cmabdtheblogger: Direct Taxation - Income from other sources

Direct Taxation

Income from other sources

Part A: Discussion and explanation of the relevant provisions of the Income Tax Act, 1961 with regard to computation of taxable income under the head "Income From Other Sources" and computation of tax liability.

Part B: 11 Illustrations with Solutions.

Part A

Incomes always taxable under the head “Income from other sources”

Under section 56(2) of the Income Tax Act, 1961 the incomes to be taxed under the head “Income from other sources” are:

1. Dividend income.

2. 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.

3. Any sum received by the assessee from his employees as contributions to any staff welfare scheme, if the same is not taxable as business income u/s 28.

4. Interest on debentures and Government securities/bonds, if the same is not taxed as business income u/s 28.

5. Rental income from machinery, plant or furniture let on hire, if the same is not taxed as business income u/s 28.

6. Rental income of letting out of plant, machinery or furniture along with letting out of building where the two lettings are not separable, if the same is not taxed as business income u/s 28.

7. Any sum received under a Keyman insurance policy (including bonus), if the same is not taxable as salary income or business income.

8. Aggregate amount of any money (in cash or by cheque or draft) received during a previous year without consideration by an individual or an HUF from any person or persons, if such aggregate amount exceeds Rs 50,000.

9. Aggregate fair market value of any movable property or properties received during a previous year without consideration by an individual or an HUF from any person or persons, if such aggregate fair market value exceeds Rs 50,000.

10. Stamp duty value of any immovable property received during a previous year without consideration by an individual or an HUF from any person or persons, if such stamp duty value exceeds Rs 50,000.

11. The difference between aggregate fair market value and consideration, if any movable property or properties is received for a consideration which is less than the aggregate fair market value of the movable property or properties and the difference is more than Rs 50,000.

12. The difference between stamp duty value and consideration, if any immovable property is received for a consideration which is less than the stamp duty value of the immovable property and the difference is more than the higher of the following amounts, namely:

a. The amount of Rs 50,000; and

b. The amount equal to 10% of the consideration, w.e.f. 1 – 4 – 2021.

13. 50% of interest received on compensation or on enhanced compensation, in the year in which such interest is received.

14. Where any sum of money, received as an advance or otherwise in the course of the negotiations for transfer of a capital asset, is forfeited and the negotiations do not result in transfer of such capital asset, then, such sum shall be chargeable to income-tax under the head “Income from other sources” with effect from the assessment year 2015-16.

Other incomes generally chargeable under the head “Income from other sources”

1. Income from subletting (if not taxed under the head profits and gains from business or profession).

2. Interest on bank deposits and loans.

3. Income from royalty (if it is not an income from business or profession).

4. Director’s fee.

5. Ground rent.

6. Agricultural income from a place outside India.

7. Director’s commission for standing as a guarantor to bankers.

8. Director’s commission for underwriting shares of new company.

9. Examination fees received by a teacher from a person other than his employer.

10. Rent of a plot of land.

11. Insurance commission.

12. Mining rent and royalties.

13. Casual income.

14. Salaries payable to a Member of Parliament.

15. Annuity payable under a will, contract or trust deed (excluding annuity payable by employer which is chargeable under the head “Salaries”.

16. Interest on securities issued by a foreign Government.

17. Family pension received by family members of a deceased employee.

18. Interest on employee’s own contribution received from unrecognised provident fund at the time of retirement of the employee.

19. Income from undisclosed sources.

20. Gratuity paid to a director who is not an employee of the company.

21. Income from racing establishments.

22. Compensation received for use of business assets.

23. Annuity payable to the lender of a trade mark.

24. Interest on income tax refund (Income tax refund itself is not an income).

Dividend income [Section 2(22)]

Under section 2(22), the following payments or distributions by an Indian company to its shareholders are deemed as dividend to the extent of accumulated profits of the company:

(a) Distribution by a company of its accumulated profits entailing release of company’s assets.

(b) Distribution by a company of its accumulated profits to its shareholders (both equity shareholders and preference shareholders) in the form of debentures, debenture stock or deposit certificates (whether with or without interest) and to its preference shareholders in the form of bonus shares.

Distribution of bonus shares to equity shareholders by capitalisation of profits is, however, not treated as dividend.

(c) Distribution by a company of its accumulated profits to its shareholders on its liquidation. Distribution in respect of preference shares issued for full cash consideration is, however, not treated as dividend.

