Income from other sources

STUDY NOTE - 9
INCOME FROM OTHER SOURCES

This Study Note includes

• Various Provisions of the Income Tax Act for determination of income under the
head “Income from other sources”

9.1 INCOME FROM OTHER SOURCES - BASIS OF CHARGE [Sec. 56]

This is the residual head of charge of income. Where a source of income does not specifically
fall under any one of the other heads of income viz. Salaries, Income from House Property,
Profits and Gains of Business or Profession, Capital gains, such income is to be brought to
charge under sec. 56 under the head ‘Income from other sources’- S.G. Mercantile Corp. P. Ltd.
v. CIT 83 ITR 700(SC).
This residuary head of income would be invoked only if all the following conditions are ful-
filled

1. There is a taxable income- Sec. 2(24) read with Sec. 4 & 5

2. The income is not exempt from tax under - Sec. 10 to 13A
3. Income should not fall under any of the four specific heads of income viz. salaries, income
from House Property, Profits and gains of Business or Profession and capital gains.

9.2 CHARGEABLE INCOME [ Sec. 56(2) ]

As per Sec. 56(2), the following incomes are expressly stated to be chargeable to tax under the
head “Income from other sources”—

(i) Dividend [Sec. 56 (2) (i)]

(ii) Any winnings from lotteries, crossword puzzles, races including horse races, card games
and other games of any sort or form, gambling or betting of any form or nature whatso-
ever- [Sec. 56(2)(ib)]
(iii) Any sum received by assessee from his employees as contributions to any provident fund
or 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 the employees, if such income is
not chargeable under the head “Profits and gains of Business or Profession”- [Sec. 56(2)(ic)].
(iv) Income by way of interest on securities, if it is not chargeable as Profits and gains of busi-
ness i.e. where securities are held as investments- Sec. 56(2)(id).

144 Applied Direct Taxation

(v) Income from machinery, plant or furniture belonging to the assessee let on hire, if the
income is not chargeable to income-tax under the head, Profits and gains of Business or
Profession - Sec. 56(2)(ii).
(vi) Income from letting of machinery, plant or furniture, if such income is not chargeable
under the head “Profits and gains of Business or Profession”- Sec. 56(iii)
(vii) Any sum received under “Key man insurance policy including bonus, if not charged un-
der the head “Profits and gains of Business or Profession”- Sec. 56(iv)
(viii) Gifts aggregating to more than Rs. 50,000 in a year on or after 1st Day of April, 2006 - Sec.
56(vi)
Some important items of income stated above are hereunder discussed:
DIVIDEND [Sec. 56(2)(I)]
Dividend means the sum paid to or received by a shareholder proportionate to his shareholding
in a company out of the total sum distributed. The definition of “Dividends” under section
2(22) is an inclusive definition and it means dividend as normally understood and include in
its connotation several other receipts set out in the definition- Kantilal Manilal v CIT 41 ITR
275(SC).

The term “Dividends” includes deemed dividends of the following nature :

(i) Any distribution of accumulated profits entailing the release of company’s assets- Sec.
2(22)(a).
(ii) Any distribution of debenture stock, deposit certificates to shareholders and bonus to pref-
erence shareholder- Sec. 2(22)(b).
(iii) Any distribution to shareholders on liquidation of company to the extent to which the
distribution is attributable to the accumulated profits of the company, other than distribu-
tion in respect of any share issued for full cash consideration where the shareholder is not
entitled to participate in the surplus assets in the event of liquidation- Sec. 2(22)(c).
(iv) Any distribution on reduction of share capital to the extent to which the company pos-
sesses accumulated profit except a distribution in respect of any share issued for full cash
consideration where the shareholder is not entitled to participate in the surplus asset in
the event of liquidation — Sec. 2(22)(d).
(v) Any payment by way of advance or loan by a closely held company following :
(a) a shareholder, being a person who is the beneficial owner of shares (other than shares
entitled to a fixed rate of dividend) holding not less than 10% of voting power ; or
(b) any concern in which such shareholder is a member or partner and in which he has a
substantial interest; or
(c) a person acting on behalf or for the individual benefit of any such shareholder - Sec.
2(22)(e)]

