Income From Other Sources

Any income, profits or gains includible in the total income of an assessee, which cannot be included under any of the preceding heads of income, is chargeable under the head ‘Income from other Sources’. Thus, this head is the residuary head of income and brings within its scope all the taxable income, profits or gains of an assessee which fall outside the scope of any other head. Therefore, when any income, profit or gain does not fall precisely under any of the other specific heads but is chargeable under the provisions of the Act, it would be charged under this head.

Casual Income

Casual income means income in the nature of winning from lotteries, crossword puzzles, races including horse races, card games and other games of any sort, gambling, betting etc. Such winnings are chargeable to tax at a flat rate of 30% under section 115BB.

Conditions:

a. No expenditure or allowance can be allowed from such income.

b. Deduction under Chapter VI-A is not allowable from such income.

c. Adjustment of unexhausted basic exemption limit is also not permitted against such income.

Any sum of money or value of property received without consideration or for inadequate consideration to be subject to tax in the hands of the recipient [Section 56(2)(x)]

In order to prevent the practice of receiving sum of money or the property without consideration or for inadequate consideration, section 56(2)(x) brings to tax any sum of money or the value of any property received by any person without consideration or the value of any property received for inadequate consideration.

Sum of Money: If any sum of money is received without consideration, and the aggregate value of which exceeds ₹ 50,000, the whole of the aggregate value of such sum is chargeable to tax.

Immovable property:

I. If an immovable property is received

A. Without consideration, the stamp duty value of such property would be taxed as the income of the recipient if it exceeds ₹ 50,000.

B. For a consideration, which is less than the stamp duty value of the property by an amount exceeding ₹ 50,000, the difference between the stamp duty value and the consideration shall be chargeable to tax in the hands of the assessee as “Income from other sources”.

II. Value of property to be considered where the date of agreement is different from date of registration: Taking into consideration the possible time gap between the date of agreement and the date of registration, the stamp duty value may be taken as on the date of agreement instead of the date of registration, if the date of the agreement fixing the amount of consideration for the transfer of the immovable property and the date of registration are not the same, provided whole or part of the consideration has been paid by way of an account payee cheque or an account payee bank draft or by use of electronic clearing system (ECS) through a bank account on or before the date of agreement.

III. If the stamp duty value of immovable property is disputed by the assessee, the Assessing Officer may refer the valuation of such property to a Valuation Officer. In such a case, the provisions of section 50C and section 155(15) shall, as far as may be, apply for determining the value of such property.

As per section 50C, if such value is less than the stamp duty value, the same would be taken for determining the value of such property, for computation of income under this head in the hands of the buyer.

Movable Property:

If the movable property is received

1. Without consideration, the aggregate fair market value of such property on the date of receipt would be taxed as the income of the recipient, if it exceeds ₹ 50,000.

2. For a consideration which is less than the fair market value of the property by an amount exceeding ₹ 50,000, and the difference between the aggregate fair market value and such consideration exceeds ₹ 50,000, such difference would be taxed as the income of the recipient.

Applicability of section 56(2)(x):

The provisions of section 56(2)(x) would apply only to property which is the nature of a capital asset of the recipient and not stock-in-trade, raw material or consumable stores of any business of the recipient.

Non-applicability of section 56(2)(x):

However, any sum of money or value of property received in the following circumstances would be outside the ambit of section 56(2)(x) –

I. From any relative; or

II. On the occasion of marriage; or

III. Under a will or by way of inheritance; or

IV. In contemplation of death of the payer or donor, as the case may be; or

V. From any local authority as defined in the Explanation to section 10(20); or

VI. From any fund or foundation or university or other educational institution or hospital, etc. referred to in section 10(23C); or

VII. From any trust or institution registered under section 12AA; or

VIII. By any fund or trust or institution or any university or other educational institution or any hospital, etc. referred to in Section 10(23C)(iv)/(v)/(vi)/(via).

IX. By way of the transaction not regarded as a transfer under section 47.

X. From an individual by a trust created or established solely for the benefit of a relative of the individual.

Relative includes:

a. In case of an individual –

I. spouse of the individual;

II. brother or sister of the individual;

III. brother or sister of the spouse of the individual;

IV. brother or sister of either of the parents of the individual;

V. any lineal ascendant or descendant of the individual;

VI. any lineal ascendant or descendant of the spouse of the individual;

VII. spouse of any of the persons referred to above.

b. In the case of Hindu Undivided Family, any member thereof.

Tax Implications

Tax TDS Implications

Consideration received in excess of FMV of shares issued by a closely held company to be treated as income of such company, where shares are issued at a premium [Section 56(2)(viib)]

a. Section 56(2)(viib) brings to tax the consideration received from a resident person by a Closely held company, which is in excess of the fair market value (FMV) of shares. Such excess is to be treated as the income taxable under section 56(2) under the head “Income from Other Sources”, in cases where the consideration received for issue of shares exceeds the face value of shares i.e. where shares are issued at a premium.

b. However, these provisions would not be attracted where consideration for issue of shares is received: by a Venture Capital Undertaking (VCU) from a Venture Capital Fund (VCF) or Venture Capital Company (VCC); or by a company from a class or classes of persons as notified by the Central Government for this purpose.

c. Fair market value of the shares shall be the higher of, the value as may be –

a) determined in accordance with the prescribed method; or

b) substantiated by the company to the satisfaction of the Assessing Officer, based on the value of its assets on the date of issue of shares.

Note: Value of assets would include the value of intangible assets being goodwill, know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature.

