "jewellery" shall have the meaning
assigned to it in the Explanation to sub-clause (ii) of clause (14) of section 2;"property"
means the following capital asset of the assessee, namely: immovable property being land or
building or both; shares and securities; jewellery; archaeological collections; drawings;
paintings; sculptures; any work of art; or bullion; "relative" means, in case of an individual
spouse of the individual;brother or sister of the individual; brother or sister of the spouse of
the individual;brother or sister of either of the parents of the individual; any lineal ascendant
or descendant of the individual;any lineal ascendant or descendant of the spouse of the
individual;spouse of the person in case of a Hindu undivided family, any member thereof;
"stamp duty value" means the value adopted or assessed or assessable by any authority of the
Central Government or a State Government for the purpose of payment of stamp duty in
respect of an immovable property; where a firm or a company not being a company in which
the public are substantially interested, receives, in any previous year, from any person or
persons, on or after the 1st day of June, 2010 [but before the 1st day of April, 2017], any
property, being shares of a company not being a company in which the public are
substantially interested, without consideration, the aggregate fair market value of which
exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property;
for a consideration which is less than the aggregate fair market value of the property by an
amount exceeding fifty thousand rupees, the aggregate fair market value of such property as
exceeds such consideration .8

Provided that this clause shall not apply to any such property received by way of a transaction
not regarded as transfer any transfer, in a scheme of amalgamation, of a capital asset being a
share or shares held in an Indian company, by the amalgamating foreign company to the
amalgamated foreign company, if at least twenty-five per cent of the shareholders of the
amalgamating foreign company continue to remain shareholders of the amalgamated foreign
company, and such transfer does not attract tax on capital gains in the country, in which the
amalgamating company is incorporated; any transfer in a demerger, of a capital asset, being a
share or shares held in an Indian company, by the demerged foreign company to the resulting

8
KANGA, PALIKHIVALA AND VYAS, THE LAW AND PRACTICE OF INCOME TAX, Vol. II, 1200(9TH
ed.,Lexis Nexis, Butterworths Publications, New Delhi, India, 2004).

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foreign company, if the shareholders holding not less than three-fourths in value of the
shares of the demerged foreign company continue to remain shareholders of the resulting
foreign company; and such transfer does not attract tax on capital gains in the country, in
which the demerged foreign company is incorporated or any transfer, in a demerger, of a
capital asset by the demerged company to the resulting company, if the resulting company is
an Indian company or any transfer by a shareholder, in a business reorganisation, of a capital
asset being a share or shares held by him in the predecessor co-operative bank if the transfer
is made in consideration of the allotment to him of any share or shares in the successor co-
operative bank or any transfer or issue of shares by the resulting company, in a scheme of
demerger to the shareholders of the demerged company if the transfer or issue is made in
consideration of demerger of the undertaking; "fair market value" of a property, being shares
of a company not being a company in which the public are substantially interested, shall have
the meaning assigned to it in the Explanation to clause (vii); where a company, not being a
company in which the public are substantially interested, receives, in any previous year, from
any person being a resident, any consideration for issue of shares that exceeds the face value
of such shares, the aggregate consideration received for such shares as exceeds the fair
market value of the shares. 9

Provided that this clause shall not apply 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 by a company from a class or classes of persons as may be notified by the Central
Government in this behalf. The fair market value of the shares shall be the value as may be
determined in accordance with such method as may be prescribed; or as may be substantiated
by the company to the satisfaction of the Assessing Officer, based on the value, on the date of
issue of shares, of its assets, including intangible assets being goodwill, know-how, patents,
copyrights, trademarks, licences, franchises or any other business or commercial rights of
similar nature, whichever is higher; "venture capital company", "venture capital fund" and
"venture capital undertaking" shall have the meanings respectively assigned to them in clause
(a), clause (b) and clause (c) of Explanation to clause (23FB) of section 10; income by way of
interest received on compensation or on enhanced compensation referred to in clause (b) of
section 145A; any sum of money received as an advance or otherwise in the course of
negotiations for transfer of a capital asset, if, such sum is forfeited; and the negotiations do
not result in transfer of such capital asset; where any person receives, in any previous year,
9
Id.

