Income From

Other Sources
CA. Vivek Doshi
 INTRODUCTION
“Income from Other Sources” is a residuary head of income. Any item of
income chargeable to tax but does not fall within the ambit of the other
four specific heads of income shall be included under this head of
income.
(1) Chargeability – Section 56

Income Chargeable only under this head

The following income shall be charged to tax only under the head
“Income from Other Sources”:
1) Dividend income covered by sub-clause (a) to (e) of clause (22) of
Section 2.
2) Income by way of winnings from lotteries, cross word puzzles, races
including horse race, card games and other games of any sort, gambling,
betting, etc. It requires mention here that such winnings are chargeable
to tax u/s 115BB at a flat rate of 30%.
3) Any sum of money, the aggregate value of which exceeds Rs.50,000
received from any person without consideration by an individual or Hindu
Undivided Family on or after 01.04.2006.
However, exemption is granted in respect of any sum of
money received –
a) from any relative; or
b) on the occasion of marriage of individual; or
c) under a Will or by way of inheritance; or
d) in contemplation of death of the payer or
e) from a local authority; or
f) from any fund, foundation, university, other
educational institution, hospital, medical institution,
any trust or institution referred to in Section 10(23C);
or
g) From charitable institutions registered u/s 12AA.
In respect of above gifts, there is no ceiling limit and
therefore, entire amount is exempt from chargeability.

The defintion of the term ‘relative’ for this purpose is as

under :

a) husband or wife of individual;

b) brother or sister of the individual;
c) brother of husband of the individual;
d) brother of wife of the individual;
e) sister of husband of the individual;
f) sister of wife of the individual;
g) brother of father of the individual;
h) brother of mother of the individual;
i) sister of father of the individual;
j) sister of mother of the individual;
k) lineal ascendant of the individual (say, grandfather)
l) lineal descendant of the individual (say, son, grandson,
daughter)
m) lineal ascendant of the husband of the individual
n) lineal descendant of the husband of the individual
o) lineal ascendant of the wife of the individual (say, wife’s
father)
p) lineal descendant of the wife of the individual;
q) wife or husband of the relatives listed at serial numbers (b)
to (p)
 Taxability of any sum received
The objective of taxation of any sum received by an individual or HUF,
without any consideration is basically to bring into tax net the bogus
transactions in the name of gifts from unknown persons. Keeping this in
mind, any gift received from non-relatives, subject to exemptions listed
above, has been subjected to tax u/s 56(2) (VI). Accordingly, any sum of
money received by an individual or HUF during the year, the aggregate of
which is exceeding Rs.50,000, shall be subject to tax in the hands of such
individual or HUF.
It needs mention that the aggregate limit of Rs.50, 000 as provided
in the Section is not in the nature of basic exemption or a threshold limit.
Accordingly, in case an individual or HUF receives any sum of money
exceeding Rs.50, 000, which are not covered by exemptions, the whole of
such sum shall be subject to tax under the head “Income from Other
Sources”. For example, in case where Mr. A receives gift of Rs.75, 000
from 3 of his friends, the entire amount of Rs.75, 000 shall be chargeable to
tax. Assessee cannot claim exemption of Rs.50, 000 as the aggregate sum
of money received has exceeded Rs.50, 000 and therefore, whole of such
sum received as gift shall be brought to tax. On the other hand, in case the
aggregate amount of gift received is Rs.45, 000, the entire sum shall be
exempted as such aggregate amount does not exceed the limit of Rs.50,
000 prescribed under the law.
 Taxability of any sum received
Further, since the expression used in the laws is ‘any sum of money’.
Therefore, it is to be understood that gifts-in-kind, movable and
immovable, are not liable to tax. They shall continue to be regarded as
capital receipts not having the character of income.
Though the law provides for chargeability of any gifts received
by individual or HUF, all the above clauses of the definition of the term
‘relative’ is confined only with reference to individuals. Therefore, an
assessee, being a HUF, is not eligible to claim exemption provided by
clauses dealing with ‘gifts received from relatives’ and ‘gifts received on
the occasion of marriage’ as mentioned above.
INCOME CHARGEABLE UNDER THIS HEAD, ONLY IF
NOT CHARGEABLE UNDER THE HEAD ‘PROFITS AND
GAINS OF BUSINESS OR PROFESSION’

