Income From Other Sources

Income From Other Sources

Section 56 of the Income Tax Act relates to the provisions of ‘Income from Other Sources’. Under Section 56 (1) of the Act, income of every kind which is not to be excluded from the total income shall be chargeable to income tax under the head ‘Income from Other Sources’, if it is not charged to income tax under any other head of income which includes incomes from salaries, house property, capital gains, and business and profession. Income from other sources is a residuary head of income, i.e., income which is not taxable under any other head will be taxable under this particular head.

Following incomes shall be specifically charged to tax under the head ‘Income from other sources’:

Dividend Income {Section 56(2)(i)}

Dividends are chargeable to tax under the head ‘Income from Other Sources’. The taxability or otherwise of dividend income received by a shareholder is based upon the provisions explained in Table:

(A) Dividend received from a foreign company	Fully taxable
(B) Taxability of Dividend received from a domestic company
Type of Dividend	Taxability Criteria
1. Deemed dividend under Section 2(22)(e)	Fully exempt under Section 10(34)
2. In case of Actual Dividend received; and Deemed Dividend under Section 2(22)(a) to 2(22) (d)	If the aggregate dividend does not exceed ₹10 lakhs during the previous year	Fully exempt under Section 10(34)
	If the aggregate dividend exceeds ₹10 lakhs during the previous year	₹10 lakhs exempt under Section 10(34); and remaining amount taxable under Section 115BBDA

For this purpose, the term ‘dividend’ is explained as follows:

• Section 2(22)(a): Distribution of accumulated profits by a company to its shareholders, entailing the release of all or some of the company’s assets, is deemed as a dividend in the hands of the shareholder.
  
  
• Section 2(22)(b): Distribution of debentures/deposit certificates by a company to its shareholders or distribution of bonus shares to preference shareholders, is deemed as a dividend in the hands of the shareholder to the extent of accumulated profits of the company.
  
  
• Section 2(22)(c): Distribution made by a company to its shareholders on its liquidation is deemed as a dividend in the hands of the shareholder to the extent of accumulated profits of the company immediately prior to liquidation.
  
  
• Section 2(22)(d): Distribution made by a company to its shareholders on reduction of its share capital is deemed as a dividend in the hands of the shareholder to the extent of accumulated profits of the company.
  
  
• Section 2(22)(e): Any advance or loan payment made by a closely held company to a beneficial shareholder holding 10% or more of equity shares is deemed as a dividend in the hands of the shareholder to the extent of the accumulated profits of the company

Sum of Money or Value of Property Received by Any Person {Section 56(2)(x)}

Any value of money or property received without consideration or value of property received for inadequate consideration are charged to tax under the head ‘Income from Other Sources’ in the hands of the recipient. Table below summarises the taxable value in case of receipt of money or property without consideration or receipt of property for inadequate consideration:

Nature of Asset	Consideration	Taxable Amount
1. Money received	Without consideration	The whole amount is taxable if the same is more than ₹50,000
2. Movable property received	Without consideration	The total fair market value (FMV) of the property if the same is more than ₹50,000
3. Movable property received	For inadequate consideration	The difference between the total fair market value (FMV) of the property and the consideration, if the difference is more than ₹50,000
4. Immovable property received	Without consideration	The total stamp duty value of the property if the same is more than ₹50,000
5. Immovable property received	For inadequate consideration	Difference between the total stamp duty value of the property and the consideration, if the difference is more than ₹50,000 or 10% of such consideration, whichever is higher

The provisions of this section apply only in case of a property which is of the nature of capital asset in the hands of the recipient and not stock-in-trade/consumables/raw materials of the business of the recipient. Hence, only transfer of capital assets, whether without consideration or for inadequate consideration, is covered under the provisions of this Section. Some receipts of money or value of the property are outside the ambit of Section 56(2)(x), i.e., these are exempted from the applicability of this section even if they fulfil the above conditions.

These are as follows:

• money or property received from any relative
  
  
• money or property received on the accession of the marriage of the individual himself
  
  
• money or property received by way of inheritance or under a will
  
  
• money or property received in contemplation of death of the donor or payer
  
  
• money or property received from a local authority
  
  
• money or property received from a fund/educational institution/university/medical institution/ hospital/trust/other institution
  
  
• money or property received from a registered trust or institution
  
  
• money or property received by a fund/educational institution/ university/medical institution/hospital/trust/other institution
  
  
• money or property received by way of transactions not regarded as a transfer under the clauses of Section 47
  
  
• money or property received by a trust from an individual where the trust is established wholly and solely for the benefit of the relative of the individual

For the purposes of Section 56(2)(x), the term ‘property’ means any capital asset of the assessee, namely:

• jewellery
• drawings
• paintings
• archaeological collections
• sculptures
• shares and securities
• immovable property including land or building or both
• bullion
• any art works

For the purposes of Section 56(2)(x), the term ‘relative’ in case of an individual, means:

• spouse of an individual
• sister or brother of an individual
• sister or brother of the spouse of an individual
• sister or brother of either of the parents of an individual
• lineal ascendants or lineal descendants of an individual
• lineal ascendants or lineal descendants of the spouse of an individual
• spouse of all the persons mentioned above

The term ‘relative’ in case of a Hindu Undivided Family (HUF) means any member of the HUF.