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from any person or persons on or after the 1st day of April, 2017, any sum of money, without
consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the
aggregate value of such sum; any immovable property, without consideration, the stamp duty
value of which exceeds fifty thousand rupees, the stamp duty value of such property; for a
consideration which is less than the stamp duty value of the property by an amount exceeding
fifty thousand rupees, the stamp duty value of such property as exceeds such consideration:
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: the
amount of fifty thousand rupees; and the amount equal to five per cent of the consideration.
Provided that where the date of agreement fixing the amount of consideration for the transfer
of immovable property and the date of registration are not the same, the stamp duty value on
the date of agreement may be taken. Provided further that the provisions of the first proviso
shall apply only in a case where the amount of consideration referred to therein, or a part
thereof, has been paid by way of an account payee cheque or an account payee bank draft or
by use of electronic clearing system through a bank account, on or before the date of
agreement for transfer of such immovable property.10

Provided also that where the stamp duty value of immovable property is disputed by the
assessee on grounds mentioned in sub-section (2) of section 50C, the Assessing Officer may
refer the valuation of such property to a Valuation Officer, and the provisions of section 50C
and sub-section (15) of section 155 shall, as far as may be, apply in relation to the stamp duty
value of such property for the purpose of this sub-clause as they apply for valuation of capital
asset under those sections;any property, other than immovable property, without
consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the
whole of the aggregate fair market value of such property; for a consideration which is less
than the aggregate fair market value of the property by an amount exceeding fifty thousand
rupees, the aggregate fair market value of such property as exceeds such consideration.
Provided that this clause shall not apply to any sum of money or any property received from
any relative; or on the occasion of the marriage of the individual; or under a will or by way of
inheritance; or in contemplation of death of the payer or donor, as the case may be; or from
any local authority as defined in the Explanation to clause (20) of section 10; or 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 clause (23C) of section 10; or from or by
10
Id.

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any trust or institution registered under section 12A or section 12AA; or by any fund or trust
or institution or any university or other educational institution or any hospital or other
medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-
clause (via) of clause (23C) of section 10; or by way of transaction not regarded as transfer
under clause (i) or 11[clause (iv) or clause (v) or] clause (vi) or clause (via) or clause (viaa) or
clause (vib) or clause (vic) or clause (vica) or clause (vicb) or clause (vid) or clause (vii) of
section 47; or from an individual by a trust created or established solely for the benefit of
relative of the individuala.Any compensation or other payment, due to or received by any
person, by whatever name called, in connection with the termination of his employment or
the modification of the terms and conditions relating thereto.11

11
§ 56, Income Tax Act,1961.

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CH-2. TAX DEDUCTIONS u/Sec. 57

The income chargeable under the head "Income from other sources" shall be computed after
making the following deductions, namely :—
(i) Allowable Deduction in respect of dividend or interest on securities-In the case of
dividends, other than dividends referred to in section 115-O, or interest on securities, any
reasonable sum paid by way of commission or remuneration to a banker or any other person
for the purpose of realising such dividend or interest on behalf of the assessee;
(ia) in the case of income of the nature referred to in sub-clause (x) of clause (24) of section 2
which is chargeable to income-tax under the head "Income from other sources", deductions,
so far as may be, in accordance with the provisions of clause (va) of sub-section (1) of section
36.

(ii)Allowable Deductions in Respect of income derived from the letting of machinery,

plant or furniture with or without building: In the case of income of the nature referred to
in clauses (ii) and (iii) of sub-section (2) of section 56, deductions, so far as may be, in
accordance with the provisions of sub-clause (ii) of clause (a) and clause (c) of section 30,
section 31 and sub-sections (1) and (2) of section 32 and subject to the provisions of section
38 ;(iia) in the case of income in the nature of family pension, a deduction of a sum equal to
thirty-three and one-third per cent of such income or fifteen thousand rupees, whichever is
less. 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.