(d) Distribution by a company of its accumulated profits to its shareholders on the reduction of capital. Distribution in respect of preference shares issued for full cash consideration is, however, not treated as dividend.

(e) Payment by way of loan or advance to the extent of accumulated profits by a closely-held company

(i). to a registered shareholder beneficially holding 10% or more of equity shares in the dividend paying company, provided the loan should not have been made in the ordinary course of business and money-lending should not be substantial part of the company’s business;

(ii). to a concern (which may be an HUF, sole proprietor, firm, AOP, BOI or a company) in which one beneficial shareholder of the dividend paying company has a substantial interest (i.e. at least 20% equity share capital of the company or at least 20% share in the income in case of other concerns) at any time during the previous year, provided the loan should not have been made in the ordinary course of business and money-lending should not be substantial part of the company’s business.

Taxability of dividend received on or after 01-04-2020

The taxability of dividends in the hands of the company as well as shareholders from Assessment Year 2021-22 [As amended by Finance Act, 2022] would be as under:

Taxable in the hands of resident shareholder

A person can deal in securities either as a trader or as an investor. The income earned by him from the trading activities is taxable under the head business income. Thus, if shares are held for trading purposes then the dividend income shall be taxable under the head business or profession. But if shares are held as investments, incomes in the nature of dividends arising from such shares shall be taxable under the head “income from other sources”. The income, taxable under the head PGBP, is computed in accordance with the method of accounting regularly followed by the assessee. For the purpose of computation of business income, a tax payer can follow either mercantile system of accounting or cash basis of accounting. However, the method of accounting employed by the assessee does not affect the basis of charge of dividend income as Section 8 of the Act provides that final dividend including deemed dividend shall be taxable in the year in which it is declared, distributed or paid by the company, whichever is earlier. Whereas, interim dividend is taxable in the previous year in which the amount of such dividend is unconditionally made available by the company to the shareholder. In other words, interim dividend is chargeable to tax on receipt basis.

Deductions from dividend income

Where dividend is assessable to tax as business income, the assessee can claim the deductions of all those expenditures which have been incurred to earn that dividend income such as collection charges, interest on loan etc. But if dividend is taxable under the head income from other sources, the assessee can claim deduction of only interest expenditure which has been incurred to earn that dividend income to the extent of 20% of total dividend income. No deduction shall be allowed for any other expenses including commission or remuneration paid to a banker or any other person for the purpose of realising such dividend.

Tax rate on dividend income

The dividend income shall be chargeable to tax at normal tax rates as applicable in case of an assessee except where a resident individual, being an employee of an Indian company or its subsidiary engaged in Information technology, entertainment, pharmaceutical or bio-technology industry, receives dividend in respect of GDRs issued by such company under an Employees’ Stock Option Scheme. In such a case, dividend shall be taxable at concessional tax rate of 10% without providing for any deduction under the Income-tax Act. However, the GDRs should be purchased by the employee in foreign currency.

Taxability in case of non-resident shareholders including FPIs

A non-resident generally invests in India either directly as private equity investors or as Foreign Portfolio Investors (FPIs). A non-resident person can also be a promoter of an Indian Company. A non-resident person generally hold shares of an Indian company as an Investment and, therefore, any income derived by way of dividend is taxable under the head other sources except where such income is attributable to Permanent Establishment of such non-resident in India. As regards FPIs, securities held by them are always treated as a capital asset and not as stock-in-trade. Thus, in case of FPIs also, the dividend income shall always be taxable under the head other sources.

Tax rate on dividend income

The dividend income, in the hands of a non-resident person (including FPIs and non-resident Indian citizens (NRIs)), is taxable at the rate of 20% without providing for deduction under any provisions of the Income-tax Act. However, dividend income of an investment division of an offshore banking unit shall be taxable at the rate of 10%. Further, where the dividend is received in respect of GDRs of an Indian Company or Public Sector Company (PSU) purchased in foreign currency, the tax shall be charged at the rate of 10% without providing for any deductions.

Inter-corporate dividend

As the taxability of dividend is proposed to be shifted from companies to shareholders, the Government has introduced a new section 80M under the Act to remove the cascading effect where a domestic company receives a dividend from another domestic company. However, nothing has been prescribed where a domestic company receives dividend from a foreign company and further distribute the same to its shareholders. The taxability in such cases shall be as under:

Domestic co. receives dividend from another domestic co.

The provisions of section 80M removes the cascading effect by providing that inter-corporate dividend shall be reduced from total income of company receiving the dividend if same is further distributed to shareholders one month prior to the due date of filing of return.

