Get More Updates From Caultimates.com Join with us : http://facebook.com/groups/caultimates Income Under The Head Other Sources 43 INCOME UNDER THE HEAD OTHER SOURCES SECTION 56 TO 59 Introduction Any income, profits or gains includible in the total income of an assessee, which cannot be included under any of the preceding heads of income, is chargeable under the head Income from other sources. Thus, this head is the residuary head of income and brings within its scope all the taxable income, profits or gains of an assessee which fall outside the scope of any other head. Therefore, when any income, profit or gain does not fall precisely under any of the other specific heads but is chargeable under the provisions of the Act, it would be charged under this head. Incomes chargeable under this head [Section 56] (i) The following income shall be chargeable only under the head Income from other sources : Dividend income [covered by sections 2(22)(a) to (e)]. Casual income in the nature of winning from lotteries, crossword puzzles, horse races, card games and other games of any sort, gambling, betting etc. Such winnings are chargeable to tax at a flat rate of 30% under section 115BB. Interest received on compensation/enhanced compensation deemed to be income in the year of receipt and taxable under the head Income from Other Sources [Sections 56(2)(viii)] (i) As per section 145(1), income chargeable under the head Profits and gains of business or profession or Income from other sources, shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (ii) Further, the Hon ble Supreme Court has, in Rama Bai v. CIT (1990) 181 ITR 400, held that arrears of interest computed on delayed or on enhanced compensation shall be taxable on accrual basis. The tax payers are facing genuine difficulty on account of this ruling, since the interest would have accrued over a number of years, and consequently the income of all the years would undergo a change. (iii) Therefore, to remove this difficulty, clause (b) has been inserted in section 145A to provide that the interest received by an assessee on compensation or on enhanced compensation shall be deemed to be his income for the year in which it is received, irrespective of the method of accounting followed by the assessee. (iv) Section 56(2)(viii) provides that income by way of interest received on compensation or on enhanced compensation referred to in clause (b) of section 145A shall be assessed as Income from other sources in the year in which it is received. (ii) The following income are chargeable under the head Income from other sources only if such income are not chargeable under the head Profits and gains of business or profession - (1) Any sum received by an employer-assessee from his employees as contributions to any provident fund, superannuation fund or any other fund for the welfare of the employees (2) Interest on securities (3) Income from letting out on hire, machinery, plant or furniture. (4) Where letting out of buildings is inseparable from the letting out of machinery, plant or furniture, the income from such letting.
Income Under The Head Other Sources 44 (iii) Any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy is chargeable under the head Income from other sources if such income is not chargeable under the head Profits and gains if business or profession or under the head Salaries i.e. if such sum is received by any person other than the employer who took the policy and the employee in whose name the policy was taken. (iv) Any income chargeable to tax under the Act, but not falling under any other head of income shall be chargeable to tax under the head Income from other sources e.g. Salary received by an MPs/MLAs will not be chargeable to income-tax under the head Salary but will be chargeable as Income from other sources under section 56. Bond washing transactions and dividend stripping [Section 94] (i) A bond-washing transaction is a transaction where securities are sold some time before the due date of interest and reacquired after the due date is over. This practice is adopted by persons in the higher income group to avoid tax by transferring the securities to their relatives/friends in the lower income group just before the due date of payment of interest. In such a case, interest would be taxable in the hands of the transferee, who is the legal owner of securities. In order to discourage such practice, section 94(1) provides that where the owner of a security transfers the security just before the due date of interest and buys back the same immediately after the due date and interest is received by the transferee, such interest income will be deemed to be the income of the transferor and would be taxable in his hands. (ii) In order to prevent the practice of sale of securities-cum-interest, section 94(2) provides that if an assessee who has beneficial interest in securities sells such securities in such a manner that either no income is received or income received is less than the sum he would have received if such interest had accrued from day to day, then income from such securities for the whole year would be deemed to be the income of the assessee. (iii) Section 94(7) provides that where (a) any person buys or acquires any securities or unit within a period of three months prior to the record date and (a) such person sells or transfers (1) such securities within a period of three months after such date, or (2) such unit within a period of nine months after such date and (c) the dividend or income on such securities or unit received or receivable by such person is exempted, then, the loss, if any, arising therefrom shall be ignored for the purposes of computing his income chargeable to tax. Such loss should not exceed the amount of dividend or income received or receivable on such securities or unit. Applicable rate of tax in respect of casual income [Section 115BB] (i) This section provides that income by way of winnings from lotteries, crossword puzzles, races including horse races or card games and other games of any sort or from gambling or betting of any form would be taxed at a flat rate of 30% plus surcharge, if applicable, plus education cess plus secondary and higher education cess. (ii) No expenditure or allowance can be allowed from such income. (iii) Deduction under Chapter VI-A is not allowable from such income. (iv) Adjustment of unexhausted basic exemption limit is also not permitted against such income. Deductions allowable [Section 57] The income chargeable under the head Income from other sources shall be computed after making the following deductions:
Income Under The Head Other Sources 45 (i) In the case of dividends (other than dividends referred to in section 115-O) or interest on securities, any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of realising such dividend or interest on behalf of the assessee. (ii) Where the income consists of recovery from employees as contribution to any provident fund etc. in terms of clause (x) of section 2(24), then, a deduction will be allowed in accordance with the provisions of section 36(1)(va) i.e. to the extent the contribution is remitted before the due date under the respective Acts. (iii) Where the income to be charged under this head is from letting on hire of machinery, plant and furniture, with or without building, the following items of deductions are allowable in the computation of such income: (a) the amount paid on account of any current repairs to the machinery, plant or furniture. (b) the amount of any premium paid in respect of insurance against risk of damage or destruction of the machinery or plant or furniture. (c) the normal depreciation allowance in respect of the machinery, plant or furniture, due thereon. (iv) In the case of income in the nature of family pension, a deduction of a sum equal to 1/3 rd of such income or 15,000, whichever is less, is allowable. For the purposes of this deduction 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. (v) Any other expenditure not being in the nature of capital expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income. (vi) 50% of income by way of interest on compensation/enhanced compensation received chargeable to tax under section 56(2)(viii). No deduction would be allowable under any other clause of section 57 in respect of such income. Illustration 3 Interest on enhanced compensation received by Mr. G during the previous year 2013-14 is Particulars Interest on enhanced compensation taxable u/s 56 (2)(vii) Less: Deduction under section 57(iv) @ 50% Interest chargeable under the head Income from other sources 5,00,000 2,50,000 2,50,000 Note - The Supreme Court held in CIT v. Rajindra Prasad Moody [1978] 115 ITR 519, that in order to claim deduction under section 57 in respect of any expenditure, it is not necessary that income should in fact have been earned as a result of the expenditure. In this view of the matter, the Court held that the interest on money borrowed for investment in shares which had not yielded any taxable dividend was admissible as a deduction under section 57 under the head, Income from other sources. Deductions not allowable [Section 58] No deduction shall be made in computing the Income from other sources of an assessee in respect of the following items of expenses: (i) In the case of any assessee: (1) any personal expense of the assessee; (2) any interest chargeable to tax under the Act which is payable outside India on which tax has not been paid or deducted at source. (3) any payment taxable in India as salaries, if it is payable outside India unless tax has been paid thereon or deducted at source. (ii) In addition to these disallowances, section 58(1A) and section 58(2) specifically provides that the disallowance of payments to relatives and associate concerns covered by section 40(a)(iia) and disallowance of payment or aggregate of payments exceeding 20,000 made to a person during a day otherwise than by
Income Under The Head Other Sources 46 account payee cheque or draft covered by section 40A will be applicable to the computation of income under the head Income from other sources as well. (iii) Income-tax and wealth-tax paid. (iv) No deduction in respect of any expenditure or allowance in connection with income by way of earnings from lotteries, cross word puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever shall be allowed in computing the said income. The prohibition will not, however, apply in respect of the income of an assessee, being the owner of race horses, from the activity of owning and maintaining such horses. In respect of the activity of owning and maintaining race horses, 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. Deemed income chargeable to tax [Section 59] The provisions of section 41(1) are made applicable, so far as may be, to the computation of income under this head. Accordingly, where a deduction has been made in respect of a loss, expenditure or liability and subsequently any amount is received or benefit is derived in respect of such expenditure incurred or loss or trading liability allowed as deduction, then it shall be deemed as income in the year in which the amount is received or the benefit is accrued. Interest income arising to certain persons [Section 10(15)] (i) Income by way of interest, premium on redemption or other payment on notified securities, bonds, annuity certificates or other savings certificates is exempt subject to such conditions and limits as may be specified in the notification. It may be noted that interest on Post Office Savings Bank Account which was so far fully exempt would henceforth be exempt from tax for any assessment year only to the extent of: (1) 3,500 in case of an individual account. (2) 7,000 in case of a joint account. (ii) Interest on 7% Capital Investment Bonds and 10.1% Relief Bonds, 1993 notified by the Central Government This exemption is available to Individuals and HUFs. Such capital Investment Bonds are not specified on or after 1.6.2002. (iii) Interest on NRI bonds, 1988 and NRI Bonds (Second Series), and Resurgent India Bonds, 1998 issued by the SBI arising to (i) Non Resident Indians who own such bonds, (ii) their nominees or survivors, (iii) donees who have received such bonds by way of gift from such non-residents. The interest and principal received in respect of such bonds whether on maturity or otherwise should not be taken out of India. The exemption will continue to apply even after the non-resident, after purchase of such bonds, becomes a resident in any subsequent year. However, the exemption will not apply in the previous year in which such bonds are encashed prior to their maturity. Such bonds shall not be specified on or after 1.06.2002. (iv) (v) Interest on securities held by the Issue Department of Central Bank of Ceylon constituted under the Ceylon Monetary Law Act, 1949. Interest payable to any bank incorporated in a country outside India and authorised to perform central banking functions in that country on any deposits made by it, with the approval of the RBI, with any scheduled bank.