(iii) Any other expenditure laid out or expanded wholly and exclusively for the purpose
of earning such income: Any other expenditure laid out or expended wholly and exclusively
for the purpose of making or earning such income.12

(iv) In the case of income of the nature referred to in clause (viii) of sub-section (2) of section
56, a deduction of a sum equal to fifty per cent of such income and no deduction shall be
allowed under any other clause of this section.13

12
KAILASH RAI, TAXATION LAWS, 223(9TH ed, Allahabad Law Agency Publications, Haryana, 2016).
13
§ 56, Income Tax Act,1961.

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In Eastern Investments Ltd vs CIT 14 the assessee, an investment company, under an

agreement with its principal shareholder, reduced its share capital and issued debentures
carrying company voluntarily on the ground of commercial expediency and in order
indirectly to facilitate the carrying on the company's activities.

The transaction was not challenged on the ground of fraud. The Supreme Court held that the
interest paid by the company on its debentures was allowable as expenditure incurred solely
for the purpose of earning the company's income, the fact that the transaction resulted in
considerable benefit to the principal shareholder being irrelevant. It was further held that in
the absence of fraud, the questions whether a transaction had the effect of diminishing the
assessee's taxable income, whether it was a prudent or wise transaction and whether it was
necessary for the assessee to enter into that transaction, were irrelevant in determining
whether expenditure relation to the transaction should be allowed. Recently, the Bombay high
court held that where the dominant objective of borrowing funds was to acquire controlling
interest in the company, the interest paid on the monies borrowed could not be claimed as a
deduction.

No deduction can be allowed under Section 57 from income earned on deposits or other
assets, in respect of interest paid on money borrowed to pay personal expenses or income-tax,
even though without such borrowing the assessee would have to withdraw the deposits or
dispose of the other assets in order to pay the expenses or tax. However, the position is
different where an assessee comes into possession of an asset subject to a liability which
attached to the asset. Any revenue expenditure which is incurred for the purpose of business
is deductible from the income-tax. Section 37 of the Income-tax Act, 1961 permits set-off of
expenses which are laid out or expended wholly and exclusively for the purposes of the
business or profession. On the other hand, revenue expenditure laid out or expended for
earning income from other sources is deductible under Section 57(iii) of the Act only is such
expenditure is laid out or expended for the purpose of making or earning such income. The
connection between the expenditure and the earning of income need not be direct - it may be
indirect. The expenditure must be incurred for the purpose of earning the income, the motive
behind the expenditure being irrelevant. It is not further necessary that "the purpose" should
have been fruitful and income should in fact have been earned in the accounting year as a

14
Eastern Investments Ltd vs CIT (1951) 20 ITR 1, 4 (SC).

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result of that expenditure. Interest on moneys borrowed to purchase shares should be allowed
as a deduction even if the shares have yielded no dividend in the relevant accounting year,
and even if there is no income at all under the head "other sources"15