The following income shall be chargeable to tax under this head of

income only if it is not taxable under the head “Profits and Gains of
Business or Profession”:
a) Interest on securities (State and Central Government
securities and debentures);
b) Any sum collected from employees towards their share of
contribution to any Welfare Fund Account :
c) Income from letting of machinery, plant and furniture; and
d) Income from letting of machinery, plant and Furniture
together with building, if the letting of the building is
inseparable to the letting of other assets.
INCOME CHARGEABLE UNDER THIS HEAD ONLY IF
NOT CHARGEABLE UNDER THE HEAD “PROFITS
AND GAINS OF BUSINESS OR PROFESSION” OR
UNDER THE HEAD “SALARIES”

Any sum received under a Keyman insurance policy including

bonus is chargeable under this head when it is received by any person
other than the employer who took the policy and the employee in
whose name the policy was taken.

Income not chargeable under other heads of income

All other income chargeable under Income Tax, Act, but not
falling under any other specific heads of income shall be chargeable to
tax under the head “Income from Other Sources”.
 INCOMES EXEMPT FROM TAX [SECTION 10]:

Sec 10 Exempted Income Conditions/Remarks

(10BC) Compensation received or (a) Such compensation is received or

receivable by an individual or his receivable from the central/State
legal heir on account of disaster. government or a local authority.
(b) Exemption is not available to the extent
such amount has been allowed a
deduction on account of any loss or
damage caused by such disaster under
this act.

(10D) Sum received under life-insurance Following are not exempt-

policy included sum by way of (1) sums u/s 80DD(3) and 80DDA(3)
bonus allocated on it. (2) sums under key man insurance policy
(3) Sums received under insurance policy
issued on or after 1-4-2003 if in any year
the premium payable exceeds 20% of
actual capital sum assured.
However sum received on death is
exempt.
Sec 10 Exempted Income Conditions/Remarks

(15) (i) Interest, premium on redemption or other payments on securities,

bonds, deposits etc. issued or notified by central government
subject to prescribed conditions or limits.
(ii) In the case of an individual or a HUF, interest on notified capital
investment bonds and interest on notified relief bonds.
(16) Education scholarship.
Note: (a) Recipient can be Indian or foreigner; whole amount need not
be spent on education.
(b) Scholarship granted to meet education cost of children of employee
is exempt.
(17) Allowance to MLA and MP or Following are exempt-
members of any (1) daily allowance;
parliamentary or legislative (2) any allowance received under the
committee. members of Parliament
(constituency allowance) Rules,
1986;
(3) any constituency allowance
received by any person by reason
of his membership of any state
legislature under any act or rules
made by that state legislature.
Sec 10 Exempted Income Conditions/Remarks

(19) Family pension received by Death of such member has occurred

widow/children or nominated in course of operational duties and in
heir of member of Armed prescribed conditions and
Forces circumstances.

(26) Income of member of Scheduled Tribes residing in specified

areas/states,-(a) from any source in that specified area or state; or (b)
by way of interest/dividends on securities.

(26- Income of a sikkimese individual - (a) from any source in the state
AAA) of Sikkim; or (b) by way of dividend or interest on securities.
However, no exemption will be available to a sikkimese woman
who marries a non- sikkimese individual on or after 1-4-2008.
(Inserted by the Finance act, 2008 w.r.e.f. 1-4-1990)

(34) Income by way of dividend However, dividends under section

referred to in-section 115-O 2(22)(e) and dividends from foreign
company are not exempt;
 DIVIDEND
Section 2(22) defines ‘Dividend’ to include –
any distribution by a company to its shareholders to the extent
of accumulated profits whether capitalized or not resulting in the
release of all or any part of the assets of the company,
any distribution to its shareholders by a company –

