Any income which does not fall under the heads of Salary, House Property, Business & Profession and Capital Gain will fall under the head Income from Other Source. Hence, this is the residuary head of income. Hence, it is very important to understand what kind of income will taxable under this and what kind of expenses will allowable under this head. Please note that once income is assessed under other source, then allow ability of expenditure depends upon only on section 57. Thus, there cannot be any deductions under section 30 to 43. Also, there is no provision for carry forward of loss from other source. It will be lapse in the same year.
Further, in the recent, gifts, sale of shares without adequate consideration etc had been included in Income from Other Sources.
Now let us understand the same with the help of some of the latest judicial decision.
Sub Lease : In the case of Ocean City Trading India Pvt Ltd V s ITO, 3 ITR (Trib) 311, it was held that when there was no evidence that sub leasing constitute a business and hence assessable as Income from Other Source. Again, in the case of Tushar Pravinchandra Shah v DCIT it was held that Income derived by a tenant from sub letting of his tenanted property is liable ro be trtated as income from other source & not from house property.
Loan to Associates : Assessee having borrowed money from group company and invested the same in a sister concern managed by her close associates and relative which is running in loss, the expenditure towards interest on loan cannot be said to have been laid out wholly and exclusively for the purpose of making income but was a colourable device, to utilize the funds of one company in the other sister concern and therefore, the interest on loan is not allowable deduction under section 57(iii). Refer, CIT v Smt Swapna Roy, 2010 5 taxmann.com 71 All. / 40 DTR 193.
During the year under consideration, assessee company had taken loans amounting to Rs. 56.88 Crores from its holding company and same was advanced to four companies belonging to same group. Assessee claimed that the said interest is taxable as income from business income. The Tribunal held that since there was nothing on record to show that assessee company was in business of finance or money lending in year under consideration, net interest income earned by it was chargeable to tax under head income from other sources. Refer, Vidhyavihar Containers Ltd. v. Dy. CIT, 133 ITD 363.
Pre-operative Incomes : Interest income which accrued to the assessee during the pre–operative period on the funds kept with the bank which, were specifically earmarked for purchase of capital asset constitute capital receipt and could not be taxed under the head income from other source. Refer, Indian Oil Panipat Power Consortium Ltd, 181 Taxman 249.
Relinquishment of Rights : Receipt by the assessee a partner for relinquishing his right in the firm so as to enable the firm to sell its land, pending the final decree for dissolution was liable to be assessed as income from other sources. Refer, Visalakshy Kumaran, 18 DTR 139.
Again in the case of Purvez A Poonawalla v ITO, it was held that Sum received by assessee for giving up his rights to contest a will cannot be treated as income u/s 56.
Delhi High Court had decided that when assessee transfers distribution business against commission which is allowed as business expenditure, Revenue is not right in treating same commission as income from other sources in case of assessee.
Indemnification : The assessee promoter of society entered in to an agreement with developer, however due to certain legal disputes, developer could not honour the commitment. The assessee received certain compensation from the developer. The assessee contended that the amount is not taxable and alternatively it can be assessed as capital gains. The court held that the amount received by the assessee to indemnify “D” from any action that might have been taken against him by persons who had booked the flats through assessee, was to be assessed as “income from other sources”. Refer, Manoj B. Joshi, 179 Taxman 30.
Gift : A Karta of the family or father in law has no moral obligation to gift gold ornaments to daughter in law and therefore, gift of gold by the father in law at the time of her marriage is chargeable to gift tax. Refer, Triveni Devi, 24 DTR 143 (Raj.).
Gift received on the occasion of marriage of daughter is taxable as income from other sources. Refer, Rajinder Mohan Lal v. Dy. CIT, 49 SOT 713.