Applied Direct Taxation 145

 Income from other sources

Note:-
(i) An advance or loan to a shareholder of the said concern in the ordinary course of the
business of the company where the lending of money is a substantial part of the company’s
business will not be regarded as dividend.
(ii) Any payment made by a company on purchase of its own shares from a shareholder in
accordance with sec. 77A of the Companies Act, 1956, is not treated as dividend.
(iii) Distribution of shares by the resulting company to the shareholder of the demerged com-
pany is also not to be treated as dividend.
DIVIDEND EXEMPT
(i) Dividend declared/distributed/paid by domestic company including deemed dividend
(i.e. other than the dividend u/s. 2(22)(e) or dividend from a foreign company) is exempt
in the hands of shareholder. However, the company has to pay dividend distribution tax
on it under section 115-O [Sec. 10(34)]
(ii) any dividend : (a) on units of a Mutual Fund specified under clause (23D); or (b) inrespect
of units from the Administrator of the specified undertaking; or (c) in respect of units
from the specified company [Sec. 10(35)]
EMPLOYEES’ CONTRIBUTIONS TO PROVIDENT FUND ETC, [Sec. 56(2)(ic)]
It has to be remembered that any sum received by the assessee from his employees as contribu-
tions to any provident fund or 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
is income in the hands of the assessee and is chargeable as income from other sources if not
chargeable as Profits and gains on Business or Profession [Sec. 2(24)(x)]
However, the tax payer is entitled to deduction of the sum of such contributions received from
his employees if such sum is credited by the taxpayer to the employee’s account in the relevant
fund on or before the due date. Here, the due date means the date by which the assessee is
required as an employer to credit an employees’ contribution to the employees’ account in the
relevant fund under an Act, rule, etc. issued in that behalf [Sec. 36(1)(va)].
Therefore, any sum received by the assessee from his employees as contributions to any fund
as aforesaid and is not deposited or deposited belatedly to the employee’s account, it becomes
income of the assessee.

INTEREST ON SECURITIES
Interest on securities is chargeable as income from other sources if it is not chargeable as Profits
and gains of Business or Profession, i.e. when the securities are held as investment.

(a) Basis of Charge – If the books of account are maintained on cash basis the interest on
securities will be chargeable on receipt basis. However, where books of account are main-
tained on mercantile system or where no method of accounting is regularly employed by
the assessee, such interest will be chargeable on “accrual basis” i.e. as the income of the

146 Applied Direct Taxation

 Previous Year in which such interest is due to the assessee – second proviso to sec. 145(1).
(b) Interest on securities exempt – The interest on securities of the following description is
exempt from tax –
(i) interest on notified securities, bonds or certificates issued by the Central Govt.
(ii) interest to an individual or a HUF on 7% Capital investment Bond or on notified
Relief Bonds.
iii) interest to non-resident Indians on notified bonds.
iv) interest on securities held by issue Department of the Central Bank of Ceylon.
v) Tax planning - Taxpayer is entitled to the deduction of any reasonable sum paid as
commission or remuneration to a banker or any other person for the purpose of real-
izing interest on securities. Similarly, he will also be entitled to the deduction of inter-
est on capital borrowed for investing in securities.
INCOME FROM INSEPARABLE LETTING OF MACHINERY, PLANT OR FURNITURE
WITH BUILDING
If an assessee lets on hire machinery, plant or furniture and also buildings and the letting of
building is inseparable from the letting of machinery, plant or furniture, the income from such
letting would be chargeable to tax under the residuary head where it is not chargeable under
the ‘Profits and gains of Business or Profession”.
What is therefore, necessary to examine is whether the letting is by way of business. Whether a
particular letting is of business has to be decided in the circumstances of each case. Each case
has to be looked at from a businessman’s point of view to find out whether the letting was the
doing of business or the exploitation of his property by the owner. A commercial asset is only
an asset used in a business and nothing else, and business may be carried on with practically
all things. Therefore, it is not possible to say that a particular activity is business because it is
concerned with an asset with which trade is carried on- Sultan Bros. (P) Ltd. vs. CIT (1964) ITR
353 (SC).
Illustration: A lets out buildings along with air conditioning plant, tube-wells, refrigerators,
etc. Though separate rent is fixed in the lease deed refers to them collectively as “demised
premise”, it will be a case of inseparable letting and the entire rental income will be assessable
as income from other sources.

GIFT
Now gift received during the previous year shall be included in the income if the aggregate of
the gifts received exceeds Rs. 50,000.
However, the following gifts are not included in taxable income, viz.
(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

Applied Direct Taxation 147

 Income from other sources

(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; 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.
For this 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).
In respect of gifts from relatives, although exempt from tax, in respect of income earned from
such a gift, provisions relating to clubbing of income apply in certain cases e.g. gift received
from spouse and father-in-law.