Domestic co. receives dividend from a foreign co.

Dividend received by a domestic company from a foreign company, in which such domestic company has 26% or more equity shareholding, is taxable at a rate of 15% plus Surcharge and Health and Education Cess under Section 115BBD. Such tax shall be computed on a gross basis without allowing deduction for any expenditure. Dividend received by a domestic company from a foreign company, in which equity shareholding of such domestic company is less than 26%, is taxable at normal tax rate. The domestic company can claim deduction for any expense incurred by it for the purposes of earning such dividend income.

Note: The Finance Act, 2022 has amended the Section 115BBD to provide that the provisions of this section shall not apply to any assessment year beginning on or after 01-04-2023.

No MAT on dividend income of a foreign company

Provisions relating to MAT apply to a foreign company only when it is a resident of a country with which India has DTAA and it carries on business through a PE situated in India. However, it should not be taxable under the presumptive taxation schemes of Section 44B, Section 44BB, Section 44BBA or Section 44BBB. Once it is determined that the foreign company is liable to pay MAT, certain adjustments are made from its profits. However, the following incomes (and expenses claimed in respect thereof) are added back to (or reduced from) the net profit if same is credited (or debited) in the profit and loss account, if such income is taxable at a rate lower than the rate of MAT:

(a) Capital gain from securities;

(b) Interest;

(d) FTS (fees for technical services).

Thus, a foreign company is not liable to pay MAT on the aforesaid incomes. Considering the taxability of dividend in the hands of the foreign company, the Finance Bill, 2021 has amended section 115JB to provide that dividend income and expenses claimed in respect thereof to be added back or reduced from the net profit if such income is taxed at lower than MAT rate due to DTAA. It should be noted that the dividend income shall be taxable in the hands of a foreign company in accordance with the provisions of the Act or relevant DTAA, whichever is more beneficial.

Advance tax liability on dividend income

If the shortfall in the advance taxes instalment or the failure to pay the same on time is on account of dividend income, no interest under section 234C shall be charged provided the assessee has paid full tax in subsequent advance tax instalments. However, this benefit shall not be available in respect of the deemed dividend as referred to in Section 2(22) (e).

Basis of charge of dividend income

1. NORMAL DIVIDEND

Normal dividend declared at annual general meeting (AGM) is deemed to be the income of the previous year in which it is declared.

2. DEEMED DIVIDEND

Deemed dividend u/s 2(22) is treated as the income of the previous year in which it is actually distributed or paid.

3. INTERIM DIVIDEND

Interim dividend is deemed to be the income of the previous year in which the amount of such dividend is unconditionally made available by the company to a shareholder.

Receipts without consideration (Gifts) [Section 56(2) (x)]

If any person receives, in any previous year, from any person or persons any sum of money or property without consideration or for inadequate consideration, it is chargeable to tax in the hands of the recipients under the head “Income from other sources”. The sum of money or property in this case falls in any of the following four categories:

Category: 1 – Gift in cash or by cheque or draft

Aggregate amount of any money (in cash or by cheque or draft) received during a previous year without consideration by an individual or an HUF from any person or persons, if such aggregate amount exceeds Rs 50,000 will be chargeable to tax.

Category: 2 – Immovable property without consideration

Stamp duty value of any immovable property received during a previous year without consideration by an individual or an HUF from any person or persons, if such stamp duty value exceeds Rs 50,000 will be chargeable to tax.

Category: 3 – Immovable property for a consideration which is less than Stamp Duty Value (SDV)

The difference between stamp duty value and consideration, if any immovable property is received for a consideration which is less than the stamp duty value of the immovable property and the difference is more than the higher of the following amounts, namely:

(i). The amount of Rs 50,000; and

(ii). The amount equal to 10% of the consideration, w.e.f. 1 – 4 – 2021.

Category: 4 – Movable property without consideration

Aggregate fair market value of any movable property or properties received during a previous year without consideration by an individual or an HUF from any person or persons, if such aggregate fair market value exceeds Rs 50,000 will be chargeable to tax.

Category: 5 – Movable property for a consideration which is less than the aggregate Fair Market Value (FMV)

The difference between aggregate fair market value and consideration, if any movable property or properties is received for a consideration which is less than the aggregate fair market value of the movable property or properties and the difference is more than Rs 50,000, will be chargeable to tax.