In CIT vs Amritaben R Shah 16 , the assessee had purchased shares in Raval Tiles and
Marbles Pvt Ltd for Rs 2.07 lakh at par after January, 1972. Her husband also purchased
shares in the said company during the same period at par of face value of Rs 1,77,500 and her
father-in-law, Korshi Hirji Shah, purchased shares during the same period of Rs 34,500.
Thus, the entire shareholding of Rs 4.19 lakh in the said company was purchased by the
assessee, her husband and her father-in-law in a couple of months after January, 1972. In her
return for the assessment years 1976-77, 1997-78 and 1978-79, the assessee claimed
deduction under Section 57(iii)of the Income-tax Act, 1961, of the interest paid by her on the
loan obtained for acquiring the shares in the above company. The assessing officer
disallowed the claim of the assessee as, according to him, the loan taken by the assessee for
the purchase of shares was for the purpose of acquiring controlling interest in the company.
He was, therefore, of the opinion that, in such a situation, the interest on moneys borrowed
for purchasing shares was not allowable as a deduction under Section 57(iii) of the Act. On a
reference, the high court held that in order to get deduction, the expenditure should be
incurred wholly and exclusively for the purposed of making or earning the income from other
sources and that it should not be in the nature of capital expenditure. Section 58(1)(a) further
provides that no deduction would be allowed in case the expenditure is in the nature of
personal expenses of the assessee. The question which arose in this case was whether the
expenditure incurred for borrowing money forpurchasing shares for acquiring controlling
interest in the company could be held to be expenditure incurred wholly or exclusively for
earning income from dividend. There was no dispute in this case that the shares in question
were purchased by the assessee for the purpose of acquiring controlling interest in the
company and, therefore, it was not allowable as a deduction under Section 57(iii) of the Act.

A similar view was taken by the Gujarat high court in the case of Sarabhai Sons (P) Ltd vs
CIT.17 In that case, it was held that if the dominant purpose for which the expenditure was
incurred was not to earn income, the expenditure incurred in that behalf would fall outside the
15
CIT vs Rajendra Prasad Moody (115 ITR 519 (SC)); Ormerods (India) Ltd vs CIT (36 ITR 329); Chhail
Beharilal vs CIT (39 ITR 696); Apparao vs CIT (46 ITR 511); Mohammed Ghouse vs CIT (49 ITR 127)).
16
CIT vs Amritaben R Shah (238 ITR 777)
17
Sarabhai Sons (P) Ltd vs CIT (201 ITR 464).

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purview of Section 57(iii) of the Act. The Bombay high court was also of the same view in
Chinai and Co Pvt Ltd vs CIT.18 In that case, there was a dispute in regard to deduction of
expenditure under Section 37 of the Act. The expenditure was incurred by the assessee in
fighting another group of shareholdersto protect the investment in the erstwhile managed
company. The court held that such an expenditure was not a business expenditure. It may be
pertinent to mention the distinction in the language used by the Legislature in Sections 37(1)
and 57(iii) of the Act. Section 37 provides for deduction of expenditure incurred wholly and
exclusively "for the purpose of business", whereas Section 57(iii) provides for deduction only
of expenditure incurred wholly and exclusively "for the purpose of making or earning such
income". "Such income" refers to "income from other sources". The expression "for the
purpose of business" is narrower than the expression "for the purpose of making or earning
such income".

In order that an expenditure may be admissible under Section 57(iii), it is necessary that the
primary motive of incurring it is directly to earn income falling under the head "income from
other sources". That is not so under Section 37 which allows deduction of expenditure
"incurred wholly and exclusively forthe purposes of the business". Under Section 57(iii),
deduction will not be allowed if the expenditure is not incurred for the purpose of earning
income falling under the head "income from other sources". Before concluding, it will be
relevant to point out that expenditure on maintaining or preserving the source of income is
allowable as revenue expenditure incurred for making or earning the income arising from that
source. Expenses incurred by a director of a company in defending a suit brought for a
declaration that his election to the directorship was invalid, or in bringing acts of
mismanagement to the notice of the shareholders, were held allowable. However, where an
assessee derived income in the form of director's fees and dividends from a company which
he had promoted, and made a gift of Rs 3,00,000 to the company at a time when the company
was in financial difficulty, the sum was disallowed, for it was not expenditure incurred for the
purpose of earning the fees as director.