Income Under The Head Other Sources 47 (vi) (vii) Interest payable to the Nordic Investment Bank, on a loan advanced by it to a project approved by the Central Government in terms of the Memorandum of Understanding entered into by the Central Government with that Bank on 25.11.86. Interest payable to the European Investment Bank, on a loan granted by it in pursuance of the framework agreement for financial co-operation entered into by the Central Government with the Bank on 25.11.1993. (viii) Interest payable (a) by the Government or a local authority on moneys borrowed by it before 01.06.2001 or debts owed by it before 01.06.2001 to sources outside India; (b) (c) by an industrial undertaking in India on moneys borrowed by it before 01.06.2001 under a loan agreement entered into with any such financial institution in a foreign country as may be approved by the Central Government; by an industrial undertaking in India on moneys borrowed or debt incurred by it before 01.06.2001 in a foreign country for the purchase outside India of raw material or capital equipment or components provided that the loan or the debt is approved by the Central Government, to the extent to which such interest does not exceed the amount of the interest calculated at the rate approved by the Government; Purchase of capital plant and machinery includes the purchase of such capital plant and machinery under hire-purchase agreement or a lease agreement with an option to purchase such plant and machinery. Exemption has also been given for payment of usance interest payable outside India by an undertaking engaged in ship-breaking business, in respect of purchase of a ship from outside India. (d) (e) (f) (g) by IFCI, IDBI, the Export-Import Bank of India and the Industrial Credit and Investment Corporation of India, NHB, SIDBI, on moneys borrowed from sources outside India before 1.6.2001 to the extent to which the interest does not exceed the amount of interest calculated at the rate approved by the Central Government having regard to the terms of the loan and its repayment; by any other financial institution or a banking company established in India on loans raised in foreign countries before 1.6.2001 under approved agreements for the purpose of advancing loans to industrial undertakings in India for importing raw materials or capital plant and machinery or other goods which the Central Government may consider necessary to import in the public interest; by an industrial undertaking in India on moneys borrowed by it in foreign currency from foreign sources under a loan agreement approved by the Central Government before 1.6.2001 having regard to the need for industrial development in India will be exempt from incometax, to the extent to which such interest does not exceed the amount of interest calculated at the rates approved by the Central Government in this behalf, having regard to the terms of the loan and its repayment. by a scheduled bank on deposits in foreign currency held by a non-resident or a person who is not ordinarily resident, where the acceptance of such deposits by the bank is approved by the RBI. It may be noted that for the purpose of exemption under this clause, a scheduled bank does not include a co-operative bank.
