PRINCIPLES OF TAXATION

LAW

CHARGEABILITY

According to Section 56(1), income of every kind, which is not to be excluded

from the total income under the Income Tax Act, 1961, shall be chargeable to
income-tax under the head Income from Other Sources if it is not chargeable
to income tax under any of the first four heads specified in Section 14.
In other words, any income is taxable under the head Income From
Other Sources, if the following conditions are satisfied:
i. There must be an income.
ii. Such income is not exempted u/s 10 to 13-A.
iii. That income is neither salary income, nor rental income from house
property, nor income from business or profession, nor capital gain.
Income from other sources is therefore a residuary head of income.

INCOME FROM OTHER SOURCES

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METHOD OF ACCOUNTING

According to Section 145 income chargeable under this head is to be computed

with the method of the accounting regularly employed by the assessee. If the
books of account are maintained on mercantile system, the income is to be
computed on due basis. On the other hands, If the books of account are
maintained on cash system, income is taxable on receipt basis and expenditure
shall be allowed as a deduction on payment basis.

INCOME FROM OTHER SOURCES

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SPECIFIED INCOMES INCLUDED UNDER

INCOME FROM OTHER SOURCES

SECTION

56(2)

There are many incomes which are taxable under the head Income from Other
Sources. However Section 56(2) enlists certain specific incomes which shall
be chargeable to income-tax under the head income from other sources
without prejudice to the generality of the provisions of sub-section (1) of
Section 56. These are:1) Dividend other than dividend referred to in section 115-O.
2) Wining fm lotteries, crossword puzzles, races (including horse races),
card games, television game shows & other games, gambling or betting
of any form or nature.
3) Any sum received by employer as Provident Fund contribution from
employees if the income is not taxable under the head Profits and Gains
of Business or Profession.
4) Income by way of Interest on securities provided the income is not
chargeable to income-tax under the head Profits and Gains of Business
or Profession.
5) Income from machinery, plant or furniture belonging to asseessee,
provided the income is not chargeable to income-tax under the head
Profits and Gains of Business or Profession.
6) Letting of machinery, plant or furniture along with the building, where
such letting of building is inseparable from the letting of machinery,
plant or furniture, if not charged to tax under the head Profits and Gains
of Business or Profession.

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7) Any sum received under a Keyman Insurance Policy, if not charged to

tax under the head Salaries or Profits and Gains of Business or
Profession.
8) Any sum of money aggregate of which exceeds Rs. 50,000 received
without consideration by an individual or a HUF o or after 1.10.2009,
subject to certain exception [Section 56(2) (vii)]
9) Any property being shares of a closely held company received without
consideration or for inadequate consideration by the firm or a closely
held company if aggregate value of the amount of such gift or inadequate
consideration exceeds Rs50,000.
10)
Income by way of interest received on compensation or on
enhanced compensation to be taxed in the year in which such interest is
received.

Apart from the above, by virtue of Section 56(1), following incomes are also
chargeable under this head:
i.

Agriculture income from a place outside India.

ii. Family pension received by family members of deceased employee.

iii. Income from sub letting.
iv. Interest on bank or post office deposits or loans.
v. Directors sitting fee.
vi. Remuneration received for evaluation of answer scripts from person other
than employer.
vii. Rent from a vacant land.
viii. Income from undisclosed source.
INCOME FROM OTHER SOURCES

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ix. Interest on Income tax refund. However, income tax refund is not taxable.
x.

Casual income.

xi. Remuneration received by the member of parliament

xii. Income received after discontinuation of business
xiii. Insurance commission
xiv. Mining rent and royalties
xv. Directors commission for underwriting shares of new company
xvi. Annuity payable to the lender of a trade mark.
xvii. Interest in loans.
xviii. Interest on securities of foreign government.
xix.

Income from racing establishment.

xx.

Income from grant of grazing rights.

xxi.

Directors commission for standing as a guarantor to bankers.

INCOME FROM OTHER SOURCES

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EXPLANING SPECIAL PROVISIONS

SECTON

56(2)

I) Dividends: Section 56(2)(i)

(I) Meaning Dividend in its ordinary connotation means sum of amount paid
to or received by a shareholder in proportion to his share holding in a company
out of total sum distributed.
(II)Types
a) Normal Dividend - The dividend so declared at annual general meeting.
b) Interim Dividend - The dividend so declared before or after the annual
general meeting.
c) Deemed Dividend - National dividend u/s 2(22) is deemed dividend.
(III)Deemed Dividend: Section 2(22)
a) Any distribution of accumulated profit entailing the release of a company
asset. Section 2(22)(a)
b) Any distribution of accumulated profit in debentures, stocks, deposit
certificates etc. Section 2(22)(b)
c) Any distribution of accumulated profit at time of liquidation of company.
Section 2(22)(c)
d) Any distribution of accumulated profit on the reduction of its capital. Section
2(22)(d)
e) Any distribution of accumulated profit by way of advance or loan. Section
2(22)(e)
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(IV) Basis Of Charge : For the purpose of including dividend to total income
they are chargeable to tax in the following previous years:
a) Normal Dividend In previous year in which it was so declared.
b) Interim Dividend The previous year in which such dividend is made
unconditionally available.
c) Deemed Dividend The year in which it was so distributed or paid.