In the case of V S Chalke v ITO, it was held that Gifts can always be exchanged out of natural love & affection
In the case of Mayawati it was held that Gift received by the assessee in excess of Rs. 25,000 each were offered by the assessee as “Income from other sources” in the return of income. The assessing officer taxed the gift of below Rs. 25,000, each as income from profession and occasion. The Tribunal held that gift received by various donors by a prominent political figure cannot be taxed as amount received as profession or occasion. As the CIT(A) held that the gift above was taxable under section 56(2)(v), gift below Rs. 25,000 cannot be taxed as income from profession or occasion. Refer, 48 DTR 233.
Capacity & Creditworthiness of Donor coupled with occassions of giving large sum of gifts are decesive factors for accepting a gift as genuine. Refer, ACIT v Deepal H Shroff.
Section 56(2)(v), read with Explanation speaks of relationship between the donor and donee and not deemed assessee, maternal uncle of the assessee who made gifts of Rs. 5 Lakhs to two minor sons of the assessee is not a “relative” of the donees with in the meaning of explanation to section 56(2)(v) and therefore, the impugned sum is chargeable to tax in the hands of the assessee under the provisions of section 56 read with section 64. Refer, ACIT vs. Lucky Pamnani, 135 TTJ 607. However, in the 129 ITD 489 (Mum.)(Trib.) it was held that Gift of ` 10 lakhs received by minor children of assessee from blood brother of assessee’s mother was eligible for exemption as in the instant case the relationship of donor & done could not fall in category of grandfather, neither donee was a lineal descendant of the donor. Thus, addition was upheld.
HUF is a “relative” for gifts exemption u/s 56(2)(v), (vi) & (vii) The assessee received a gift of Rs.60 lakhs from his HUF. The AO & CIT(A) held that as HUF was not covered by the definition of “relative”, the gift was chargeable to tax u/s 56(2)(v). The alternate submission that gift was exempt u/s 10(2) was rejected on the basis that s. 10(2) applied only to amounts received “out of income of the estate” on partial or total partition of the HUF. On appeal by the assessee, HELD allowing the appeal. Refer, Vineetkumar Raghavjibhai Bhalodia vs. ITO (ITAT Rajkot).
Applicant is to receive contribution of shares of GIL without consideration. GIL is a company in which public are substantially interested and its shares are listed on BSE , therefore no income is liable to tax within the meaning of section 56 (2) (viia). Consequently ,provisions of sections 92 to 92 F are not applicable. Refer, Good Year Tire & Rubber CO IN RE., 240 CTR 209.
Gifts received by Minors from a donor, who is not a brother or sister of either of their parents is hit by provisions of sec 56. Refer, ACIT v Lucky Pamnani.
In the case of CIT v Gopala Naicker Bangaru, it was held that Unless & until, Gift is not connected with profession or vocation, It cannot be taxed.
Rental Income : Where the prominent object of the assessee company was, ‘to deal in properties’ and the rental income derived by the assessee from such business was assessed as business income in earlier years, the same cannot be treated as income from other sources in absence of any new facts / evidence brought on by the revenue authorities. Refer, D.S. Promoters & Developers (P) Ltd, 25 DTR 8 (Del.).
The assessee let out its factory with all machineries with effect from September 8, 1983 as per lease agreement for a period of 11 months. After the expiry of lease period, lease agreement was not renewed. The Court held that one has to see whether the intention of the assessee is to go out of business altogether or to come back and restart the same. Except lease agreement, no material has been produced by the assessee before the Assessing Officer or this court to come to the conclusion that the assessee is likely to come back and restart the business .Accordingly the court held that income to be treated as income from other sources. Refer, CIT v Ventateswra Agro Chemicals and minerals P. Ltd, 338 ITR 428.
Where the assessee has not started his discontinued business and nothing is available on record wherefrom it can be inferred that assessee has ever intended to start its business the rental income was rightly considered by the AO as an income from other sources; however, whatever expenses are necessary to be incurred to earn the income are allowable expenditure u/s 57(iii). Refer, ITO v. PujyaSujatha Agro Farms (P) Ltd. 145 TTJ 489 (Visakha) (Trib.)