Income Under The Head Other Sources 48 (h) (i) by an Indian public limited company, being a company eligible for deduction under section 36(1)(viii), mainly engaged in providing long-term finance for construction or purchase of residential houses in India on loans raised in foreign countries under a loan agreement approved by the Central Government before 1.6.2003 by public sector companies on certain specified bonds and debentures subject to the conditions which the Central Government may specify by notification, including the condition that the holder of such bonds or debentures registers his name and holding with that company; Accordingly, the Central Government has specified tax free bonds issued by India Infrastructure Company Ltd. and tax free, secured, redeemable, non-convertible Bonds of the Indian Railway Finance Corporation Ltd. (IRFCL), National Highways Authority of India (NHAI), Rural Electrification Corporation Ltd.(RECL), Housing and Urban Development Corporation Ltd. (HUDCL) and Power Finance Corporation (PFC), the interest from which would be exempt under this section. (j) by Government of India on deposit made by an employee of the Central or State Government or a public sector company in accordance with the scheme as may be notified of the moneys due to him on account of his retirement while on superannuation or otherwise. It is significant that this scheme is not applicable to non-government employees. The term industrial undertaking means any undertaking which is engaged in : (i) the manufacture or processing of goods; or (ii) the manufacture of computer software or recording of programmes on any disc, tape, perforated media or other information device; or (iii) the business of generation or generation and distribution of electricity or any other form of power; or (iv) the business of providing telecommunication services; or (v) mining; or (vi) construction of ships, or (vii) the business of ship-breaking; or (viii) the operation of ships or aircrafts or construction or operation of rail systems. For the purposes of the clause, interest shall not include interest paid on delayed payment of loan or default if which is more than 2% p.a. over the rate of interest payable in terms of such loan. Interest would include hedging transaction charges on account of currency fluctuation. (ix) Bhopal Gas Victims - Section 10(15)(v) provides exemption in respect of interest on securities held by the Welfare Commissioner, Bhopal Gas Victims, Bhopal, in the Reserve Bank s Account No. SL/DH 048. Recently, in terms of an order of the Supreme Court to finance the construction of a hospital at Bhopal to serve the victims of the gas leak, the shares of the Union Carbide Indian Ltd., have been sold. The sale consideration reserved for construction has been deposited with SBI, New Delhi. The interest on the aforesaid deposit and similar deposits which may be made in future needs to be provided income tax exemption. The scope of the above exemption has been extended to interest on deposits for
Income Under The Head Other Sources 49 the benefit of the victims of the Bhopal Gas Leak disaster. Such deposits can be held in such account with the RBI or with a public sector bank as the Central Government may notify in the Official Gazette. Such notification may have prospective or retrospective effect. However, in no case it can be effective from a period earlier than 1-4-1994. (x) Interest on Gold Deposit Bond issued under the Gold Deposit Scheme, 1999 notified by the Central Government. (xi) Interest on bonds, issued by (a) a local authority; or (b) a State Pooled Finance Entity and specified by the Central Government by notification in the Official Gazette. State Pooled Finance Entity means such entity which is set up in accordance with the guidelines for the Pooled Finance Development Scheme notified by the Central Government in the Ministry of Urban Development. Accordingly, the Central Government has specified the Tax-free Pooled Finance Development Bonds under Pooled Finance Development Fund Scheme of Government of India, interest from which would be exempt under section 10(15). (xii) interest income received by a non-resident/not-ordinarily resident in India from a deposit made on or after 1.4.2005 in an Offshore Banking Unit referred to in section 2(u) of the SEZ Act, 2005 i.e. a branch of a bank located in a SEZ and which has obtained permission under section 23(1)(a) of the Banking Regulation Act, 1949. Method of accounting [Section 145] Income chargeable under the head Income from other sources has to be computed in accordance with the cash or mercantile system of accounting regularly employed by the assessee. However, deemed dividend under section 2(22)(e) is chargeable to tax on payment basis under section 8, irrespective of the method of accounting followed by the assessee. Taxability of Gift Transfer of shares without consideration or for inadequate consideration to attract the provisions of section 56(2) in case of recipient firms and companies also [Section 56(2)(viia)] (i) Section 56(2)(viia) provides that the transfer of shares of a company without consideration or for inadequate consideration would attract the provisions of section 56(2), if the recipient is a firm or a company. The purpose is to prevent the practice of transferring unlisted shares at prices much below their fair market value. (ii) If such shares are received without consideration, the aggregate fair market value on the date of transfer would be taxed as the income of the recipient firm or company, if it exceeds 50,000. If such shares are received for inadequate consideration, the difference between the aggregate fair market value and the consideration would be taxed as the income of the recipient firm or company, if such difference exceeds 50,000. (iii) However, the provisions of section 56(2)(viia) would not apply in the case of transfer of shares - (1) of a company in which the public are substantially interested; or (2) to a company in which the public are substantially interested.