Exempted categories of gifts

While calculating the above monetary limit of Rs 50,000 in any of the five categories, any sum of money or property received from the following shall not be considered:

1. Money or property received from a relative.

2. Money or property received on the occasion of the marriage of the individual.

3. Money or property received by way of will or inheritance.

4. Money or property received in contemplation of death of the payer.

5. Money or property received from a local authority.

6. Money or property received from any fund, foundation, university, other educational institution, hospital, medical institution, any trust or institution referred to in section 10(23C).

7. Money or property received from a charitable institute registered u/s 12AA.

Meaning of property

Property for the purpose of above means the following capital asset:

1. Immovable property being land or building or both;

2. Shares and securities;

3. Jewellery;

4. Archaeological collections;

5. Drawings;

6. Paintings;

7. Sculptures;

8. Any work of art; or

9. Bullion (with effect from 1^st June, 2010). [Bullion is gold, silver, or other precious metals in the form of bars, ingots, or specialized coins that is said to maintain its worth better than conventional currencies and is therefore, kept as a form of emergency currency by both governments and private citizens alike.]

Valuation of properties

1. Immovable property

Stamp duty value of the property.

2. Jewellery, archaeological collections, drawings, paintings, sculptures

Or any work of art

The invoice value on the valuation date if purchased from a registered dealer (registered under GST) or the net realisable value in the open market on the valuation date in any other case will be the value of the property.

3. Quoted shares and securities

(a) The transaction value as recorded in the recognised stock exchange in India when received by way of a transaction carried out through such stock exchange.

(b) The lowest price quoted on the valuation date (or on a date immediately preceding the valuation date when such shares/securities are traded, if such shares/securities are not traded on the valuation date) on any recognised stock exchange in India when received not by way of a transaction carried out through any such stock exchange.

4. Unquoted equity shares

Value of one equity share =

(Net worth ÷ Total amount of paid up equity share capital as shown in the balance sheet) x Paid up value of one equity share.

Where,

1. Net worth =

Assets (on the valuation date) – Liabilities (on the valuation date)

2. Asset =

Total assets as per balance sheet – Advance tax paid – Fictitious assets – Debit balance of profit and loss account.

3. Liabilities =

Total liabilities as per balance sheet – Paid up equity share capital – Proposed dividends (if they are not declared at AGM before the date of transfer) – Reserves and surplus – Provision for taxation – Provisions for unascertained liabilities.

5. Other unquoted shares and securities

Fair market value of the shares and securities i.e. net realisable value of the shares and securities on the valuation date.

Meaning of relative

Relative for the purpose of above means –

1. Spouse of the individual;

2. Brother or sister of the individual;

3. Brother or sister of the spouse of the individual;

4. Brother or sister of either of the parents of the individual;

5. Any lineal ascendant or descendant of the individual;

6. Any lineal ascendant or descendant of the spouse of the individual; and

7. Spouse of the person referred to in (2) to (6).

Winnings from lotteries, crossword puzzles, horse races and card games [Sec. 56(2) (i b)]

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, is taxable u/s 56 under the head “Income from other sources”.

Gross winnings from lotteries, crossword puzzles, races including horse races (other than income from the activity of owning and maintaining race horses), card games and other games of any sort or from gambling or betting of any form or nature whatsoever are chargeable to income-tax at a flat rate of 30% (+ SC + Health and Education Cess) on the gross winnings (without claiming any allowance or expenditure).

Under section 194B and 194BB, tax is deductible @ 30% on payments in respect of winnings from lotteries or crossword puzzles or card games or other games exceeding Rs 10,000. In case of winnings from horse races, payments exceeding Rs 5,000 are subject to tax deduction at source @ 30%.

Interest on securities [Section 2(28B)]

Interest on securities means –

(a) Interest on any security of the Central Government or a State Government;

(b) Interest on debentures or other securities for money issued by or on behalf of a local authority or a company or a corporation established by a Central, State or Provincial Act.

Basis of charge of interest on securities

Interest on securities is taxable on “receipt” basis, if the assessee maintains books of account on “cash basis”. It is taxable on “due” basis, if the books of account are maintained on “mercantile basis”. Interest is taxable on “receipt” basis, even if the books of account are maintained on “mercantile basis”, if such interest had not been charged to tax on “due” basis for any earlier previous year.

Interest exempt from tax [Section 10(15)]

Interest on the following is exempt from tax:

1. Interest on notified securities, bonds or certificates. From the assessment year 2012-13, Post Office Savings Bank Account interest will be exempt only to the extent of Rs 3,500 in the case of an individual account and Rs 7,000 in the case of joint account.