18
Chinai and Co Pvt Ltd vs CIT (206 ITR 616)

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 INCOME FROM OTHER SOURCES

CH-3. NON DEDUCTABLE EXPENSES u/Sec. 58

The following amounts shall not be deductible in computing the income chargeable under the
head "Income from other sources", namely :—
1. In the case of any assessee,- (i) any personal expenses of the assessee ;(ii) any
interest chargeable under this Act which is payable outside India (not being interest
on a loan issued for public subscription before the 1st day of April, 1938) on which
tax has not been paid or deducted at source; and (iii) any payment which is chargeable
under the head "Salaries", if it is payable outside India, unless tax has been paid
thereon or deducted there from or deducted from source.19
2. Amount Of Wealth Tax: Section 58(1A) makes section 40(a)(ii-a) applicable in
computing chargeable under the head "Profits and gains of business or profession". 20
3. Payment to relatives or associations, cash payment etc.[Section 58(2)]:The
provisions of section 40A shall, so far as may be, apply in computing the income
chargeable under the head "Income from other sources" as they apply in computing
the income chargeable under the head "Profits and gains of business or profession".
4. Expenditure incurred by a foreign company for earning royalty or technical fees,
etc: In the case of an assessee, being a foreign company, the provisions of section
44D shall, so far as may be, apply in computing the income chargeable under the head
"Income from other sources" as they apply in computing the income chargeable under
the head "Profits and gains of business or profession".
5. In the case of an assessee having income chargeable under the head "Income from
other sources", no deduction in respect of any expenditure or allowance in connection
with such income shall be allowed under any provision of this 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, whatsoever.

Provided that nothing contained in this sub-section shall apply in computing the income of an
assessee, being the owner of horses maintained by him for running in horse races, from the
activity of owning and maintaining such horses.
Explanation.—For the purposes of this sub-section, "horse race" means a horse race upon
which wagering or betting may be lawfully made. 21

19
KAILASH RAI, TAXATION LAWS, 228(9TH ed, Allahabad Law Agency Publications, Haryana, 2016).
20
TAXMANN, INCOME TAX ACT,1.419(Taxmann Publication Pvt.Ltd., New Delhi, India,2017).

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 INCOME FROM OTHER SOURCES

CH-4 PROFITS CHARGEABLE TO TAX U/59

According to section 41(1) where an allowance or deduction has been made in the assessment
for any year in respect of loss, expenditure or trading liability incurred by the assessee
(hereinafter referred to as the first-mentioned person) and subsequently during any previous
year, the first-mentioned person has obtained, whether in cash or in any other manner
whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of
such trading liability by way of remission or cessation thereof, the amount obtained by such
person or the value of benefit accruing to him shall be deemed to be profits and gains of
business or profession and accordingly chargeable to income-tax as the income of that
previous year, whether the business or profession in respect of which the allowance or
deduction has been made is in existence in that year or not; or the successor in business has
obtained, whether in cash or in any other manner whatsoever, any amount in respect of which
loss or expenditure was incurred by the first-mentioned person or some benefit in respect of
the trading liability referred to in clause (a) by way of remission or cessation thereof, the
amount obtained by the successor in business or the value of benefit accruing to the successor
in business shall be deemed to be profits and gains of the business or profession, and
accordingly chargeable to income-tax as the income of that previous year. For the purposes of
this sub-section, the expression "loss or expenditure or some benefit in respect of any such
trading liability by way of remission or cessation thereof" shall include the remission or
cessation of any liability by a unilateral act by the first-mentioned person under clause (a) or
the successor in business under clause (b) of that sub-section by way of writing off such
liability in his accounts. For the purposes of this sub-section, "successor in business" means,
where there has been an amalgamation of a company with another company, the
amalgamated company; where the first-mentioned person is succeeded by any other person in
that business or profession, the other person; where a firm carrying on a business or
profession is succeeded by another firm, the other firm; where there has been a demerger, the
resulting company. 22 Section 59(1) extends these provisions of section 41(1) to income from
other sources also.23

21
KAILASH RAI, TAXATION LAWS, 229(9TH ed, Allahabad Law Agency Publications, Haryana, 2016).
22
§ 41(1), Income Tax Act,1961.
23
Income From Other Sources, INCOME TAX MANAGEMENT, available at
http://incometaxmanagement.com/Pages/Gross-Total-Income/Other-Sources/Deductions-from-Income-from-
Other-Sources.html(last visited on Aug.21,2018).