Income Under The Head Other Sources 50 Consideration received in excess of FMV of shares issued by a closely held company to be treated as income of such company, where shares are issued at a premium [Section 56(2)(viib)] (i) New clause (viib) has been inserted in section 56(2) to bring to tax the consideration received from a resident person by a company, other than a company in which public are substantially interested, which is in excess of the fair market value (FMV) of shares. (ii) Such excess is to be treated as the income of a closely held company taxable under section 56(2) under the head Income from Other Sources, in cases where consideration received for issue of shares exceeds the face value of shares i.e. where shares are issued at a premium. (iii) However, these provisions would not be attracted where consideration for issue of shares is received: (1) by a Venture Capital Undertaking (VCU) from a Venture Capital Fund (VCF) or Venture Capital Company (VCC); or (2) by a company from a class or classes of persons as notified by the Central Government for this purpose. (iv) Fair market value of the shares shall be the higher of, the value as may be (a) determined in accordance with the prescribed method; or (b) substantiated by the company to the satisfaction of the Assessing Officer, based on the value of its assets on the date of issue of shares. For the purpose of computation of FMV, the value of assets would include the value of intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. Example The following are the details of the shares issued by Ray (P) Ltd. Discuss the applicability of provisions of section 56(2)(viib) in the hands of the company: (i) (ii) (iii) (iv) Face value of shares () 100 100 100 100 FMV of shares () 120 120 90 90 Issue price of shares () 130 110 98 110 Applicability of section 56(2)(viib) The provisions of section 56(2)(viib) are attracted in this case since the shares are issued at a premium (i.e., issue price exceeds the face value of shares). The excess of the issue price of the shares over the FMV would be taxable under section 56(2)(viib). 10 ( 130-120) shall be treated as income in the hands of Ray (P) Ltd. The provisions of section 56(2)(viib) are attracted since the shares are issued at a premium. However, no sum shall be chargeable to tax under the said section as the shares are issued at a price less than the FMV of shares. Section 56(2)(viib) is not attracted since the shares are issued at a discount, though the issue price is greater than the FMV. The provisions of section 56(2)(viib) are attracted in this case since the shares are issued at a premium. The excess of the issue price of the shares over the FMV would be taxable under section 56(2)(viib). Therefore, 20 ( 110-90) shall be treated as income in the hands of Ray (P) Ltd.
Income Under The Head Other Sources 51 Dividend [Section 2(22)] The term dividend as used in the Act has a wider scope and meaning than under the general law. According to section 2(22), the following receipts are deemed to be dividend: (a) Distribution of accumulated profits, entailing the release of company s assets Any distribution of accumulated profits, whether capitalised or not, by a company to its shareholders is dividend if it entails the release of all or any part of its assets. For example, if accumulated profits are distributed in cash it is dividend in the hands of the shareholders. Where accumulated profits are distributed in kind, for example by delivery of shares etc. entailing the release of company s assets, the market value of such shares on the date of such distribution is deemed dividend in the hands of the shareholder. (b) Distribution of debentures, deposit certificates and bonus shares to preference shareholders - Any distribution to its shareholders by a company of debenture stock or deposit certificate in any form, whether with or without interest, and any distribution of bonus shares to preference shareholders to the extent to which the company possesses accumulated profits, whether capitalised or not, will be deemed as dividend. The market value of such bonus shares is taxable in the hands of the preference shareholder. In the case of debentures, debenture stock etc., their value is to be taken at the market rate and if there is no market rate they should be valued according to accepted principles of valuation. Note: Bonus shares given to equity shareholders are not treated as dividend. (c) Distribution on liquidation - Any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not, is deemed to be dividend income. Note: Any distribution made out of the profits of the company after the date of the liquidation cannot amount to dividend. It is a repayment towards capital. Accumulated profits include all profits of the company up to the date of liquidation whether capitalised or not. But where liquidation is consequent to the compulsory acquisition of an undertaking by the Government or by any corporation owned or controlled by the Government, the accumulated profits do not include any profits of the company prior to the 3 successive previous years immediately preceding the previous year in which such acquisition took place subject to certain exceptions. (d) Distribution on reduction of capital - Any distribution to its shareholders by a company on the reduction of its capital to the extent to which the company possessed accumulated profits, whether capitalised or not, shall be deemed to be dividend. Exception - The same exceptions as given in case (c) above shall also apply in this case. (e) Advance or loan by a closely held company to its shareholder - Any payment by a company in which the public are not substantially interested of any sum by way of advance or loan to any shareholder who is the beneficial owner of 10% or more of the equity capital of the company will be deemed to be dividend to the extent of the accumulated profits. If the loan is not covered by the accumulated profits, it is not deemed to be dividend. There are two exceptions to this rule: (i) If the loan is granted in the ordinary course of its business and lending of money is a substantial part of the company s business, the loan or advance to a shareholder is not deemed to be dividend.