(i) Of debentures, debenture-stock or deposit-certificates with or

without interest;
(ii) Distribution of bonus shares to the preference shareholders by
the company, to the extent of accumulated profits, whether
capitalized or not,
any distribution made to the shareholders by a company on its
liquidation to the extent to which the distribution is attributable to
the accumulated profits of the company, whether capitalized or
not,
 Note: Where the liquidation is consequent on the compulsory
acquisition of the undertaking of the company by the
Government or by any Corporation owned or controlled by the
Government under any law in force, the accumulated profits
shall not include any profits of the company prior to three
consecutive previous years immediately preceding the
previous year in which such acquisition took place.
Any distribution by a company to its shareholders on account
of reduction of share capital to the extent of which the
company possesses accumulated profits, whether capitalized
or not.
any payment to the extent of accumulated profits by a
company, not being a company in which public are
substantially interested, of any sum by way of :
(i) Loan or advance to a shareholder who holds the beneficial
ownership of equity shares carrying not less than 10% voting
power,
(ii) loan or advance to any concern (HUF, firm, AOP, Body of
Individuals or a company) in which such shareholder is a
member or partner holding substantial interest (20% or more
beneficial interest at any time during the previous year),
(iii) Any payment on behalf of or for the individual benefit of any
such shareholder made to any person.
 DIVIDEND
Exceptions:

1. Any advance or loan to a shareholder or the concern in which the

shareholder has substantial interest by a company will not be
deemed as dividend, if the loan or advance is given during the
normal course of its business provided the lending of money is a
substantial part of the business of the company.

2. Any payment made by a company on purchase of its own shares

from a shareholder in accordance with the provisions of Section
77A of the Companies Act, 1956, shall not be regarded as
dividend. Such buyback of shares attracts capital gains tax
liability in the hands of the shareholder u/s 46A.

3. Any distribution of shares pursuant to a demerger by the resulting

company to the shareholders of the demerged company (whether
or not there is a reduction of capital in the demerged company)
shall not be treated as dividend.
 Explanation:
X Ltd. is a closely held company as it is not covered by Section 2(18) of the
Income Tax Act. Mr. A is a shareholder holding 10% voting rights in the
company. He also holds substantial interest in AB and Sons, a partnership
firm, where his share of profit is not less than 20%. In this background,
Section 2(22) (e) may get attracted under 3 situations indicated above:
1. Loan or advance is given to Mr. A by the company. To the extent
of accumulated profits of the company such loan or advance shall
be deemed to be dividend in the hands of Mr. A.
2. Loan or advance is given to a concern (proprietary concern, firm,
HUF, company, etc.) in which the shareholder holding 10% voting
rights has substantial interest. Here, X Ltd. gives loan to AB and
Sons. A holds 10% voting rights in X Ltd. and 20% or more share
of profit in AB and Sons. As this nexus exists, the loan given by X
Ltd. to AB and Sons shall be deemed as dividend in the hands of
Mr. A.
3. Where payment is made to any person for and on behalf of the
shareholder holding 10% voting rights shall be deemed dividend.
In this case, A owes payment to Z for any benefit received or to be
received towards which X Ltd. makes payment, such payment shall
be deemed to be dividend in the hands of Mr. A. In order to
determine 10% of the voting rights, only the interest owned by the
assessee alone has to be considered.
 Notes:
(i) If A holds 9% voting rights in X Ltd. and even 90% in AB and Sons,
then 2(22)(e) will not be attracted. Similarly, if A holds 90% voting
rights in X Ltd. but 19% in AB and Sons, then deemed dividend as
per situation 2 above will not attract.
(ii) In order to determine 20% voting rights/share of profit of the
shareholder in a firm or AOP or company, etc., the interest held by
the shareholder in such firm, AOP, Company, etc. is alone relevant.