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 INCOME FROM OTHER SOURCES

CH-5 CONCLUSION AND SUGGESTION

Income from Other Sources is one of the heads of income chargeable to tax under the Income
tax Act. 1961. Any income that is not covered in the other four heads of income is taxable
under income from other sources, because of this, it is known as residuary head of income.
All the incomes excluded from salary, capital gains, house property or business & profession
(PGBP) are included in IFOS, except those which are exempt under the Income Tax
Act.Dividend, income from securities, income from undisclosed sources, Royalty, etc., are
incomes which are taxable under other sources u/s 56. Some special provisions are applicable
to some incomes only like dividend u/s 2(22)(e) is taxable but dividend received from Indian
company normally is not taxable. Commission or brokerage is given to get dividend to
banker, repairs and depreciation to plant and machinery, etc., are allowed as deduction u/s 57.
Income which are taxed under other heads of income like income from salary, income
from house property, income from business, income from capital gain. The income
which are not taxed under these any kind of heads of income are taxed under this head
of income from other sources so it is called as other source income or residual income.
Income which are not earned as salary, from business, from properties owned are
treated as other source because the source of income is not regular or casual.
Speculation transaction which are made at stock exchange is an example of other source
because income is earned from non-regular business. If assessee keeps mercantile
system of accounting, income which are chargeable under the head are taxed on due
basis. If assessee keeps cash system of accounting, income which are chargeable under
the head are taxed on receipt basis. 24 The position would now be different as in the case
of dividends which are exempt from tax under Section 10 (33) of the Income-tax Act,
because such income enjoys complete exemption and does not enter into the
computation of income under Section 56. In such an event, the question of claiming
deduction under Section 57(iii) would not arise.25

24
Keerthivasan, Income from other sources under income tax act 1961, General Finance Articles, (Nov. 17,
2012) available at http://www.indiastudychannel.com/resources/156881-Income-from-other-sources-under-
income-tax-act-1961.aspx (last visited on Aug.19,2018).
25
H P Ranina, Issues in deduction of revenue expenditure from income tax available at
http://expressindia.indianexpress.com/fe/daily/19990906/fex06059.html (last visited on Aug.21,2018).

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 INCOME FROM OTHER SOURCES

BIBLIOGRAPHY
NEWSPAPER: Indian Express

ONLINE ARTICLES AND WEBSITES

1. Income From Other Sources, INCOME TAX MANAGEMENT, available at

http://incometaxmanagement.com/Pages/Gross-Total-Income/Other-
Sources/Deductions-from-Income-from-Other-Sources.html
2. Keerthivasan, Income from other sources under income tax act 1961, General Finance
Articles, (Nov. 17, 2012) available at
http://www.indiastudychannel.com/resources/156881-Income-from-other-sources-
under-income-tax-act-1961.aspx.
3. H P Ranina, Issues in deduction of revenue expenditure from income tax available at
http://expressindia.indianexpress.com/fe/daily/19990906/fex06059.html.
4. https://taxguru.in/income-tax/tax-treatment-income-sources.html.
5. http://www.indiastudychannel.com/resources/156881-Income-from-other-sources-
under-income-tax-act-1961.aspx.

BOOKS
1. RAI KAILASH, TAXATION LAWS, (9TH ed, Allahabad Law Agency Publications,
Haryana, 2016).
2. SHUKLA GIRJESH SHUKLA AND TIWARI.V. MAHIMA, TAX LAW-1, (1ST ed.,
Lexis Nexis Publications, Haryana, India, 2015).
3. PALIKHIVALA KANGA AND VYAS, THE LAW AND PRACTICE OF INCOME
TAX, Vol. II, (9TH ed.,Lexis Nexis, Butterworths Publications, New Delhi, India,
2004).
4. TAXMANN, INCOME TAX ACT,(Taxmann Publication Pvt.Ltd., New Delhi,
India,2017).

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