Income Under The Head Other Sources 52 (ii) Where a loan had been treated as dividend and subsequently the company declares and distributes dividend to all its shareholders including the borrowing shareholder, and the dividend so paid is set off by the company against the previous borrowing, the adjusted amount will not be again be treated as a dividend. Advance or loan by a closely held company to a specified concern - Any payment by a company in which the public are not substantially interested to any concern (i.e. HUF / Firm / AOP / BOI / Company) in which a shareholder, having the beneficial ownership of atleast 10% of the equity shares is a member or a partner and in which he has a substantial interest (i.e. atleast 20% share of the income of the concern). The dividend income shall be taxable in the hands of the concern. Also, any payments by such a closely held company on behalf of, or for the individual benefit of any such shareholder will also deemed to be dividend. However, in both cases the ceiling limit of dividend is the extent of accumulated profits. Illustration : Suppose Mr. X is a shareholder in a Company A as well as Company B. He has 10% shareholding in Company A and 20% shareholding in Company B. The accumulated profits of Company A = 10 lakh. A loan of 12 lakh is given by Company A to Company B. This loan up to the extent of accumulated profits of 10 lakh is treated as dividend and is taxable in the hands of Company B. Other exceptions Apart from the exceptions cited above, the following also do not constitute dividend - (i) 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; (ii) any distribution of shares on demerger by the resulting companies to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company). Basis of charge of dividend : Any income by way of dividends, referred to under section 115-O, is excluded from the total income of the shareholder [Section 10(34)]. Under section 115-O, any dividend declared, distributed or paid by a domestic company, whether out of current or accumulated profits, shall be charged to additional income-tax at a flat rate of 15% in addition to normal income-tax chargeable on the income of the company. This is known as corporate dividend tax. Corporate dividend tax is not leviable on deemed dividend under section 2(22)(e). Hence, the same will be taxed in the hands of the shareholder. Dividends received from a company, other than a domestic company, are still liable to tax in the hands of the shareholder. For example, dividend received from a foreign company is liable to tax in the hands of the shareholder. Year of accrual of dividend : Section 8 provides that deemed dividend under section 2(22) declared by a company or distributed or paid by it shall be deemed to be the income of the previous year in which it is declared, distributed or paid, as the case may be. Any interim dividend shall be deemed to be the income of the previous year in which the amount is unconditionally made available to the member who is entitled to it. Illustration 1: Mr. Sahil Anand has taken a loan of 1,00,000 @ 10%. The amount was invested by him in the securities of one company. During the year he has received gross interest of 18,000 and has paid collection charges to the bank 500. He has paid interest 10,000 on the loan taken by him for investment and has long term capital gain of 2,00,000. Compute his tax liability for assessment year 2014-15. Solution: Gross Interest 18,000 Less: (i) Bank Charges u/s 57 500 (ii) Interest paid for borrowing the amount u/s 57 10,000
Income Under The Head Other Sources 53 Income under the head Other Sources 7,500 Income under the head Capital Gains (LTCG) 2,00,000 Total Income 2,07,500 Computation of Tax Liability Tax on 7,500 (2,00,000 1,92,500) @ 20% u/s 112 1,500 Tax on 7,500 at slab rate Less: Rebate u/s 87A (1,500 or 2,000) whichever is less 1,500 Tax Liability Illustration 2: Mrs. Shweta is getting family pension of 7,000 p.m. and has incurred 50 p.m. as bank collection charges. She also has dividend income from domestic company of 7,00,000 and bank collection charges are 1,000. She has long term capital gain of 3,89,000. Compute her tax liability for assessment year 2014-15. Solution: Family Pension 84,000 (7,000 x 12) Less: Deduction u/s 57 15,000 69,000 1/3 of 