Whenever there is a declaration of dividend or any distribution in

the nature of dividend covered by sub-clauses (a) to (d) of clause
(22) of Section 2, the company is liable to pay tax at 12.5% u/s 115-
O. Such dividend income is exempt in the hands of shareholders
u/s 10(34). However, in the case of deemed dividend covered by
sub-clause (e) of Section 2(22) and dividend declared/distributed by
a foreign company, the shareholder is chargeable to tax under the
head “Income from Other Sources” as Section 115-O does not apply
to such dividend.
 WINNINGS FROM LOTTERY, ETC. –
Section 115BB
Where the total income of an assessee includes any income by
way of winnings from any lottery or crossword puzzle or race including
horse race or card game and other game of any sort or from gabling or
betting of any form, tax shall be calculated at the rate of 30% of such
income plus surcharge.
The taxability of income in the nature of winnings from any lotteries,
crossword puzzles, race, etc. are subject to the following:
a) No expenditure or allowance can be allowed against such income;
b) No deduction under Chapter VI-A can be allowed;
c) No benefit of carry forward and set off of loss/unabsorbed depreciation
allowance is available against such income; and
d) No basic exemption limit is available.
This provision does not apply to income derived from owning and
maintaining race horses in respect of which normal rates of tax shall
apply. Loss derived from this source shall be governed by the
provisions of Section 74A.
‘Lottery’ includes winnings from prizes awarded to any
person by draw of lots or by chance or in any other
manner whatsoever, under any scheme or arrangement
by whatever name called.
‘Card game and other game of any sort’ includes any
game show, an entertainment programme on television
or electronic mode, in which people compete to win
prizes or any other similar game.
 DEDUCTIONS ADMISSIBLE IN COMPUTING
INCOME FROM OTHER SOURCES [SEC. 57];

Income included and the sec. 56 Deduction

(1) Dividends, other than exempt Any reasonable sum paid by way of
dividends, or interest on securities. commission or remuneration to a banker
or any other person for realising such
dividend or interest on behalf of the
assessee.
(ia) sum received by employer from Amount out of such sum credited by the
employees as contribution to certain assessee to the employee's account in
funds. the relevant fund of funds on or before
the due date as per section 36(1) (va).
(ii) Letting on hire of machinery, plants, Repairs, insurance and depreciation on
furniture or buildings as given under such assets as per section 30, 31 and
section 56(2) (ii)/ (iii). 32.Deduction shall be subject to the
provisions of section 38.
 Income included and the sec. 56 Deduction

(iia) family pension i.e. regular monthly Reduction shall be lower of the
amount payable by employer to a following-(i) one-third of such family
family member of an employee on his pension; or
death. (ii) Rs 15,000.

General deduction [section 57(iii)]: any other expenditure (not being capital
expenditure), which is laid out or expanded wholly and exclusively for the
purpose of making or earning such income is deductible.
Expenditure deductible even if income not actually earned: the expenditure
satisfying the conditions under section 57(iii) is allowed as a deduction even if
the income for which it is incurred is not actually earned. Thus interest on loan
borrowed to purchase investments, is deductible even if there is no income
derived from the investments in a particular year.
 INADMISSIBLE EXPENSES – Section 58
i. Personal expenses
ii. Interest and salary payable outside India, if tax has not
been paid or deducted at source
iii. Wealth-tax
iv. Expenses of the nature described in Section 10A
v. No deduction shall be allowed in respect of winnings
from lotteries, cross word puzzles, card games, races
including horse race, gambling, betting, etc.
However, in respect of the activity of owning and
maintaining racehorses, 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.
 INADMISSIBLE EXPENSES – Section 58

Students may not that in addition to the above, section 14A

read with the rule 8D prescribes disallowance of any
expenditure incurred in relation to exempt income. In a
case where dividend, interest or any other income which
are exempt by virtue any of the sub-sections of section 10
and where-a) the assessing officer, having regard to the
accounts, is not satisfied with the correctness of the claim
of the assessee in respect of expenditure in relation to
exempt income; orb) The assessee claims that no
expenditure has been incurred by him in relation to the
exempt income.In the above circumstances, the assessing
officer shall determine the correct amount of expenditure
incurred in relation to exempt income in accordance with
the manner prescribed under rule 8D for disallowance of
such expenditure.
 INADMISSIBLE EXPENSES – Section 58
MANNER OF COMPUTATION OF DISALLOWANCE

