TAX LAW PROJECT

ON

INCOME FROM OTHER

SOURCES

By: - Syed Mohammad Ahmad

Section-B, 3rd Year,

B.A.L.L.B (Hons.), Faculty of Law

Jamia Millia Islamia

 ACKNOWLEDGMENT

I would like to express my special thanks of gratitude to my professor,

Dr. Kahkashan Y. Danyal ma’am, who gave me the golden opportunity
to do this wonderful project on the topic “Income from Other Sources”,
which also helped me in doing a lot of research and I came to know
about so many new things. I am really thankful to her.
 INDEX

1. INTRODUCTION

2. INCOMES PROVIDED UNDER SECTION 56(2)

3. ADMISSISBLE DEDUCTIONS

4. CONDITIONS TO BE SATISFIED FOR CLAIMING

DEDUCTIONS

5. INADMISSIBLE DEDUCTIONS

6. BIBLIOGRAPHY
 INCOME FROM OTHER SOURCES

1.1. INTRODUCTION

Tax is a financial charge imposed by the Government on income, commodity or activity.

Therefore, Government imposes two types of taxes namely Direct Taxes and Indirect
Taxes.

Article 265 of the Constitution of India provides that no tax shall be levied or collected
except by the authority of law. Thus, the tax proposed to be levied or collected must be
within the legislative competence of the legislature imposing the tax. Entry 82 of List 1
(Union List) to the Seventh Schedule of the Constitution of India confers power on
Parliament to levy taxed on income other than agricultural income. Thus, it is Central
Government’s responsibility for collection of income tax. Thus, the Law governing
direct taxation in India is Income Tax Act 1961 (hereinafter referred to as “the Act”).
The Act provides for different heads under which the incomes are taxable: -

1. Income from Salaries

2. Income from House Property
3. Profits and Gains from Business and Professions
4. Capital Gains
5. Income from Other Sources

Income chargeable under the Income Tax Act which does not specifically fall for
assessment under any of the heads i.e., “income under the head Salaries, Capital Gains,
House Property, Profit and Gains from Business and Profession” must be charged to tax
under the head “income from other sources”. This head is thus a residuary head of
income under which income can be computed only after deciding whether the particular
item of income is otherwise assessable under any of the first four heads. Section 56 of
the Act defines Income from other Sources.

Therefore, there are two types of incomes which are taxable under the head IOS and
these are the incomes which cannot be placed in the four heads of the Income tax
(Section 56(1)) and those incomes which are specifically provided by the Income Tax
Act, 1961 which are to be included in Income from Other Sources (Section 56(2)).
1.2. INCOMES PROVIDED UNDER SECTION 56(2)

 Dividend (Section 56(2)(i)]- Dividend income other than dividend referred

under Section 10(34) shall be included under income from other sources.
 Keyman Insurance Policy- Amount received under a keyman insurance Policy,
including bonus on each policy. If it is not taxable under any other head of
income shall be chargeable under Income from other sources.
 Winnings from lotteries [Section 56(2)(ib)]- 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 shall be chargeable
to tax under Income from other sources. The entire income of winnings, without
any expenditure or allowance or deductions under Section 80C to 80U, will be
taxable. However, expenses relating to the activity of owning and maintaining
race horses are allowable. Further, such income is taxable at a special rate of
income tax i.e. 30%+ surcharge+ cess (Section 115BB).
 Contribution to Provident Fund- Income of the nature referred to in Section
2(24)(x) (relating to certain contributions to any provident fund or
superannuation fund or any fund set up under the provisions of the ESI Act or
any other fund for the welfare of such employees received by the asseessee from
his employees in his capacity as an employer) will be chargeable to income tax
under the head “income from other sources” if such income is not chargeable to
income tax under the head “profits and gains of business or profession”. But if
the employer deposits such amount on or before due date of deposit applicable
for such contribution, he will be allowed a deduction on account of the same.
[Section 56(2)(ic)].
 Income by way of Interest on Securities- If the income by way of interest on
securities is not chargeable to income tax under the head ‘Profit and gains of
business or profession’ than such income shall be taxable under Income from
other sources.
 Income from hiring of machinery etc.- Section 56(2)(ii) 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” shall be taxable under Income from other sources.
 Income from hiring out of building with machinery- Section 56(2)(iii) Where
an assessee lets on hire machinery, plant or furniture belonging to him and also
building and the letting of the building 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” shall
be taxable under Income from other sources.
 Money Gifts- 56(2)(v) 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
57[but before the 1st day of April, 2006], the whole of such sum shall be taxable
under the head income from other sources.
56(2)(vi) 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:
Provided that these clauses shall not apply to any sum of money received—
(a) from any relative; or
(b) on the occasion of the marriage of the individual; or
(c) under a will or by way of inheritance; or
(d) in contemplation of death of the payer; or
[(e) from any local authority as defined in the Explanation to clause (20) of
section 10; (f) 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
(g) from any trust or institution registered under section 12AA.]
 Explanation.—For the purposes of this clause, "relative" means—
(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 the person referred to in clauses (ii) to (vi);