84,000 or 15,000 whichever is less Dividend income (exempt u/s 10(34)) Income under the head other sources 69,000 Income under the head Capital Gains Long term capital gain 3,89,000 Gross Total Income 4,58,000 Less: Deduction u/s 80C to 80U Total Income 4,58,000 Computation of Tax Liability Tax on 2,58,000 (3,89,000 1,31,000) @ 20% u/s 112 51,600 Tax on 69,000 at slab rate Less: Rebate u/s 87A (51,600 or 2,000 whichever is less) 2,000 Tax after rebate 49,600 Add: Education cess @ 2% 992 Add: SHEC @ 1% 496 Tax Liability 51,088 Rounded off u/s 288B 51,090 Illustration 3: Mr. Ashish Goyal has one factory building along with machines and furniture in Bombay which has been let out @ 50,000 p.m. Repair charges of the building is 7,000 and that of furniture fixtures are 4,000, insurance premium paid 3,000 and depreciation is 27,000. Compute his income under the head other sources. Solution: Gross Rent (50,000 x 12) 6,00,000 Less: Repair of building 7,000 Less: Repair of Furniture and fixtures 4,000 Less: Insurance premium 3,000 Less: Depreciation 27,000 Income under the head Other Sources 5,59,000
Income Under The Head Other Sources 54 Illustration 4: Mr. Sachin Kumar has one factory building with machines and furniture, which has been let out @ 50,000 p.m. and repair charges of the building are 10,000, insurance premium 7,000 and repair charges of plant & machinery is 3,000. Insurance premium 1,000 and depreciation with regard to building plant & machinery etc. is 12,000. Compute his income under the head other sources. Solution: Gross Rent (50,000 x 12) 6,00,000 Less: Repair of building 10,000 Less: Insurance premium 7,000 Less: Repair of plant and machinery 3,000 Less: Insurance premium 1,000 Less: Depreciation 12,000 Income under the head other sources 5,67,000 Illustration 5: ABC Ltd. has current profits of 150 lakhs and the company has distributed dividends of 55 lakhs. Compute income tax liability of the company and that of shareholder. Calculate additional income tax payable by the company also. Solution: Profit before tax 150,00,000.00 Income tax on 150,00,000 @ 30% 45,00,000.00 Surcharge @ 5% 2,25,000.00 Education cess @ 2% 94,500.00 SHEC @ 1% 47,250.00 Income tax liability 48,66,750.00 Dividend 55,00,000.00 Additional income tax @ 15% of 55 lakhs 8,25,000.00 Add: Surcharge @ 10% 82,500.00 Add: Education cess @ 2% 18,150.00 Add: SHEC @ 1% 9,075.00 Additional income tax 9,34,725.00 Rounded off u/s 288B 9,34,730.00
Income Under The Head Other Sources 55 PRACTICE PROBLEMS TOTAL PROBLEMS 17 Problem 1. Mrs. Ridhi Grover has received incomes as given below during the previous year 2013-14: 1. Interest on savings bank account with State Bank 15,500 (gross). 2. Interest from Government securities 1,000 on 01.01.2014 (collection charge paid to the bank @ 1.5%). 3. Interest from ABC Ltd on non listed debentures 4,000 (gross) on 01.03.2014 (collection charge paid to the bank 30). 4. Interest credited to post office savings bank account during the year 230. 5. Interest credited to public provident fund during the year 12,000. 6. Interest received from XYZ Ltd on listed debentures 5,000 (gross). (Collection charge 30) The amount was invested by taking a loan of 1,00,000 @ 7% p.a. 7. Mrs. Ridhi Grover has income from house property 2,30,000. Compute her tax liability for the assessment year 2014-15. Answer = Tax Liability: 1,900 Problem 2. Mr. Arun Garg has income from business of owning and maintaining race camels 60,000, loss from owning and maintaining race horses 7,000 and income from horse races 7,000. He has brought forward business loss of 7,000 of the assessment year 1998-99 and brought forward business loss of 7,000 of the assessment year 2010-11. Compute his tax liability for the assessment year 2014-15. Answer = Total Income: 60,000; Tax Liability: 100; Carry forward loss from owning and maintaining race horses: 7,000 Problem 3. Mr. Deepak Kumar has income from owning and maintaining of race horses 4 lakhs and loss from horse races 10 lakhs. Determine his tax liability for the assessment year 2014-15. Answer = Tax Liability: 18,540 Problem 4. Mr. Sunny Goel has loss from owning and maintaining of race horses 4 lakhs and income from owning and maintaining of race camels 4 lakhs. Determine his tax liability for the assessment year 2014-15.