2. Interest on 7% Capital Investment Bonds in the hands of individual and HUF.

3. Interest received by an NRI from notified bonds (i.e. NRI Bonds issued by the SBI).

4. Interest on notified Relief Bonds in the hands of individual and HUF.

5. Interest on notified bonds/debentures of a public sector company.

6. Interest on deposit made by a retired Government employee or an employee of a public sector company, out of money due to him on account of retirement.

7. Interest on Gold Deposit Bonds.

8. Interest on notified bonds issued by a local authority (up to the A.Y. 2007-08).

9. Interest on securities held by the Welfare Commissioner, Bhopal Gas Victims, Bhopal, or interest on deposits for the benefit of the victims of the Bhopal gas leak disaster held in such account with the RBI or with a public sector bank, as the Central Government may specify in this behalf.

10. Interest on notified bonds issued by a local authority or by a State Pooled Finance Entity (applicable from the assessment year 2008-09).

Grossing up of interest

Gross interest [i.e. net interest + tax deducted at source] is taxable. Net interest is grossed up in the hands of recipient if tax is deducted at source by the payer. Tax is deducted at source @ 10% from payment of interest. But no tax is deductible in the case of Government securities.

Prevention of avoidance of tax by Bond Washing Transactions u/s 94(1)

Where a security owner transfers the securities on the eve of due date of interest and reacquires them after the due date of interest is over, the interest received by the transferee will be deemed as income of the transferor and, accordingly, it will be included in the total income of the transferor and not of the transferee.

Prevention of avoidance of tax u/s 94(2)

If an assessee, having beneficial interest in securities during the previous year, sells them in such a way that either no income is received or income received is less than the sum he would have received if interest had accrued from day to day, then income from such securities for such year would be deemed as income of such person.

Exceptions to sections 94(1) and 94(2)

The deeming provisions of sections 94(1)/(2), as discussed above, are not applicable if the security owner proves to the satisfaction of the Assessing Officer that –

(a) There has been no avoidance of income-tax; or

(b) The avoidance of income-tax was exceptional and not systematic and there was not any avoidance of income-tax u/s 94(1)/ (2) in this case, during three years preceding the previous year.

Income from plant, machinery or furniture let on hire [Section 56(2) (ii)]

Income from plant, machinery or furniture, belonging to the assessee and let on hire, is taxable as income from other sources, if the same is not chargeable to tax under the head “Profits and gains of business or profession”.

Income from composite letting of building, plant, machinery or furniture

[Section 56(2) (iii)]

If an assessee lets on hire plant, machinery or furniture and also building and letting of building is inseparable from letting of plant, machinery or furniture, income from such letting is taxable as income from other sources, if the same is not chargeable to tax under the head “Profits and gains of business or profession”. On the basis of the judicial pronouncements, following conclusions can be drawn:

1. WHERE COMPOSITE RENT INCLUDES RENT OF BUILDING AND CHARGES FOR DIFFERENT SERVICES

If the owner of a house property gets a composite rent in the form of rent for the property as well as charges for different services rendered to the tenants, the composite rent is to be split up and the sum which is attributable to the use of property is to be assessed and charged to tax under the head “Income from house property” u/s 22. The amount which relates to rendition of the services is to be charged to tax either under the head “Profits and gains of business or profession” u/s 28 or under the head “Income from other sources” u/s 56(1). This rule is applicable even if the assessee receives the rent of the building and the charges for different services rendered to the tenants separately.

2. WHERE COMPOSITE RENT INCLUDES RENT OF BUILDING AND RENT OF OTHER ASSETS, AND THE TWO LETTINGS ARE INSEPARABLE

If there is letting of plant, machinery or furniture and also letting of building and the two lettings form part and parcel of the same transaction or the two lettings are inseparable (in the sense that letting of one is not acceptable to the other party without letting of the other), the composite rent as a whole is taxable as income from other sources u/s 56(2) (iii), if the same is not taxable as business income. This rule is applicable even if the total sum receivable for the two lettings is fixed separately.

3. WHERE COMPOSITE RENT INCLUDES RENT OF BUILDING AND RENT OF OTHER ASSETS, AND THE TWO LETTINGS ARE SEPARABLE

If there is letting of building and also letting of plant, machinery or furniture and the two lettings are separable (in the sense that letting of one is acceptable to the other party without letting of the other), the income from letting out of building is taxable under the head “Income from house property” and the income from letting out of other assets is taxable either as business income or as income from other sources u/s 56(2) (iii). This rule is applicable even if the assessee receives composite rent from his tenant for two lettings.