A. Rule 8D of the income tax Rules prescribes the manner of computation

of disallowance of expenditure, which is claimed as deduction against
exempt income. This rule shall be made applicable in a case where the
assessing officer, having regard to the accounts of the assessee is not
satisfied with the:

i) Correctness of the claim of the expenditure made by the assessee; or

ii) Claim made by the assessee that no expenditure has been incurred.
in relation to the exempt income. In such cases, the assessing officer
shall determine the amount of such expenditure in relation to exempt
income in accordance with the manner prescribed in rule 8D(2)

B. according to rule 8D(2), the manner of computation of expenditure

relating to exempt income shall be as follows:
 Description Amount in Rs.

Amount of expenditure directly relating to exempt A

income.
Amount of interest expenditure incurred by the B
assessee, which is not directly attributable to any
particular income (Refer note-1 below for
computation).
Amount equal to 0.5% of the average value of C
investment, income in respect of which is exempt from
tax.
Total amount disallowable u/s.14A A+ B+ C
 INADMISSIBLE EXPENSES – Section 58

Note:
1. The amount disallowable in respect of interest expenditure as
referred above shall be computed in the following manner:

X*Z
Y
Where: X= Total amount of interest other than those considered in
item ‘A’ above.Y= the average of the total assets in the balance
sheet as on the first day and the last day of the previous year.Z= the
average value of investment, income from which does not or shall
not form part of the total income as appearing in the balance sheet
as on the first day and the last day of the previous year.
2. Average value of investments is the investments as on the first and
last of the previous year as on the balance sheet, which income is
exempt from tax.
3. Total assets means total assets as appearing in the balance sheet
excluding the increase on account of revaluation of assets but
including the decrease on account of revaluation of assets.
 Illustration:
Mr. Jagadeesh is a chartered accountant in practice. The
income & expenditure account for the year ended March 31,
2009 read as follows:-
Expenses Rs. Income Rs.
To Employees cost 1,50,000 By Professional 12,00,000
earnings
To Traveling and 50,000 By Dividend income 2,00,000
Conveyance - from shares
To Administration & office 4,00,000 - from equity oriented 1,00,000
expenses mutual funds
To Interest 1,50,000
To Demat charges 10,000
To Net profit 7,40,000
Total 15,00,000 Total 15,00,000
Other information:

a.) Entire dividend income is claimed as exempt from taxation by virtue

of section 10 (34) and 10 (35).
b.) Jagadeesh claims that no expenditure has been incurred against
the dividend income, which is claimed as exempt from tax.
c.) The value of investment in shares as on the first day and the last
day of the previous year is Rs 2,50,000/-and 7,00,000/- respectively.
d.) The value of investment in units of mutual funds as on the first day
and the last day of the previous year is Rs 5,00,000 and 2,00,000
respectively.
e.) All expenditure including interest expenditure of Rs.1,50,000
incurred by Jagadeesh are relating to taxable and non-taxable
income. Demat charges are directly attributable to exempt income.
f.) The value of the total assets as appearing in the balance sheet of
the assessee as on the first day and last day of the previous year is
Rs. 50,00,000 and Rs.60,00,000 respectively.
You are required to compute the taxable income of Jagadeesh for
the assessment 2009-10.
 Answer
Computation of taxable income A.Y 2009-10

Particulars Rs.

Income from Profits and Gains of Business or 4,40,000

Profession
- As per working note 1.
Income from other sources Nil
- As per working notes 2.
Total 4,40,000
Add: Disallowance u/s. 14A 36,625
- As per working note 3.
Taxable Income 4,76,625
Working Note 1 - profits and gains of business or Rs. Rs.
profession
Net profit as per income and expenditure account 7,40,000
Less: Income considered under other heads
- Dividend Income from shares 2,00,000
- income from UTI 1,00,000 3,00,000
Taxable Professional Income 4,40,000

Working Note 2 - Income from other sources Rs. Rs.