 Gifts in Cash or in Kind- Where an individual or a Hindu undivided family

receives, in any previous year, from any person or persons on or after the 1st
day of October, 2009 5[but before the 1st day of April, 2017],—
(a) any sum of money, without consideration, the aggregate value of which
exceeds fifty thousand rupees, the whole of the aggregate value of such sum;
(b) any immovable property,—
(i) without consideration, the stamp duty value of which exceeds fifty thousand
rupees, the stamp duty value of such property;
(ii) 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:
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;
(c) any property, other than immovable property,—
 (i) without consideration, the aggregate fair market value of which exceeds
fifty thousand rupees, the whole of the aggregate fair market value of such
property;
(ii) 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 where the stamp duty value of immovable property as referred to
in sub-clause (b) 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 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—
(a) from any relative; or
(b) on the occasion of the marriage of the individual; or
(c) under a will or by way of inheritance; or
(d) in contemplation of death of the payer or donor, as the case may be; or
(e) from any local authority as defined in the Explanation to clause (20)
of section 10; or
(f) 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
(g) from any trust or institution registered under section 12AA; [ or]
(h) by way of transaction not regarded as transfer under clause (vicb) or clause
(vid) or clause (vii) of section 47.]

Explanation.—For the purposes of this clause,—

(a) "assessable" shall have the meaning assigned to it in the Explanation 2 to

sub-section (2) of section 50C;
 (b) "fair market value" of a property, other than an immovable property, means
the value determined in accordance with the method as may be prescribed7;
(c) "jewellery" shall have the meaning assigned to it in the Explanation to sub-
clause (ii) of clause (14) of section 2;
(d) "property" means the following capital asset of the assessee, namely:—
(i) immovable property being land or building or both;
(ii) shares and securities;
(iii) jewellery;
(iv) archaeological collections;
(v) drawings;
(vi) paintings;
(vii) sculptures;
(viii) any work of art; or
(ix) bullion;

(e) "relative" means,—

(i) in case of an individual—
(A) spouse of the individual;
(B) brother or sister of the individual;
(C) brother or sister of the spouse of the individual;
(D) brother or sister of either of the parents of the individual;
(E) any lineal ascendant or descendant of the individual;
(F) any lineal ascendant or descendant of the spouse of the individual;
(G) spouse of the person referred to in items (B) to (F); and
(ii) in case of a Hindu undivided family, any member thereof;
(f) "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;

 Shares as Gift- Section 56(2)(viia) 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—
(i) without consideration, the aggregate fair market value of which exceeds
fifty thousand rupees, the whole of the aggregate fair market value of such
property;
(ii) 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 such property received by way
of a transaction not regarded as transfer under clause (via) or clause (vic) or
clause (vicb) or clause (vid) or clause (vii) of section 47.
Explanation—For the purposes of this clause, "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);

 Premium received on Issuance of Shares- 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:
Provided that this clause shall not apply where the consideration for issue of
shares is received—
(i) by a venture capital undertaking from a venture capital company or a
venture capital fund; or
(ii) by a company from a class or classes of persons as may be notified by the
Central Government in this behalf.
Explanation.—For the purposes of this clause,—
(a) the fair market value of the shares shall be the value—
 (i) as may be determined in accordance with such method as may be
prescribed9; or
(ii) 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;
(b) "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- Section 56(2)(viii)

Income received on compensation or enhanced compensation referred to in
clause (b) of Section 145A shall be chargeable to tax under Income from other
sources.
 Advance money received- any sum of money, received as an advance or
otherwise in the course of negotiations for transfer of a capital asset is chargeable
to income tax under the head ‘Income from other sources’ if such sum is forfeited
and the negotiations do not result in transfer of such capital asset.