The assesse company is engaged in the business of real estate development . It had declared a sum under the head income from house property . The Assessing Officer took the view that the amount received on account of signage rent, parking rent, terrace rent and license fees was to be taxed under the ‘profits and gains of business. In appeal Commissioner (Appeals) held that the same is assessable as income from other sources. On appeal the Tribunal confirmed the view of the Commissioner (Appeal) and held that signage rent, terrace rent and license fee is taxable as Income from other sources u/s. 56 and not as income from house property u/s. 22. Refer, JMD Realtors (P) Ltd. v. DCIT, 135 ITD 337 (Delhi)(Trib.).
Interest Income : Builder collecting advance from prospective purchasers of flats and keeping the funds temporarily in fixed deposit. Interest on such deposit is chargeable as ‘Business Income’ and not as ‘Other Sources’. Refer, Lok Holdings, 212 Taxation 159.
In the case of G T N Textiles Limited v DCIT, 326 ITR 352, it was held that Share application money received has been placed on FD with Bank and the same taxable under other source.
Where Company handed over its business to other companies with a view to earn fixed monthly income & intention of reviving that business was not dominant, income earned by assessee there from was assesseaable to tax under head " Income from Other Source" and not as " Business Income". Refer, Automann India (P) Limited v ITO.
Fixed deposit placed with Bank as performance guarantee as condition for being awarded contract work. Interest on fixed deposits not assessable as income from other sources. Refer, CIT v Jaypee Dsc Ventures Ltd, 335 ITR 132.
In the case of CIT v Eastman Industries, 327 ITR 29, it was held that Interest income earned by the assessee from dealer of shares & mutual fund to be treated as Income from Other source.
Assessee which is engaged in the business of developing, operating and maintaining an industrial park, interest income earned by it from surplus funds kept as fixed deposits in various banks is to be taxed under the head income from other sources. Refer, ITO v. Information Technology Park Ltd., 49 SOT 491 (Bang.)(Trib.).
In the case of CIT v. Madhya Bharat Energy Corporation Ltd, 337 ITR 589 it was held that interest income earned from fixed deposits kept in the court for arbitration as Income from other source.
Interest Expenditure : It is held by the Larger Bench that under section 57(iii), expenditure laid out or expended wholly or exclusively for the purpose of making or earning income is deductible. It is the purpose of the expenditure that is relevant but the purpose need not be fulfilled. R. P. Moody 115 ITR 519 (SC) followed. The assessee must act bona fide & show nexus between the advancing of funds and his business interest. The dominant purpose for making the investment must be to earn income & to ascertain the purpose the Assessing Officer may lift the veil (Swapna Roy 233 CTR 10 (All) & Punjab Stainless 324 ITR 396 (Del.) followed); It was also held that legal effect of a transaction cannot be displaced by probing into the “substance of the transaction”. Thus, the exercise of jurisdiction cannot be stretched to hold a roving enquiry or deep probe. Refer, CIT vs. Rockman Cycles Industries.
Where the assessee borrowed funds from bank and invested the same in Fixed Deposits (‘F.D’) and earned more interest on the F.D. than the interest payable on the borrowed funds taking advantage of Export Import policy of the Government interest paid on the borrowing was held to be allowable as deduction under section 57(iii) of the Act from the interest earned on F.D as there was direct nexus between the interest earned and interest paid by the assessee. Refer, CIT vs. Taj International Jewellers. 50 DTR 348.
Difference in Inventory : Income in respect of deficiency in Inventory found during cource of survey has to be assessed as income from other sources, not under the head" income from business or profession". Refer, ACIT v Ratan Industries (P) Limited.
Interest on Tax Refunds : The assessee claimed that the interest earned on income tax refund should be netted off against payment of interest . The Assessing Officer has not agreed with the contention of assessee and assessed the entire interest refund from Income tax department as income from other sources. On appeal the Commissioner (Appeals) held that the netting of interest is to be allowed . On appeal by revenue the Tribunal held that since the payment of income tax could not be said to be made for earning of interest the deduction cannot be allowed under section 57 (iii).Appeal of revenue was allowed. Refer, Dy. CIT v. American Express (India ) (P) Ltd, 135 ITD 211.