1. Dividend Income from shares 2,00,000
Less: Exempt under sec. 10(34) 2,00,000 Nil
2. Income from units in Mutual Funds 1,00,000
Less: Exempt under sec. 10(35) 1,00,000 Nil
Taxable income from other sources Nil
Working Note 3 - Disallowance u/s 14A Rs.
a) Amount of expenditure directly relating to exempt income 10,000
(other than interest)
b) Amount of interest incurred by way of expenditure other than 22,500
those included above (1,50,000* 8,25,000/55,00,000)
c) Amount equal to 0.5% of the average value of investments 4,125
(8, 25,000 * 0.5%)
Total amount disallowed u/s. 14A[(a) + (b) + (c)] 36,625

Note:
Average value of investments = ( 7,50,000 + 9,00,000) /2 = Rs.8,25,000/-
Average value of total assets =
( 50,00,000 + 60,00,000) /2 = Rs.55,00,000/-
 Deemed Income – Section 59

Any amount received or benefit derived in respect of

expenditure incurred or loss or trading liability allowed as
deduction shall be deemed as income in the year in which
the amount is received or the benefit is accrued. This
provision is similar to that of Section 41(1) under the head
“Profits and Gains of Business or Profession”.
 Method of Accounting – Section 145

Income chargeable under the head “Income from Other

Sources” shall be computed in accordance with cash
system of accounting or mercantile system of accounting
regularly employed by the assessee. The only 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 u/s 8 of
the Income Tax Act and not on the basis of method of
accounting followed.
 Income during construction period
Interest income earned on deposits made out of surplus
funds before commencement of business is taxable as
“income from other sources”. The interest income so
derived from out of investment in the nature of deposit
cannot be reduced from the cost of construction as it has
no nexus with the construction of the plants - Tuticorin
Alkali Chemicals and Fertilizers Ltd. Vs. CIT (SC), 227 ITR
172; CIT vs. Coromandel cements Ltd., (SC) 234 ITR 412;
similarly, where loan is borrowed from bank and placed in
short-term deposits till the money is paid to supplier of plant
and machinery, the interest earned thereon cannot go to
reduce the cost of plant and machinery but will be charged
under “Income from other sources” - CIT vs. Autokast Ltd.,
248 ITR 110 (SC).
 Income during construction period
On the contrary, if the receipts during construction period
have close nexus with such construction, the amount shall
go to reduce the construction cost of the plant. The
Supreme Court, in the case of CIT vs. Bokaro Steel Ltd.,
236 ITR 315, held that the following income of the
assessee-company derived during construction period is
not taxable:
i. rent charged from its contractors for housing workers and
staff employed by contractor for construction work of
assessee;
ii. hire charges for plant and machinery given to contractors
for use in construction work;
iii. Interest from advances made to contractors for the
purpose of facilitating the work of construction; and
iv. Royalty for excavation and use of stones lying on
assessee’s land for construction work.
Thus, the above items should go to reduce the cost of the
plant. However, in the same decision the Supreme Court
held that interest on bank deposits is taxable under income
from other sources as the same has no nexus to the
construction of the plant. It may be appreciated that
Bokaro Steels Ltd. Decision affirms and distinguishes the
decision in Tuticorin Alkali case but does not over rule the
same.
Any amount deposited to open letter of credit for purchase
of plant and machinery required for setting up a plant,
interest of such amount is directly connected and incidental
to construction of plant. Therefore, interest receipt is
capital in nature and it would go to reduce the cost of asset.
CIT vs. Karnal Co-operative Sugar Mills Ltd., 243 ITR 2
(SC). Similar view has been upheld in CIT vs. Karnataka
Power Corporation, 247 ITR 268 (SC) and Bongaigaon
Refinery and Petrochemicals Ltd. vs. CIT 251 ITR 329
(SC).
 COMPUTATION SEQUENCE TO BE
REMEMBERED
1. Identify income chargeable under this head of income and include
them. In respect of dividend income, year of chargeability should be
decided by applying Section 8.
2. If net amount after tax deducted at source is given, include the gross
amount.
3. If the income so identified is eligible for exemption u/s 10, avail the
exemption and include only the balance amount. E.g. in respect of
interest on certain notified securities, deposits and bonds qualify for
exemption u/s 10(15).
4. If income is clubbed from minor children, claim exemption u/s 10(32)
in respect of such income upto a maximum of Rs.1, 500 per child.
5. Expenses and deductions qualifying u/s 57 should be claimed.
6. Claim deductions, if any, available under Chapter VI-A to the extent
applicable after arriving at the gross total income and not under this
head of income. Deductions cannot exceed the amount of such
income included in the gross total income.
7. If the total income includes winnings from lotteries, crossword
puzzles, gambling, betting, etc., apply flat rate of 30% for calculating
the income tax payable on such income u/s 115BB.
 Illustration:
Shri Ratanlal, a businessman, presents to you the following statements
of account relating to the year ending 31.3.2007 for computation of his
gross total income.
Capital Account