GIFTFROM THE FOLLOWING RELATIVES IS TAX FREE

148 Applied Direct Taxation

OTHER INCOMES INCLUDIBLE UNDER THE HEAD
Apart from the incomes specified in Sec. 56(2) of the Act, as mentioned above, courts have held
that incomes of the following nature will be chargeable as income from other sources:
Income of company in winding-up. Vijay Laxmi Sugar Mills Ltd. v. CIT
Gratuity received by a director who is not an employee of the company. CIT v. Lady Navajbai
R.J. Tata
Interest is assessed under the head ‘Income from other sources’, if it not taxed as business or
professional income. CIT v. Govinda Choudhury & Sons .
Interest on tax refunds Smt. B. Seshamma v. CIT
Interest earned prior to commencement of business - CIT v. Modi Rubber Ltd. / Goa Carbon
Ltd. v. CIT
Interest earned on short-term investment of funds borrowed for setting up of factory during
construction of factory before commencement of business has to be assessed as income from
other sources and it cannot be held to be non-taxable on ground that it would go to reduce
interest on borrowed amount which would be capitalized - Tuticorin Alkali Chemicals & Fer-
tilizers Ltd. v. CIT .
The Institute of Chartered Accountants of India, a recognized authority on accounting prin-
ciples, has suggested in its publication ‘A study on expenditure during construction period’
that interest income earned during construction period by temporary investment of surplus
funds may be set off against interest expenses incurred during this period - CIT v. Maharashtra
Electrosmelt Ltd.
Interest earned by a company on deposits during pre-production period is assessable as its
income from other sources, and cannot be set off against pre-operative expenditure which is
allowable under section 35D - Saraf Textile Industries v. CIT
Gross interest income is taxable - Where the assessee-HUF, carrying on business, took loan
against fixed deposits in banks and utilised a major portion of the loan on the construction of a
house (which was not a business asset), the gross interest from the deposits in banks is to be
taxed without any set off towards interest attributable to the loan portion utilised for the con-
struction of the house - Kaviraj Mahipat Singh v. CIT
Winnings from Lotteries, even if accrue or arise outside India they are part of taxable income of
a resident assessee in view of section 5(1)(c) and such income has to be treated as income
derived from other sources as provided by section 56(2)(ib) - CIT v. Chaman Lal
Tax on salary of assessee borne by payer, for whom assessee was working under a contract,
under a legal obligation - Emil Webber v. CIT
Sale receipts prior to commencement of business CIT v. Rassi Cement Ltd.
If the business as a whole is let out the income i.e. the rent, would not be liable to be assessed as
income from business. If only the commercial assets are leased out the income would continue

Applied Direct Taxation 149

 Income from other sources

to be income from business- CIT Vs. Biswanath Roy, CIT Vs. Kuya & Khas Kuya Colliery Co.
Reimbursement of taxes on salary – Z. Zizlaw Skakuz Vs. CIT
Interest on employee’s contribution to unrecognised provident fund- CIT vs. Hyatt
Interest on bank deposits of idle business funds - Collis Line P. Ltd. Vs. ITO
Interest deposit of share capital in bank before commencement of business Traco Cable Co.
Ltd. vs. CIT
Interest on realizations put by liquidator of company in fixed deposits- Vijay Lakshmi Sugar
Mills Ltd. vs. CIT
Interest received from Government u/s. 214/243/244/244A of the Income Tax Act, 1961- Smt.
B. Seshmma vs. CIT
Income from subletting of a House Property by a tenant.
Insurance commission, if it is not assessable as income from business.
Family Pension
Director’s Sitting Fees for attending board meeting
Income from undisclosed sources
Income received after discontinuance of business
Examinorship fee received by a teacher.

INCOME NOT CHARGEABLE UNDER RESIDUARY HEAD

Income of the following nature will not be chargeable as income from other sources but on
business income –
I. Interest on short-term deposit with State Bank received by a cooperative society carrying
on banking business- Bihar State Cooperative Bank Ltd. Vs. CIT
II. Income to the principal from business carried on through an agent- CIT vs. S.K. Sahana
and Sons Ltd.
III. Portion of business received by beneficiary from trust or wakf-CIT vs. P. Krishna Warier.
IV. Income from temporary letting out of business assets as a part of exploitation is to be
assessable as business income and not as income from other sources- CIT vs. Vikram Cot-
ton Mills Ltd.
INCOME FROM LETTING OF MACHINERY, PLANT OR FURNITURE
The income from machinery, plant or furniture belonging to the assessee and let out on hire is
chargeable as income from other sources, if it is not chargeable as Profits and gains of Business
or Profession. - Sec. 56 (2) (ii).