1.3. DEDUCTIONS ALLOWABLE IN COMPUTING INCOME FROM OTHER

SOURCES

The income chargeable under the head “Income from other sources” is the income after
making the following deductions:

1. Commission or remuneration for realising dividend or interest on Securities :

Section 57(i) and (iii): any reasonable sum paid by way of commission or remuneration
to a banker or any other person for the purpose of realising dividend or interest on
securities on behalf of the assessee is deductible. Though unlike in Section 43(2) the
word “paid” is not defined for the head “Income from Other Sources”, the aforesaid
expenditure is deductible on “due basis” in the case of mercantile system of accounting
or on “payment” basis in the case of cash system of accounting [Section 145].

Any expenditure incurred for earning dividend from a domestic company is not
deductible. However, expenditure for earning dividend from a foreign company is
deductible under Section 57(iii). There was a conflict of opinion whether interest on
money borrowed for investing in shares in a foreign company was allowable as
deduction if shares had not yielded income. The controversy was however laid to rest
by the Supreme Court in CIT v. Rajendra Prasad Moody1, wherein the Court held that
the interest paid was allowable as deduction even if the shares had not yielded any
income during the previous year.

2. Deduction in respect of employee’s contribution towards staff welfare schemes:

Section 57(ia): Deduction in respect of any sum received by a taxpayer as contribution
from his employees towards any welfare fund of such employees is allowable only if
such sum is credited by the tax payer to the employee’s account in the relevant fund
before the due date. For this purpose “due date” is the date by which the asseessee is
required as employer to credit such contribution ot the employees account in the
relevant und under the provisions of any law or terms of contract of service or otherwise.

3. Repairs, depreciation in the case of letting out of plant, machinery, furniture,

building: In the case of income chargeable under Section 56(2)(ii) the following
expenses are deductible:

a. Current repairs in respect of building

b. Insurance premium against risk of damage or destruction of the premises

c. Repairs and insurance of machinery, plant or furniture

d. Depreciation

1
(1978) 115 ITR 519
4. Standard deduction in the case of family pension- In the case of income in the
nature of family pension, the amount deductible is Rs. 15,000 or 33.34 percent of such
income, whichever is less.

5.Any other expenses for earning income- Section 57(iii) Any other expenditure is
deductible under Section 57(iii) if the following four conditions are satisfied :

a. the expenditure must be laid out or expended wholly and exclusively for the purpose
of making or earning the income;

b. the expenditure must not be in the nature of capital expenditure;

c. it must not be in the nature of personal expenses of the assesse;

d. it must be laid out or expended wholly and exclusively for the purpose of making or
earning such income [ Virmati Ramkrishna v. CIT (1981)]2

1.4. CONDITIONS TO BE SATISFIED FOR CLAIMING DEDUCTIONS

 In the case of CIT v. Basant Rai Takhat Singh3, it was held that to be deductible
under Section 57(iii) the expenditure in question must be incurred in the year in
which the income forming the basis of assessment arose.
 The expenditure is laid out wholly and exclusively for the purpose of earning
such income. If the purpose of earning income is coupled with some other
extraneous purpose, it will not be possible to say that the deduction under Section
57 (ii) is earned by the assessee. [Smt. Padmavati Jaykrishna v. CIT]4
 It is not in the nature of capital expenditure.
 It is not a personal expenditure.

2
(1981) 131 ITR 659 (Guj)
3
(1933) 1 ITR 197 (PC)
4
(1975) 101 ITR 153
1.5. AMOUNT NOT DEDUCTIBLE
Section 58 of the Act provides for those expenses which shall not be deducted in
computing income chargeable under the head ‘Income from other sources’:
(a) in the case of any assessee,—
(i) any personal expenses of the assessee ;
(ia) any expenditure of the nature referred to in sub-section (12) of section 40A ;
(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 under Chapter XVII-B;
(iii) any payment which is chargeable under the head "Salaries", if it is payable
outside India, unless tax has been paid thereon or deducted therefrom under Chapter
XVII-B ;

(1A) The provisions of [sub-clauses (ia) and (iia)] of clause (a) of section 40 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".

(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".
(3) 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".
(4) 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.
1.6. BIBLIOGRAPHY

https://www.incometaxindia.gov.in/pages/acts/income-tax-act.aspx
http://www.icnl.org/research/library/files/India/IndiaIncomeTax1961.pdf
http://shodhganga.inflibnet.ac.in/bitstream/10603/147895/9/09_chapter%20
-i.pdf
http://www.legalserviceindia.com/article/l85-Application-of-Income.html