Receipt of shares by a firm or a closely held company [Section 56(2) (viia)]

Aggregate fair market value of shares in a (or in more than one) closely held company (or companies) received by a firm or a closely held company from any person or persons during the previous year without consideration will be taxable in the hands of the recipient, if such aggregate fair market value exceeds Rs 50,000.

Where shares in a (or in more than one) closely held company (or companies) are received for a consideration by a firm or a closely held company from any person or persons during the previous year and the consideration is less than the aggregate fair market value of the shares, the difference between the consideration and the aggregate fair market value of the shares will be taxable in the hands of the recipient, if such difference exceeds Rs 50,000.

Interest on deep discount bonds

Every person holding a deep discount bond will make a market valuation of the bond as on 31^st March of each financial year. The difference between the market valuations as on two successive valuation dates will represent the accretion to the value of the bond during the relevant financial year and will be taxable as interest income (where the bonds are held as investments) or business income (where the bonds are held as trading assets i.e. as stock-in-trade).

Where the bond is transferred at any time before the maturity date, the difference between the sale price and the cost of the bond will be taxable as short-term capital gains in the hands of an investor or as business income in the hands of a trader.

Where the bond is redeemed by the registered subscriber at maturity, the difference between the redemption price and the value as on the last valuation date immediately preceding the maturity date will be taxed as interest income in the case of investors, or business income in the case of traders.

Deductions permissible from income from other sources [Section 57]

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

1. Expenditure on repairs and insurance premium in the case of income from letting out of building/premises u/s 56(2) (ii)/ (iii).

2. Expenditure on repairs and insurance premium in the case of income from letting out of plant, machinery and furniture u/s 56(2) (ii)/ (iii).

3. Depreciation in the case of income from letting out of building/premises, plant, machinery and furniture u/s 56(2) (ii)/ (iii). The mode of computation of depreciation is the same which is applicable for calculating business income.

4. Any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of realising dividend (if it is taxable in the hands of recipient) or interest on securities [Section 57(i)].

5. Any sum received by a taxpayer as contribution from his employees towards any welfare fund of such employees, if such sum is credited by the taxpayer to the respective employees’ accounts in the relevant fund before the due date [Section 57(ia)].

6. Rs 15,000 or ‘1/3^rd of the income in the nature of family pension’, whichever is less. [Sec. 57(iia)].

7. Interest on money borrowed for investing in shares, even if the shares have not yielded any income during the previous year [CIT vs. Rajendra Prasad Moody (1978)]. Similarly, interest on money borrowed for investing in debentures is also allowable as deduction from interest income.

8. Any other expenditure is deductible u/s 57(iii) in computing the chargeable income under the head “Income from other sources”, if the following four basic 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. The expenditure must not be in the nature of personal expenses of the assessee;

d. The expenditure must be laid out or expended in the relevant previous year and not in any prior or subsequent year.

9. In the case of income by way of interest received on compensation or on enhanced compensation, 50% of such interest is deductible from such income u/s 57(iv) from the assessment year 2010-11. However, no other deduction is permitted from such income.

Important Note:

No deduction is available u/s 57 in the case of income referred to in sections 115A, 115AB, 115AC, 115AD, 115BBA, and 115D.

Amounts not deductible while computing income from other sources [Section 58]

1. PERSONAL EXPENSES – Any personal expenses of the assessee is not deductible.

2. INTEREST – Any interest chargeable under the Act which is payable outside India and on which tax has not been deducted at source is not deductible.

3. SALARY – Any payment chargeable under the head “Salaries” and payable outside India is not deductible, if tax has not been paid or deducted there from at source.

4. AMOUNT SPECIFIED BY SECTION 40A – Any amount specified by section 40A is not deductible while calculating income under the head “Income from other sources”.

5. EXPENDITURE IN RESPECT OF ROYALTY AND TECHNICAL FEES RECEIVED BY A FOREIGN COMPANY – In the case of foreign companies, expenditure in respect of royalties and technical service fees as specified u/s 44D is not deductible.

6. EXPENDITURE IN RESPECT OF WINNINGS FROM LOTTERIES, RACES, CARD GAMES, ETC. – No deduction (and no set off of losses) shall be allowed under any provision of the 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. Where, however, a certain percentage has to be foregone by the winner to the Government/Agency conducting the lotteries, it is deductible, vide Circular No. 461, dated 9^th July, 1986.

