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 or 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 deemeddividend as has been referred to in section 2(22) of the Act]. Although section 8 of the Act provides taxing of dividend income, it has been brought to tax under this head of income.
   However, CBDT has issued clarification regarding trade advance not to be treated as deemed dividend under section 2(22)(e) vide circular No. 19/2017 dated 12.06.2017. CBDT has clarified that it is a settled position that trade advances, which are in the nature of commercial transactions, would not fall within the ambit of the word ‘advances’ in section 2(22)(e) of the Act and therefore, the same would not be treated as deemed dividend. Exemptions available until A.Y. 2020-2021:
   Exemptions available until A.Y. 2019-2020:
   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).
2. Income by way of winning from lotteries, crossword puzzles, races, card games and other games, gambling or betting, etc. [Section 2(24)(ix)].
3. 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)].
4. Any sum received under a keyman 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)].
5. Income by way of interest on securities if not chargeable under the head Profit and Gains of Business or Profession [Section 56(2)(id)].
6. Income from letting of machineries, plant or furniture belonging to assessee, if not chargeable to tax under the head Profit and Gains of Business or Profession [Section 56(2)(ii)].
7. Income from letting of machineries, plant 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 56(2)(iii)].
8. Any sum received by a company (in which public are not substantially interested), from any person being a resident, any consideration for issue of shares on premium
   that exceeds the fair market value of the shares shall be deemed to be income of such company. However, this is not applicable where shares are issued by a venture
   capital undertaking to a venture capital company or a venture capital fund or a specified fund like category I and II Alternate Investment Fund (AIF). This also not applicable to company which issues shares to certain class of persons in case of “start up” companies. [Section 56(2)(viib)]
9. Interest received on compensation or enhanced compensation.[Section 56(2)(viii)]
10. Any sum received as an advance against transfer of capital asset if such advance is forfeited and the negotiations do not result in transfer of capital asset. [Section 56(2)(ix)]

THE NEW SUB-SECTION (x) WHICH IS APPLICABLE FROM 1-4-2017 TO ALL ASSESSEES IS ENUMERATED FOR REFERENCE:

11. Taxability of Gifts:
    Where any person (which includes individual, HUF, AOP, BOI, artificial juridical person, firm, cooperative society, company) receives, in any previous year, from any person or persons:
    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 higher of –

(i) fifty thousand rupees, and
(ii) 10% of the consideration (AY 2021-22 onwards),

the stamp duty value of the property as exceeds such 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 for the purposes of this sub-clause:

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, hasbeen 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 or through such other electronic mode as may be prescribed, on or before the date of agreement for transfer of such immovable property:

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 of the Act, 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:

EXCEPTIONS

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 except received by persons covered in sub-section (3) of section 13; or

• from or by any trust or institution registered under section 12A or section 12AA except received by persons covered in sub-section (3) of section 13; 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 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 individual;

• from such class of persons and subject to such conditions, as may be prescribed:

• by an individual, from any person, in respect of any expenditure actually incurred by him on his medical treatment or treatment of any member of his family, for any illness related to COVID-19 subject to such conditions, as the Central Government may, by notification in the Official Gazette, specify in this behalf;

• by a member of the family of a deceased person—

  1. from the employer of the deceased person; or

  2. from any other person or persons to the extent that such sum or aggregate of such sums does not exceed ten lakh rupees,                 

where the cause of death of such person is illness related to COVID-19 and the payment is—

1. received within twelve months from the date of death of such person; and

2. subject to such other conditions, as the Central Government may, by notification in the Official Gazette, specify in this behalf. 

Here, "family", in relation to an individual, shall have the same meaning as assigned to it in Explanation 1 to clause (5) of section 10;

For the purposes of the taxability of gifts,—

1. the expressions "assessable", "fair market value", "jewellery", "relative" and "stamp duty value" shall have the same meanings as respectively assigned to them in the Explanation to clause (vii); and

2. the expression "property" shall have the same meaning as assigned to it in clause (d) of the Explanation to clause (vii) and shall include virtual digital asset.               

For the purposes of the exceptions, “Relative” means –

1. In the 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 any of the above

2. In case of HUF, any member thereof.

1. With effect from AY 2019-20, 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. [Section 56(2)(xi)].

Applicability of Section 145(1) of the Act 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] dated 25-1-1996.

DEDUCTION ALLOWED FROM INCOME CHARGEABLE UNDER THIS HEAD [SECTION 57]

Restriction has been imposed about extent of amount that will be allowable by specifying that “ No deduction shall be allowed from the dividend income, or income in respect of units of a Mutual Fund specified under clause (23D) of section 10 or income in respect of units from a specified company defined in the Explanation to clause (35) of section 10, other than deduction on account of interest expense, and in any previous year such deduction shall not exceed twenty per cent of the dividend income, or income in respect of such units, included in the total income for that year, without deduction under this section.” This restriction shall be effective from AY 2021-22. This proviso shall have overriding effect on all sub sections with respect to allowability of expenditure.

In case of income from dividend (other than Dividend referred in section 115-O) or interest on securities [Section 57(i)]

Any reasonable sum, paid by way of commission or remuneration to a banker or any other person for the purpose for realising dividend (other than dividend referred to in Section 115-O), or interest as the case may be on behalf of the assessee is deductible.

In case of sum received by assessee from his employees as contribution to any staff welfare funds etc. [Section 57(ia)]

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 [Section 57(ii)]

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

In case of income in the nature of family pension received by family of the employee in whose hand such amount is chargeable [Section 57(iia)]

Deduction is allowed to the extent of lower of (a) one-third of such income or (b) Rs. 15,000.

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.

The family pension received by the widow or children or nominated heirs of a member of the armed forces (including pre military forces) of the Union, where the death of such member has occurred in the course of operational duties, in specified circumstances would however, be exempt under section 10(19).

The family pension received by any member of the family of individual who had been in the service of central or state Government and had been awarded “Param Vir Chakra” or “Vir Chakra” or other notified gallantry awards would be exempt under section 10(18)(ii).

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 [SECTION 58]

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 amount disallowable u/s 40(a)(i) or (ia) - i.e. for failure to deduct tax at source, if applicable (AY 2019-20).
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 profits 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.

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”.

RESIDUAL INCOME

Any income chargeable to tax under the act but not falling under any other head of income shall be chargeable to tax under the head “income from other source” e.g. salary received by MP/MLAs will not be chargeable under the head “Salary” but will be chargeable under the head “Income from other source” under section 56.