II) Winning from lotteries, crossword puzzles, horse

race and card games etc. {Section. 56(2)(ib)}
Winning of the following nature are taxable under this head:
i. Lotteries;
ii. Crossword puzzles;
iii. Races including horse races;
iv. Gambling & betting of any nature;
v.

Card games, game show or entertainment program on television or

electronic mode and any other game of any sort in which people compete to
win prizes or any other similar game;
IMPORTANT TO NOTE THAT
No deduction can be claimed from such income even if such expenditure
is incurred exclusively & wholly for earning such income.
No deduction u/s 80.
Winnings are taxable at the flat rate of 30% in case of all the assessee as
per Section 115-BB.

INCOME FROM OTHER SOURCES

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TDS shall be deducted @ 30% if the amount of winning exceeds Rs.

5,000 in case of winnings from horserace while Rs 10,000 in case of
other.

III) Interest On Securities Section 56(2)(ic)

Income by way of interest on securities is chargeable 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.
Security means a document held by the creditor as a guarantee of his right of
payment. Security is there on secured loans such as debentures and bonds and
any interest received on such debentures and bonds is interest on securities and
is taxable u/s 56(2). Equity shares are not secured loans and hence are not
taxable.
TYPES OF SECURITIES Section 2(28B)
1. Securities of Central and State Government.
2. Debentures and bonds issued by:
On or behalf of local authority.
A company.
Corporation established under statutory provisions.
In case of certain securities issued by Central Government or State
Government or in case of certain notified bonds or debentures issued by
public sector companies, the interest is fully exempted {Section 10(15)}.
Grossing Up Of Interest

INCOME FROM OTHER SOURCES

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Net Interest

Net Interest x 100

100Rate of TDS

IV) Income From Machinery, Plant Or Furniture

Section56(2)(ii)
Income from machinery, plant or furniture belonging to asseessee and let on
hire is chargeable as income from other sources if the income is not chargeable
to income-tax under the head Profits and Gains of Business or Profession.

V)

Income from composite letting of machinery, plant

or furniture and building. Section 56(2)(iii)

Where an assessee lets on hire the machinery, plant or furniture belonging to
him and also building, and letting of the building is inseparable from the letting
of said machinery, plant or furniture, the income from such letting known as
composite rent, shall be chargeable as income from other sources if is not
chargeable to income-tax under the head Profits and Gains of Business or
Profession.

VI)

Receipt

without

considerations

{Sec.

56(2)

(vii)&(viia) }
It is applicable to:
Individual and HUF
The following three kinds of gifts received by an individual or HUF from an
unrelated person (s) shall be taxable u/s 56(2)(vii)
Gift in money
INCOME FROM OTHER SOURCES

PRINCIPLES OF TAXATION
LAW

Gift of immovable property received without consideration or acquired

for inadequate consideration (w.e.f 1.04.09)
Gift of any property, other than immovable property whether received
without consideration or acquired for inadequate consideration.
Conditions:
A. Gift in money
Where any sum of money is received by an individual or HUF from any person
or persons without consideration the aggregate value of which exceeds Rs
50,000/- , the whole of the aggregate value of sum shall be taxable in the hands
of recipient.
B. Gift of immovable property
(i) Without consideration where any immovable property is received by an
individual or HUF from any person without consideration , the stamp duty
value of which exceeds Rs. 50,000 , the stamp duty value of such property shall
be taxable in the hands of the recipient .
(ii) Acquired for inadequate consideration Where such immovable property
is acquired by an individual or HUF for a consideration which is less than the
stamp duty value of the property, by an amount exceeding Rs. 50,000, the
excess of stamp duty value of such property over such consideration shall be
taxable in the hands of the recipient.
C. Gift of property other than immovable property
(i) Without consideration Where any property other than immovable property
is received by an individual or HUF, the aggregate fair market value of which
exceeds Rs. 50,000, the whole of the aggregate, FMV of such property shall be
taxable in the hands of the recipient.
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(ii) Acquired for the inadequate consideration where such property other
than immovable property is acquired for a consideration which is less than the
aggregate FMV of such property as exceeds such consideration shall be taxable
in the hands of the recipient . [all transaction]
EXCEPTIONS
i) Any sum of money which is received by way of consideration;
ii) Any sum of money which is received fm any relative;
Relatives includes:
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 (b) to (c).
iii) Any sum of money which is received on the occasion of marriage of the
individual;
iv) Any sum of money which is received under will or by way of inheritance;
v) Any sum of money which is received in contemplation of the death of the
payer;
vi) Any sum of money not exceeding Rs 50,000/- ;

