Thursday, 27 June 2013

Income From Other Sources

Income From Other Sources

Synopsis
Section 2(24) defines the term "income" under the Act, and the same is charged to tax by section 4 of the Act. Section 14 enumerates the different heads under which the income of an assessee is classified, viz.
  1. salaries,
  2. Income from house property,
  3. profit and gains of business and profession,
  4. capital gains, and
  5. Income from Other sources.
Income of every kind which is not to be excluded from the total income under the Act, and if it is not charged to tax under the heads A to D specified in Section 14, shall be charged under the head income from other sources. Thus Section 56 deals with this residuary head of income and covers all such taxable income,
Nature of income and the basis of charge
Sub-section 2 to section 56 enumerates various types of income which would be chargeable to tax under the residuary head, viz.
  1. Income by way of dividends [which includes deemed dividend as has been referred to in section 2(22)(e) of the Act].
Exemptions are:

  1. Dividend income referred to in section 115-O (on which dividend distribution tax has been paid),
  2. Any income by way of income received in respect of units of a Mutual Fund, Administrator of a specified undertaking or from a specified company; (income arising from transfer of units is not exempt).
  1. Income by way of winning from lotteries, crossword puzzles, races, card games and other games, gambling or betting, etc. [Section 2(24)(ix)].
  2. Any sum received from employees by way of contribution to any P.F., ESIC or superannuation fund if such income is not chargeable under the head Profit and Gains of Business or Profession [Section 2(24)(x)].
  3. Any sum received under a key-man insurance policy including amount allocated by way of bonus on such policy, if not chargeable under the head Salaries or profit and gains of business or profession [section 2(24)(xi)].
  4. Income by way of interest on securities if not chargeable under the head profit and gains of business or profession [section 2(24)(id)].
  5. Income from letting of machineries, plants or furniture belonging to assessee, if not chargeable to tax under the head profit and gains of business or profession [section 2(24)(ii)].
  6. Income from letting of machineries, plants or furniture belonging to assessee and also building, where letting of building is not separable from letting of such machineries etc. then entire income therefrom, if not chargeable to tax under the head profit and gains of business or profession. [Section 2(24)(iii)].
  7. Any sum of money or specified properties, the aggregate value of which exceeds fifty thousand rupees in a year, received by an individuals or HUF from any person or persons other than the specified person/s or occasion, without any consideration (generally understood as "gift") the whole of such sum.
This clause is amended by the Finance Act, 2009 w.e.f 1-10-2009 to bring to tax not only the sum of money received in cash but also to include specified properties other than cash received by an individual or HUF either without any consideration or inadequate consideration.
The provisions of this clause apply to individuals and HUF where he/it receives any sum of money or any specified properties either without any consideration or for an inadequate consideration from a person or persons other than specified persons or occasion. The amount chargeable under this clause would be:
  1. In case of any sum of money, received in any previous year on or after 1.10.2009, where the aggregate value of which exceeds fifty thousand rupees, without any consideration the whole of such sum.
  2. In case of any immovable property being land or building or both received on or after 1.10.2009 without consideration and if the stamp duty value of such property exceeds fifty thousand rupees the whole of such stamp duty value. (Thus any immovable property whose stamp duty valuation is less than fifty thousand rupees no addition would be made under this clause)
Note : If the assessee claims before the AO that the value adopted or assessed by the stamp duty valuation authority exceeds fair market value of the property or if the stamp duty paid is subsequently revised in any appeal or revision the assessing officer may refer the valuation of such property to a valuation officer and the provisions of sub-section (2) of Section 50C and sub-section (15) of Section 155 shall apply accordingly.
  1. a) In case of any property other than immovable property being following capital assets of the assessee viz.
  1. shares and securities, or
  2. jewellery or archaeological collections, drawings, paintings, sculptures,
  3. any work of art or bullion, received by the assessee in any previous year without any consideration and that aggregate fair market value of such property exceeds rupees fifty thousand then the whole of the aggregate fair market value of such property.
b) In case of any property other than immovable property being following capital assets of the assessee viz. shares and securities or jewellery or archaeological collections, drawings, paintings, sculptures, any work of art or bullion, received by the assessee in any previous year for a consideration which is less than aggregate fair market value of such property by rupees fifty thousand, the difference between the fair market value and the consideration received shall be the amount included as income.
(Fair market value in case of property other than immovable property shall be the value which is determined in accordance with the method as may be prescribed.)
Persons or occasions specified under clauses vi and vii of sub-section (2) of Section 56 :
  • Any relative; i.e., 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 descendants of the individual, any lineal ascendants or descendants of the spouse of the individual, and spouse of the persons referred to hereinbefore. (No definition of relative in respect of HUF has been laid down — this is a grey area).
  • On the occasion of marriage of the individual
  • Under a will or by way of inheritance,
  • In contemplation of death of the payer
  • Amount received from any local authority as defined in the explanation to clause (20) of section 10
  • Amount received 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
  • Any amount received from any trust or institution registered u/s 12AA.
  1. With effect from 1st June, 2010
where a firm or a company other than the one in which public are substantially interested, receives in any previous year, any property being shares of any company other than the company in which public are substantially interested —
  • without any consideration and that the fair market value of such property exceeds rupees fifty thousand than the whole of the aggregate fair market value of such property shall be included as income of the firm or the company as the case may be.