Rs. Rs.
To Entertainment Exps. 12,000 By Balance b/f 32,000
To Gift to Son 3,000 By Profit 1,31,200
To Shares purchased 50,000 By Race Winnings 12,000
To Drawings 1,30,000 By LIC Policy matured 1,57,920
To Balance c/f 1,93,120 By Bad Debts recovered 5,000
By Loan for Investment 50,000
3,88,120 3,88,120
 Profit & Loss A/c
Rs. Rs.
To Salaries 26,000 By Gross Profit 1,93,000
To Rent 10,800 By Discounts received 2,500
To Bonus 1,200 from wholesalers 9,000
To Subscriptions 5,000 By Interest on Deposits 5,000
To Drawings 11,000 (TDS Rs.1,000) 1,200
To Conveyance 7,500 By Income Tax Refund 16,500
To Bad Debts 3,000 By Interest on Income
To Advertisement 16,000 Tax Refund
To Travelling 15,500 By Profit on Sale of
To Profit transferred to 1,31,200 Personal Motor Car
Cap. A/c
2,27,200 2,27,200
Additional Information:
a) Entertainment Expenses relate to business.
b) Bad Debts recovered relate to deduction allowed in 2003-04.
c) The LIC policy is for a assured sum of Rs.1, 50,000. Annual premium
@ Rs.47, 000 each for 3 years.
 solution
Computation of Gross Total Income for the assessment year 2007-08
Rs.
I. Profits and gains of business or profession – Note 1 1,03,500
II. Income from Other Sources – Note 2 40,120
Gross Total Income Rs. 1,43,620
Note 1 : Computation of Business Income Rs. Rs.
Net Profit as per Profit & Loss A/c 11,000 1,31,200
Add : 1. Inadmissible expenses – Drawings 5,000 16,000
2. Income not credited but taxable
- Bad Debts recovered
Less : 1. Income credited to be considered separately 9,000 1,47,200
a) Interest on Deposits 5,000 43,700
b) Income-tax Refund (not an income) 1,200
c) Interest on I.T. Refund 16,500
d) Profit on sale of personal motor car (not taxable) 12,000
2. Expenses deductible but not debited -
Entertainment Expenses
Taxable Business Income 1,03,500
Note 2 : Income from Other Sources Rs.
(i) Interest (including TDS) on deposits 10,000
(ii) Interest on I.T. Refund 1,200
(iii) Race Winnings 12,000
(iv) Maturity proceeds of LIC (Refer Note 4) 16,920
Taxable Income from Other Sources 40,120

Note 3:
Out of the gross total income of Rs.1, 43,620, a sum of Rs.12,000 being
race winnings is taxable at a flat rate of 30% u/s 115BB.
Note 4:
The exemption u/s 10(10D) is not available in respect of maturity of LIC
policy where the premium payable on such policy for any year exceeds
20% of the capital sum assured. In the given case, premium payable for
one year is Rs.47, 000 being 31% of capital sum assured. Therefore,
exemption u/s 10(10D) is not available. The amount taxable under the
head “Income from Other Sources” is Rs.16, 920 being maturity
proceeds of Rs.1, 57,920 less premium paid for 3 years Rs.1, 41,000.