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vii) Any sum of money received from any local authority u/s 10(20) ; any fund
or foundation or university or other educational institute or any trust covered
u/s 10(23C) or any trust institute registered u/s 12AA
Property Means Immovable property being land or building or both ,
Shares and securities , Jewellery, archaeological collection , Drawing
,Painting ,Sculptures or any work of art and Bullion.
VII) Keyman Insurance policy
It means life insurance policy taken up on the life of another person. Any sum
received including bonus under keyman insurance policy is chargeable to tax
under the head income from other sources provided that the same is not
chargeable to income-tax under the head Salary or Profits and Gains of
Business or Profession.
VIII) Receipts of shares by a firm or a closely held
company 56(2) (viia)
Clause (viia) has been inserted in section 56(2)(viia) w.e.f 1-06-2010 .This
clause is applicable if the following conditions are satisfied:
a. Recipient is a firm or closely held company.
b. The assets (which are received) is in the form of shares in a closely held
company.
c. These shares are received from any person on or after 1-06-2010.
d. Such share is received without consideration or for an adequate
consideration.
e. Such shares are not received by shareholder in a scheme of amalgamation
or demerger.
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If these are condition satisfied, then value of such shares will be taxable in the
hands of recipient. (Firm or closely held company).

DIFFERENT SITUATION

TAXABILITY IN THE HANDS OF

RECIPIENT

Shares

are

received

without Nothing is taxable

consideration and aggregate FMV of

these shares received during the PY does
not exceeds Rs. 50,000

Shares

are

received

without Aggregate FMV will taxable in the

consideration and aggregate FMV of hands of recipient

these shares received during the PY

Shares are received for a consideration Nothing is taxable

which is less than FMV and the
aggregate difference does not exceeds
Rs. 50,000

Shares are received for a consideration Aggregate FMV minus aggregate

which is less than FMV and the consideration will be taxable
aggregate difference exceeds Rs. 50,000

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IX) Income by way of interest received on compensation

or on enhanced compensation. Section 56(2)(viii).
According to Section 145A(b) any interest received by an assessee on
compensation or enhanced compensation shall be deemed to be income of the
year in which it is received.
Further as per Section 56(2)(viii) income by way of interest received by an
assessee on compensation or enhanced compensation shall be taxable under the
head income from other sources in the previous year in which it is received.

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AMOUNT NOT DEDUCTIBLE

According to Section 58, the following amounts shall not be deductible in

computing the income chargeable under the head "Income from other sources":
i)

Personal expenses of the assessee;

ii) Wealth Tax;

iii) Interest or salary paid outside India on which tax has not been paid or
deducted at source;
iv) Any amount paid to a person specified u/s 40-A (payment to relative in
excess of requirement).
v) Any expenditure or allowance in connection with winning of lottery,
crosswords puzzles etc. However any expenditure incurred by the assessee for
activity of owning and maintain race horses shall be allowed as deduction.

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ALLOWABLE DEDUCTIONS

Under Section 57, the income chargeable under the head Income from Other
Sources shall be computed after making the following deductions:
i) In respect of any sum collected from employees towards the Welfare Fund
contribution, deduction shall be allowed to the extent the amount is remitted
within the relevant due date.

Due date is the date by which the assessee is required as employer to credit
such contribution to the employees account in the relevant fund under the
provision of any law or terms of contract of service or otherwise.
ii) In case of income from machinery, plant and furniture let on hire, the
following deductions are permissible:
a) Current repairs to machinery, plant and furniture
b) Insurance premium paid for machinery, plant or furniture
c) Depreciation and unabsorbed depreciation as per section 32.
iii) In case of income from machinery, plant and furniture along with building
let on hire, the following deductions are permissible:
a) If the assessee owns the building, only current repairs is deducted
b)
c)
d)
e)

otherwise both current as well as capital repairs are deductible.

Rent, rates and taxes paid by the assessee for building.
Current repairs to machinery, plant and furniture
Insurance premium paid for machinery, plant or furniture or building.
Depreciation and unabsorbed depreciation as per sec. 32.

iv) Deduction of 1/3rd of such income or Rs 15,000/- whichever is lower, is

allowed from the income in the nature of family fund.
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A. Family Pension means a regular monthly amount payable by the

employer to a person belonging to the family in the event of his death.
B. Relief u/s 89 is also available on family pension.
v) Any other expenditure not being in the nature of capital expenditure,
incurred wholly and exclusively for earning such income.

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