  • any property being shares received by the assessee in any previous year for a consideration which is less than aggregate fair market value of such property by rupees fifty thousand, the difference between the fair market value and the consideration received shall be the amount included as income.
[Note: Provisions of this section would not apply in case where the property which received by a transaction which is not regarded as transfer under clause ((via), or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of section 47.]
(For the purpose of this clause fair market value of property shall be the value which is determined in accordance with the method as may be prescribed.)
  1. The Finance Act, 2009 w.e.f. A.Y. 2010-11 provides for taxation of Interest on compensation or on enhanced compensation received in any year. Before the insertion of this section the compensation or enhanced compensation were generally spread over the years for which it was received. However as per the amended provisions irrespective of the method of accounting adopted by the assessee, the interest on the compensation/enhanced compensation shall be taxable only in the year in which such interest is received by the assessee.
  2. Apart from the income which are mentioned hereinabove any income which is chargeable to tax under the Act and does not fall in any other heads mentioned in section 14 (A-D), shall be charged to tax under this head.
Applicability of [Section 145(1)] in case of income chargeable under this head
Section 145(1) provides that income chargeable under the head income from other sources shall be computed either on cash or mercantile system of accounting, depending on the method of accounting regularly employed by the assessee. The assessee is also required to follow the Accounting Standards notified by The Central Government (for Accounting Standard refer notification No. 9949 [F. No. 132/7-95-TPL] dt. 25.1.1996).
DEDUCTION ALLOWED FROM INCOME CHARGEABLE UNDER THIS HEAD [SECTION 57]
In case of income from dividend (other than Dividend referred 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 for realizing dividend (other than dividend referred to in Section 115-O), or interest as the case may be on behalf of the assessee.
In case of sum received by assessee from his employees as contribution to any funds, etc. as referred to in Section 2(24)(x)
Any amount paid or credited by the assessee to the employee’s account of the relevant fund/s as referred to in section 2(24)(x) of the Act, provided such sum is paid or credited by the assessee to the employee’s account of the relevant fund on or before due date specified under those Acts.
In case of letting of machinery, plant, furniture, and building
In respect of building:
  1. amount paid by the assessee on the account of current repairs to the premises if the premises are occupied by the assessee otherwise than as the tenant.
  2. any premium paid for the risk of damage or destruction to the premises and
  3. depreciation and unabsorbed depreciation as per section 32 (i), subject however, to the provisions of section 38 which restrict such allowance based on usages.
In respect of plant and machinery and furniture
  1. amount paid by the assessee on the account of current repairs to the plant and machineries
  2. any premium paid for the risk of damage or destruction to such plant and machineries and
  3. depreciation and unabsorbed depreciation as per section 32, subject however, to the provisions of section 38 which restrict such allowance based on usages.
In case of income in the nature of family pension received by family of the employee in whose hand such amount is chargeable
Deduction is allowed to the extent of lower of (a) one-third of such income or (b) Rs. 15,000 (Rs. 12,000 up to the assessment year 1997-98).
For this purpose family pension means a regular monthly amount payable by the employer to a person belonging to the family of the employee in the event of his death.
In case of income of the nature Interest on compensation or on enhanced compensation received in any year
Deduction is allowed of a sum equal to 50% of such Interest on compensation or on enhanced compensation received in any year. Other than this no other deduction will be allowed under any other clause of this section.
Any other expenditure [general deductions Section 57(iii)]
Any other expenditure (not being in nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning income chargeable under the head ‘Income from other sources’, is deductible.
For the purpose of claiming deduction under this clause it is not necessary that expenditure incurred should result in earning of income [CIT vs. Rajendra Prasad Moody 115 ITR 519 (SC)]
AMOUNTS NOT DEDUCTIBLE
Following sum irrespective of whatever or not allowed as deduction under Section 57, shall not be deductible in computing the income under the head "Income from Other Sources".
  1. Personal expenses of the assessee.
  2. Any interest which is payable outside India on which tax has not been paid or deducted.
  3. Any payment chargeable under the head Salaries, payable outside India, if tax has not been paid or deducted therefrom.
  4. Any sum paid on account of wealth tax.
  5. Any amount disallowed as per section 40A in so far as they are applicable to the income chargeable under this head as they may apply to income chargeable under profits and gains of business and profession.
  6. In case of foreign company, expenditure in respect of royalty or fees for technical services as deductible under the provision of section 44D in so far as they are applicable to income chargeable under the head profit and gains.
  7. In case of income in the nature of winning from lotteries, crossword puzzles, races including horse race and games of any sorts, etc, no deduction for expenses or allowances shall be allowed which are incurred in connection with such income. However, this provision of disallowance does not apply in computing income from the activity of owning and maintaining race horses of an assessee being the owner of the horses maintained by him for running in horse races.
Applicability of section 14A
Further by virtue of section 14A, no deduction is allowed in respect of expenditure incurred by the assessee in relation to the income which does not form part of the total income under the Act.
PROFITS CHARGEABLE TO TAX [SECTION 59]
Section 59 provides for applicability of section 41(1) of the Act as it would be applicable to income chargeable under the head Profits and Gains of Business and Profession. Thus if any expenditure, loss or trading liabilities incurred by the assessee in any previous year and is allowed as deduction while computing the Income under this head and if later any amount of recovery is made against any such expenses, for which deduction was previously allowed under this head, shall be included in the income of the assessee in the year in which such recovery is made as "Income from Other Sources".

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