Casual Income {Section 56(2)(ib)}

Casual income refers to any income earned by way of winnings from lotteries, races including horse races, crossword puzzles, betting, gambling, card games, such other games, etc. These incomes are chargeable to tax under the head ‘Income from other sources’.

Section 115BB is applicable to casual income, wherein such incomes are taxed at a flat rate of 30% plus surcharge, if any, plus health and education cess of 4%. No allowance, expenditure, loss, or deductions under Chapter VI-A can be allowed/set off from casual income. Also, the unexhausted basic exemption limit is also not permitted to be adjusted against such income.

Interest on Compensation/enhanced Compensation {Section 56(2)(viii)}

Any interest income received on compensation or enhanced compensation payable by the Government on compulsory acquisition of land of the assessee shall be taxed under the head ‘Income from Other Sources’. Such interest income shall be deemed to be the income in the year of receipt irrespective of the method of accounting followed by the assessee.

Consideration in Excess of FMV of Shares {Section 56(2)(viib)}

Any consideration received from a resident shareholder for shares issued by a closely held company to the extent to which it exceeds the fair market value (FMV) of shares, is deemed to the income of such company under the head ‘Income from Other Sources’. This section is applicable only when the shares are issued at a premium.

Sums Forfeited on the Transfer of Capital Assets {Section 56(2) (ix)}

This Section covers any amount of money received as an advance or otherwise during the course of negotiations for the transfer of a capital asset. Such amounts are taxable under the head ‘Income from Other Sources’ if the negotiations did not result in the transfer of a capital asset and, thus, the sums are forfeited.

Compensation Received on Termination of Employment {Section 56(2)(xi)}

This Section covers any compensation or other payments, by whatever name called, due to or received by a person in relation to the termination of his employment or modification of terms and conditions relating to his employment. Such income is chargeable to tax under the head ‘Income from Other Sources’.

Sums Not Chargeable Under the Head ‘profits and Gains of Business or Profession’

The below-mentioned incomes shall be taxable under the head ‘Income from Other Sources’ if and only if they are not taxable under the head ‘Profits and Gains of Business or Profession’:

• Sums received by employers from their employees as contributions to provident funds, superannuation funds, or other employee welfare funds.
  
  
• Income received from letting out of the plant, machinery or furniture on hire, whether with or without building
  
  
• Interest on securities

Keyman Insurance Policy

All sums including bonus, received under a Keyman insurance policy, are chargeable to tax under the head ‘Income from Other Sources’. This is true only when such sums allocated are not taxable under the head ‘Profits and Gains of Business or Profession’ or under the head ‘Salaries’.

Residual Income

Any income not falling under other heads of income is chargeable to tax under the head ‘Income from Other Sources’. For example, salaries received by MPs/MLAs are not charged to tax under the head ‘Salaries’ but charged under Section 56.

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Deductions Allowable (Section 57)

The income under the head ‘Income from Other Sources’ is calculated after making the deductions as given in Table:

S. No.	Particulars	Deduction(s) allowable
1.	Income from recovery from employees as the contribution to provident fund, superannuation fund, etc.	Amount to the extent the contribution is remitted prior to the due date under different respective Acts as per the provisions of Section 36(1)(va)
2.	Income from dividends (except dividends under Section 115-O on which corporate dividend tax is leviable) or interest income on securities	Any amount reasonably paid to a banker or other person as remuneration or commission
3.	Income received from letting out of the plant, machinery or furniture on hire, whether with or without building	Insurance premium paid Depreciation or unabsorbed depreciation Amount paid on current repairs to plant, machinery, furniture, or building
4.	Family pension received	Least of the following: ₹15,000 33-1/3% of family pension received
5.	Any interest income on compensation or enhanced compensation received	50% of interest income
6.	Any other expenditure (except that of capital nature) incurred wholly and exclusively for the purpose of earning such income.

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Deductions Not Allowable (Section 58)

The items of expenses which are not allowed as deductions in the computation of ‘Income from Other Sources’ of an assessee are discussed in Table:

S. No.	Deductions not allowable
1.	Personal expenses incurred by an assessee
2.	An interest chargeable under the Act and payable outside India, on which tax has not been deducted at source or paid
3.	A payment chargeable under the ‘Salaries’ and payable outside India, on which tax has not been deducted at source or paid
4.	Payment of any expense made to a related person to the extent to which it is unreasonable or excessive from its Fair Market Value (FMV) on consideration by the Assessing Officer.
5.	Payment of any expense made to a person otherwise than by draft/account-payee cheque/ECS through a bank account, if the aggregate payment exceeds ₹10,000 in a day
6.	Any expense connected to income or earnings from lotteries, races including horse races, crossword puzzles, card games, gambling or other games of such nature
7.	30% of any sum or expenditure payable to a resident, if the tax on it deductible at source, has not been deducted or has been deducted but not paid on or before the due date specified under Section 139(1)

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Deemed Income Chargeable to Tax (Section 59)

Under appropriate circumstances, following incomes will be treated as incomes under the head ‘Income from Other Sources’, like they are treated as business income when computing ‘Profits and Gains of Business or Profession’:

• Cessation or remission of trade liabilities
  
  
• Cessation or remission of trade liabilities of discontinued business
  
  
• A business successor getting any benefit with respect to the deduction availed by the predecessor
  
  
• Bad debt that has been written off and allowed and subsequently recovered is considered to be the previous year income in which the sale took place