Part B

Direct Taxation

Income from other sources

Selected Problems

Illustration: 1

X receives the following gifts during the previous year 2021-22 –

01.09.21	Cash gift of Rs 51,000 from a friend on marriage anniversary
30.09.21	Purchase of a house property from a friend for Rs 10,00,000 (stamp duty value is Rs 40,00,000)
01.12.21	Purchase of a house property from Mrs. X for Rs 15,00,000 (stamp duty value is Rs 80,00,000)
29.12.21	Purchase of a painting from an art gallery (being registered dealer under Maharashtra GST) for a concessional price of Rs 80,000 (invoice value is Rs 80,000, however, this painting can be easily sold for Rs 2,00,000)
10.03.22	Cash gift of Rs 40,000 from a colleague
15.03.22	Purchase of a second hand car for Rs 2,00,000 (fair market value is Rs 3,50,000)
31.03.22	Cash gift of Rs 30,000 from a non-resident friend

Find out the amount chargeable to tax under the head “Income from other sources” for the assessment year 2022-23. Does it make any difference if X is a dealer in second hand cars and on 15.03.22 the car is purchased as stock-in-trade?

Click here for Solution: 1 in PDF

Illustration: 2

X, a resident and ordinarily resident in India, gives the following particulars of his income and expenditure for the P.Y. 2021-22:

1) Rent of a house situated in Delhi: Rs 30,000; rent from letting a building (in Mumbai) along with plant and machinery (letting out of the building cannot be separated from letting out of the plant and machinery): Rs 60,000; depreciation of building in Mumbai: Rs 3,000; depreciation of building in Delhi Rs 2,000; repairs and maintenance of building (in Mumbai) and plant and machinery: Rs 6,000.

2) Dividends on preference shares from an Indian company declared on 03.08.21: Rs 9,000.

3) Loan from another Indian company which is deemed as dividend u/s 2(22) (e) is given on 03.04.21: Rs 18,000.

4) Royalty income: Rs 7,000.

5) Winnings from camel races on 25.09.21: Rs 13,000 [TDS: Nil].

6) Interest received on 6.5% (tax-free) National Relief Bonds: Rs 42,000.

7) Gift received on 20.01.22 in foreign currency from a school friend: Rs 1, 80,000. Gift from another friend on 31.03.22: Rs 20,000.

Determine the income chargeable under the head “Income from other sources” for the A.Y. 2022-23.

Click here for Solution: 2 in PDF

Illustration: 3

Mrs. X (age: 42 years) holds the following securities on 01.04.2021:

10% (Non-listed) debentures of ABC Ltd. (dates of payment of interest: June 1 and December 1 every year)	Rs 20,000
10% Central Government securities (date of payment of interest: February 28 every year)	Rs 1,70,000
11% debentures of PQR Ltd. (dates of payment of interest: March 1 and September 1 every year)	Rs 1,30,000

On 31.10.2021, Mrs. X sells 11% debentures of PQR Ltd. Determine the taxable income and tax liability of Mrs. X for the A.Y. 2022-23 on the assumption that her salary income (after standard deduction) is Rs 11,83,860 and she contributes Rs 1,32,270 towards unrecognised provident fund. Mrs. X gets a gift of Rs 1.50 lakh from her husband on 31.03.2022. Ignore Section 115BAC pertaining to alternative tax regime.

Click here for Solution: 3 in PDF

Illustration: 4

X, maintaining books of account on the basis of financial year, holds the following securities on 1^st April, 2021:

7% MP Government Loan (date of payment of interest: 15^th July every year)	Rs 60,000
11% debentures (non-listed) of ABC Ltd. (date of payment of interest: 30^th June every year)	Rs 30,000

Apart from the aforesaid securities, X invests in UP Government Loan, Central Government securities and (listed) debentures of PQR Limited and receives on 1^st December, 2021 Rs 3,000, Rs 9,000 and Rs 2,700 (net of tax deducted @ 10%), respectively, as interest. His business income is Rs 11, 86,000. He pays Rs 200 as commission to his bank for collecting interest on securities. Determine the taxable income of X for the A.Y. 2022-23.