Interest received on compensation/enhanced compensation deemed to be income in the year of receipt and taxable under the head “Income from Other Sources” [Sections 56(2)(viii)]

Clause (b) of section 145A provides that the interest received by an assessee on compensation or on enhanced compensation shall be deemed to be his income for the year in which it is received, irrespective of the method of accounting followed by the assessee. Section 56(2)(viii) provides that income by way of interest received on compensation or on enhanced compensation referred to in clause (b) of section 145A shall be assessed as “Income from other sources” in the year in which it is

For reference: The Hon’ble Supreme Court has, in Rama Bai v. CIT (1990) 181 ITR 400, held that arrears of interest computed on delayed or on enhanced compensation shall be taxable on accrual basis. The tax payers are facing genuine difficulty on account of this ruling, since the interest would have accrued over a number of years, and consequently the income of all the years would undergo a received.

Advance forfeited due to the failure of negotiations for the transfer of a capital asset to be taxable as “Income from other sources” [Section 56(2)(ix)]

With effect from A.Y.2015-16, section 56(2)(ix) provides for the taxability of any sum of money, received as an advance or otherwise in the course of negotiations for the transfer of a capital asset. Such sum shall be chargeable to income-tax under the head ‘Income from other sources’ if such sum is forfeited and the negotiations do not result in the transfer of such capital asset. Prior to A.Y.2015-16, any advance retained or received in respect of a negotiation for transfer which failed to materialize is reduced from the cost of acquisition of the asset or the written down value or the fair market value of the asset, at the time of its transfer to compute the capital gains arising therefrom as per section 51. In case the asset transferred is a long-term capital asset, indexation benefit would be on the cost so reduced.

It may be noted that advance received and forfeited up to 31.3.2014 has to be reduced from the cost of acquisition while computing capital gains since such advance would not have been subject to tax under section 56(2)(ix).

Income chargeable under the head “Income from other sources” only if not chargeable under the head “Profits and gains of business or profession” –

I. Any sum received by an employer-assessee from his employees as contributions to any provident fund, superannuation fund or any other fund for the welfare of the employees.

II. Income from letting out on hire, machinery, plant or furniture.

III. Where letting out of buildings is inseparable from the letting out of machinery, plant or furniture, the income from such letting.

IV. Interest on securities

Keyman Insurance Policy

Any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy is chargeable under the head “Income from other sources” if such income is not chargeable under the head “Profits and gains if business or profession” or under the head “Salaries” i.e. if such sum is received by any person other than the employer who took the policy and the employee in whose name the policy was taken.

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 sources” e.g. Salary received by an MPs/MLAs will not be chargeable to income-tax under the head ‘Salary’ but will be chargeable as “Income from other sources” under section 56.

Dividend Income

The term ‘dividend’ as used in the Act has a wider scope and meaning than under the general law. The dividend is covered by sections 2(22)(a) to (e). For a detailed discussion on the dividend, click here.

Deductions allowable from “Income from other Sources”

1. For Dividends 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 realizing such dividend or interest.

2. Recovery from employees as a contribution to any provident fund etc. in terms of clause (x) of section 2(24), then, a deduction will be allowed in accordance with the provisions of section 36(1)(va) i.e. to the extent the contribution is remitted before the due date.

3. Income from letting on the hire of machinery, plant, and furniture, with or without building, the following items of deductions are allowable in the computation of such income:

a. the amount paid on account of any current repairs to the machinery, plant or furniture.

b. the amount of any premium paid in respect of insurance against the risk of damage or destruction of the machinery or plant or furniture.

c. the normal depreciation allowance in respect of the machinery, plant or furniture, due thereon.

4. In the case of income in the nature of family pension, a deduction of a sum equal to 33-1/3 percent of such income or ₹ 15, 000, whichever is less, is allowable.

5. Any other expenditure not being in the nature of capital expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income.

6. 50% of income by way of compensation/enhanced compensation received chargeable to tax under section 56(2)(viii). No deduction would be allowable under any other clause of section 57 in respect of such income.

Deductions not allowable [SECTION 58]

No deduction shall be made in computing the “Income from other sources” of an assessee in respect of the following items of expenses:

1) In the case of any assessee:

I) any personal expense;

II) any interest which is payable outside India on which tax has not been paid or deducted at source.

III) any payment taxable in India as salaries, if it is payable outside India unless the tax has been paid thereon or deducted at source.

2) Disallowance of payments to relatives and associate concerns and disallowance of payment or aggregate of payments exceeding `10,000 made to a person during a day otherwise than by account payee cheque or draft or use of Electronic clearing system through a bank account covered by section 40A will be applicable to the computation of income under the head ‘Income from other Sources’ as well.

3) 30% of expenditure shall not be allowed, in respect of a sum which is payable to a resident and on which tax is deductible at source if

i) such tax has not been deducted or;

ii) such tax after deduction has not been paid on or before the due date of return specified in section 139(1).

4) No deduction in respect of any expenditure or allowance in connection with income by way of earnings 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 shall be allowed in computing the said income.

The prohibition will not, however, apply in respect of the income of an assessee, being the owner of race horses, from the activity of owning and maintaining such horses. In respect of the activity of owning and maintaining race horses, expenses incurred shall be allowed even in the absence of any stake money earned. Such loss shall be allowed to be carried forward in accordance with the provisions of section 74A.

Method of Accounting [SECTION 145]

Income chargeable under the head “Income from other sources” has to be computed in accordance with the cash or mercantile system of accounting regularly employed by the assessee. However, deemed dividend under section 2(22)(e) is chargeable to tax on payment basis under section 8, irrespective of the method of accounting followed by the assessee.

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