150 Applied Direct Taxation

DEDUCTIONS [Sec. 57]
The income chargeable under the head “Income from other sources” shall be computed after
the following deductions, namely –

(a) In the case of dividend income and interest on securities—

(i) ]any reasonable sum paid by way of remuneration or commission for the purpose of
realizing dividend or interest, and
(ii) interest on borrowed capital if required for investment in shares or securities.
(b) In the case of income from machinery, plant or furniture let on hire
(i) current repairs to building - sec. 30(a)(ii)
(ii) current repairs to machinery, plant or furniture and insurance premium -sec.(31)
(iii) depreciation on building, machinery, plant or furniture - sec. (32) subject to sec.38
and
(iv) unabsorbed depreciation - sec. 32(2).
(c) In the case of income in the nature of family pension- Rs. 15,000 or 33.33% of such income
whichever is less.
(d) In the case of income specified in sec. 2(24)(x) i.e. deductions from employee salary for any
fund, expenses of nature specified in – S. 36(1)(va) i.e. contribution to such fund on or
before the due date.
(e) Any other expenditure (not being a personal or capital expenditure) expended wholly
and exclusively for the purpose of earning such income. However, this deduction is not
available to a foreign company in respect of dividend income.
AMOUNTS NOT DEDUCTIBLE [Sec. 58]
The following amounts are not deductible while computing income from other sources—
O Personal expenses of the assessee – Sec. 58(1)(a)(i)
O Interest payable outside India on which tax has not been paid or deducted at source
S.58(1)(a)(ii)
O Salary payable outside India on which no tax has been paid or deducted at source – Sec.
58(1)(a)(iii)
O Any sum paid on account of wealth tax- sec. 58(1A).
O any expenditure referred to sec. 40A i.e. excessive payment to relatives u/s. 40A(v) & 20%
of cash payment where it exceeds Rs. 20,000 u/s. 40A(3).
O Where an assessee has income from other sources no deduction of any expenditure or
allowance in connection with such income shall be allowed under any other provisions of
the Act in computing the income by way of any winnings from lotteries, crossword puzzles,

Applied Direct Taxation 151

 Income from other sources

races including horse races, and games – S.58(4). However, this prohibition will not apply to
the owner of the horse maintained by him in horse race in computing his income from the
activity of owning and maintaining such horses – Proviso to Sec. 58(4).
PROFITS CHARGEABLE TO TAX [Sec. 59]
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 and subsequently during any
previous year he has obtained any amount or benefit in any form in respect of such loss or
expenditure or trading liability the amount or value of benefit obtained by such person shall be
deemed to be income from other sources. If any amount or benefit is obtained by a successor it
shall be chargeable to income-tax as income of such a successor.

In short, provision of sec. 41(1) of the Act are made applicable while computing the income of
an assessee under the head income from other sources, as they apply in computing the income
of an assessee under the head ‘Profits and gains of Business or Profession”.
METHOD OF ACCOUNTING [Sec. 145]
Income chargeable under the head “Income from other sources” shall be computed in accor-
dance with cash system of accounting or mercantile system of accounting regularly employed
by the assessee.

Exception to this general rule is deemed dividend income covered by sub-clause (e) of clause
(22) of section 2 which is chargeable to tax on payment basis as prescribed under section 8 of
the Income-tax and not on the basis of method of accounting followed.
Points to be noted:
(i) An assessee is entitled to change his regular method of accounting by another regular
method and such change can be effected in respect of apart of assesses income.- Snow
White Food Products Co Ltd. v/s CIT
(ii) Where assesses is allowed to change his method of accounting from an accounting year he
is entitled to claim computation of income on changed basis.- Seth Chemical Works v/s
CIT
(iii) A company was regularly valuing its stock under total cost method and wanted to change
the method of valuation which excluded certain expenses which were to be included un-
der former method. The company allowed to change method. CIT v/s Carborandum Uni-
versal Ltd.
(iv) Mere circumstances that appellant should dividend income under head IFOS in its return
could not in law decide nature of dividend income. Brooke Bond & Co Ltd. v/s CIT– SC

Case Law:
The assessee Company was a manufacturer of zinc concentrate and was apparently an inter-
mediary product which was captively consumed by the company, the company valued the
same at cost or net realizable value whichever is lower. The Supreme Court considered as to

152 Applied Direct Taxation

whether the assessee was right in adopting the London Metallic Exchange price when in past
they valued at domestic prices. The Court held that when the assessee changed the valuation of
stock, the assessee must have cogent reasons to do so and such change must be in accordance
with generally accepted accounting principles. This fact must be disclosed to the shareholders
and users of financial statements. The company appears to have failed in this aspect of the
matter.

CIT vs Hindustan Zinc 291 ITR 391.

Applied Direct Taxation 153