FAQ on Income from Other Sources.
Q. What constitutes Income from other sources?
A. A source of income, which does not specifically fall under any of the other heads of income namely Salary, Income from house property , Profits and gains from business or profession or capital gains will be brought to charge under section 56 under the head `Income from other sources'. In other words, it can be said that the residuary head of income can be resorted to only if none of the specific heads is applicable to the income in question, and that comes into operation only if the other heads are excluded.
Q. What are the various incomes taxable under the head Income from Other Sources?
A. The following incomes are chargeable under this head, namely, Income from interest on bank deposits and loans, royalty, directors fees, ground rent, agricultural income from outside India, examination fees received by a teacher, rent of a plot of land, insurance commission, mining rent and royalties, casual income in excess of Rs. 5000 (Rs. 2500 in case of winnings from races including horse races), winnings from lotteries, crossword puzzles, card games etc. Income from machinery, plant or furniture let on hire and interest on Securities.
Q. What is deemed dividend and is it taxable?
A. Any payment by way of a loan or advance by a closely-held company to a registered shareholder holding substantial interest - provided the loan should not have been made in the ordinary course of business, and money-lending should not form a substantial part of the company’s business - is treated as deemed dividend and is taxable under the head, Income from other sources. However, subsequent dividend to the extent it is so set-off against any loan or advance deemed as dividend is not taxable.
Q. Are there any securities, the interest on which is exempt from tax?
A. From the assessment year 1989-90, interest on the following is exempt from tax: Interest on notified securities, bonds and certificates. The notified securities/bonds etc., are: 12 year National Savings Annuity Certificates; National Defence Gold Bonds, 1980; Special Bearer Bonds, 1991; Treasury Savings Deposit Certificate; Post Office Cash Certificates (5 years); National Plan Certificate (10 years); National Plan Certificates (12 years); Post Office National Savings Certificates (12 years/7 years); Public Account of Post Office Savings Account Rules (interest upto Rs. 5000); Post Office Savings Rules; Post Office CTD; Fixed Deposit [Government Savings Certificates (Fixed Deposits) Rules, 1968 or Post Office (Fixed Deposit) Rules, 1968]; Special Deposit Scheme, 1981 and Non-Resident (Non-Repatriable) Rupee Deposit Scheme.
Interest to an individual and Hindu undivided family on 7% Capital
Investment Bonds with effect from the assessment year 1983-84.
Interest on notified bonds arising to non-resident Indians [i.e., NRI Bonds and NRI Bonds (Second Series), issued by the State Bank of India].
Interest on securities held by the Issue Department of the Central Bank of Ceylon. Interest payable to any foreign bank performing central banking functions outside India in respect of deposits made by such bank with any scheduled bank in India (from assessment year 1985-86).
Interest on 9% Relief Bonds, 1987 in case of an individual or a Hindu undivided family. Interest on notified debentures of public sector companies.
Interest on deposits made in a notified scheme by a retired Government employee and an employee of a public sector company with effect from April, 1991 out of the money due to him on account of retirement, applicable from the assessment year 1990-91.
Q. What do you mean by Family pension and how is it taxable?
A. “Family Pension” means a regular monthly amount payable by the employer to a person belonging to the family of an employee in the event of his death.Taxability : "Family Pension" will be taxable under the head, Income from other Sources. The asseessee will be allowed a deduction of a sum equal to one-third ( 1/3 rd) of such income or rupees fifteen thousand, whichever is less.
I hope the above summary of case laws in respect of section 54 in respect of Income from Other Source will be useful for your business and practice. In case you need any further clarification, please contact me at my e mail Id email@example.com. You can also read other tax news and articles at my blog www.taxbymanish.blogspot.com. you will get more details in respect of the above very shortly in another version.