Click here for Solution: 4 in PDF

Illustration: 5

X holds the following securities on 1^st April, 2021:

8% non-listed debentures of ABC Ltd.	Rs 24,000
15% securities of the Punjab Government	Rs 1,35,000

Interest in both the cases is payable on 31^st October every year. On 1^st September, 2021, X borrows Rs 30,000 at 7% per annum and invests in purchasing Rs 30,000, 7.5% securities of the UP Government (due dates of interest: 15^th January and 15^th July every year). Interest which becomes due on 15^th January, 2022 is actually received by 31^st March, 2022. However, interest on borrowing for the period ending 31^st March, 2022 is still unpaid. His business income is Rs 14, 69,000. Determine the taxable income of X for the A.Y. 2022-23 on the assumption that:

(a) He maintains books of account on mercantile basis.

(b) He maintains books of account on cash basis.

Click here for Solution: 5 in PDF

Illustration: 6

X (44 years) is a businessman. For the P.Y. 2021-22, his business income is Rs 19, 40,000. During 2009-10, a plot of land owned by X was compulsorily acquired by the Gujarat Government. Initial compensation of Rs 16, 00,000 was received by X in 2012-13. On X’s appeal, the Gujarat High Court has increased the compensation from Rs 16, 00,000 to Rs 20, 00,000. On 1^st July, 2021, he received the additional compensation of Rs 4, 00,000 along with interest of Rs 70,000 (as directed by the High Court and it is calculated from 2009-10 onwards). To get the compensation enhanced, X has spent a sum of Rs 45,000 (it includes advocate fees as well as other incidental expenses).

On 1^st March 2022, X purchases a Raja Ravi Ram painting from a friend for Rs 1, 00,000. However, its market value is not less than Rs 4, 00,000. On the same day, he purchases a second hand car for Rs 80,000. Its market value is not less than Rs 1, 40,000.

X deposits Rs 1,30,000 in Public Provident Fund and is eligible for deduction of Rs 1,40,000 u/s 80G.

Find out the net income and tax liability of X for the A.Y. 2022-23.

Click here for Solution: 6 in PDF

Illustration: 7

On 1^st March 2022, X purchases a Raja Ravi Ram painting from Jain Art Gallery, Andheri West, (Mumbai) (being a registered GST dealer). The painting is purchased at the invoice price of Rs 1, 00,000, whereas market value of the same is Rs 4, 00,000. On the same day, he purchases a second hand car for Rs 80,000. Its market value is not less than Rs 1, 40,000.

X deposits Rs 1,30,000 in Public Provident Fund and is eligible for deduction of Rs 1,40,000 u/s 80G.

Find out the net income and tax liability of X for the A.Y. 2022-23.

Click here for Solution: 7 in PDF

Illustration: 8

X (32 years) is resident in India. Find out the net income and tax liability of X for the A.Y. 2022-23 from the information given below:

(a) Winnings from races: Rs 10,000 (expenditure incurred: Rs 200)

(b) Short term capital gain: Rs 3,65,000 (securities transaction tax applicable)

(d) Contribution made to public provident fund: Rs 1,14,000

Click here for Solution: 8 in PDF

Illustration: 9

X (32 years) is non-resident in India. Find out the net income and tax liability of X for the A.Y. 2022-23 from the information given below:

(a) Winnings from races: Rs 10,000 (expenditure incurred: Rs 200)

(b) Short term capital gain: Rs 3,65,000 (securities transaction tax applicable)

(d) Contribution made to public provident fund: Rs 1,14,000

Click here for Solution: 9 in PDF

Illustration: 10

Mrs. X (27 years) is resident in India. Find out the net income and tax liability of Mrs. X for the A.Y. 2022-23 from the information given below:

(a) Winnings from lottery: Rs 35,000 (expenditure incurred: Rs 500)

(b) Long term capital gain (on transfer of gold): Rs 2,25,000

(d) Interest on debentures: Rs 82,000

(e) Contribution made to public provident fund: Rs 1,50,000

Click here for Solution: 10 in PDF

Illustration: 11

Mrs. X (Date of birth: 1^st April, 1942) is resident in India. Find out the net income and tax liability of Mrs. X for the A.Y. 2022-23 from the information given below:

(a) Winnings from lottery: Rs 35,000 (expenditure incurred: Rs 500)

(b) Long term capital gain (on transfer of gold): Rs 2,25,000

(d) Interest on debentures: Rs 82,000

(e) Contribution made to public provident fund: Rs 1,50,000

Click here for Solution: 11 in PDF

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Thursday, June 15, 2023

Direct Taxation - Income from other sources

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