Income Under The Head Other Sources 56 Answer = Tax 18,540; Carry forward loss from owning and maintaining of race horses: 4,00,000 Problem 5. Find the tax liability of Mrs. Gupta (age 40 years), a resident individual, for the assessment year 2014-15. From the following particulars of her incomes and spending for the previous year ending March 31 st, 2014. Income from house property (Computed) 90,000 Dividend from UTI 35,000 Family pension (gross) 90,000 Interest on bank FD (gross) 14,000 Dividend from foreign company 36,000 Gift received from her sister 26,000 Winnings from lotteries (gross) 70,000 Long-term capital gain 1,20,000 Payment for purchase of National Savings Certificates (VIII issue) 35,000 Answer = Tax Liability: 40,170 Problem 6. ABC Ltd a domestic company has accumulated profits of 225 lakhs has distributed dividends of 12 lakhs and one of the shareholders Mr. Sumit Monga has received dividend of 1 lakh. Compute tax payable by the shareholder and also additional income tax payable by the company. Answer = Tax payable by the shareholder ; Additional Income tax payable by the company 2,03,940 Problem 7. Mr. Varun Talwar is holding 100 shares of ABC Ltd. which were purchased by him on 01.10.1978 @ 10/- per share. Market value of one share on 01.04.1981 was 25/- and total number of shares issued by the company is 10,000. The company goes into liquidation on 01.10.2013 and has net distributable amount of 25 lakhs after discharging all the liabilities including any additional income tax under section 115-O. Out of 25 lakhs, 10 lakhs is accumulated profits. Compute dividends in the hands of Mr. Varun Talwar. Answer = Dividend under section 2(22)(c) 10,000 Problem 8. ABC Ltd. a closely-held company has bonus share capital of 10 lakhs, General Reserves of 6 lakhs and current profits of 2 lakhs. The company has given a loan of 9 lakhs to one of the shareholders, who is beneficial owner of equity shares holding 10% of the voting power. Compute amount of dividend in the hands of shareholder. Answer = 8,00,000
Income Under The Head Other Sources 57 Problem 9. Mr. Rohit Aggarwal is beneficial owner of equity shares holding 10% of the voting power in ABC Ltd, a closely held company. He is partner in a partnership firm XY and has 20% share in the firm. The company has given a loan of 5 lakhs to the firm and company s accumulated profits are 6 lakhs. Compute amount of dividend in the hands of shareholder and the firm. Answer = Dividend in the hands of Shareholder: ; dividend in the hands of Firm: 5,00,000 Problem 10. Accumulated profits of ABC Ltd, a closely-held company is 3 lakhs on 01.07.2013. A loan of 2 lakhs was advanced to Ranjeet Sharma holding 13% shares on 01.07.2013 and a loan of 1.5 lakhs was advanced to Saurabh Gupta on 01.10.2013 holding 11% shares. Compute amount of dividend in the hands of Mr. Ranjeet Sharma and Mr. Saurabh Gupta. Answer = Mr. Ranjeet Sharma: 2,00,000; Mr. Saurabh Gupta: 1,00,000 Problem 11. Mr. Prince Manchanda is holding 10% equity shares in ABC Ltd, a closely-held company and he has taken a loan of 3 lakhs on 01.10.2013. The loan was repaid after ten days. The company has accumulated profits of 10 lakhs. Compute amount of dividends in the hands of Mr. Prince Manchanda. Answer = 3,00,000 Problem 12. ABC Ltd. is a company in which public are not substantially interested. The company has Bonus share capital of 5 lakh and General Reserve of 7 lakh and the company has given a loan of 8 lakh to one of the shareholders who is holding 10% of the voting power. Compute amount of dividend in the hands of shareholder and also his tax liability. Answer = Dividend 7,00,000; Tax Liability 72,100 Problem 13. There is a partnership firm XY. Mr. Suresh Kumar is holding 10% of the voting power of the closely held company and he has 20% share in profits of the firm. A loan of 3 lakh has been given to this partnership firm by the company having General Reserve of 10 lakhs. Compute amount of dividend and discuss its taxability. Answer = Dividend 3,00,000; Tax Liability 92,700 Problem 14. If a closely held company has accumulated profits of 10 lakhs. A loan of 7 lakh was given to one of the shareholders who is holding 10% of voting power and subsequently loan of 6 lakh was given to another similar shareholder. Compute amount of dividend and discuss its taxability. Answer = 1st shareholder Dividend: 7,00,000; Tax Liability: 72,100; 2nd shareholder Dividend: 3,00,000;
Income Under The Head Other Sources 58 Tax Liability: 8,240 Problem 15. Mr. Ankush Jain holds shares carrying 25% of voting power in a domestic company in which public are not substantially interested. On 01.09.2013, he obtained a loan of 5 lakhs @ 14% p.a. from the company, as on that date the company had accumulated profit of 4 lakhs. Explain the tax implication in the hands of the company and also in the hands of shareholder. Answer = Dividends in the hands of the shareholder shall be 4,00,000 Problem 16. Mr. Vibhor Gupta is holding 12% equity shares in ABC Ltd., a company in which public are not substantially interested. Mr. Vibhor Gupta needs 7,00,000 to purchase a car for his personal use. He can either borrow this money at an interest rate of 11% p.a. from ABC Ltd. or from a finance company @ 15% p.a. Business of ABC Ltd. is not money lending but it has sufficient accumulated profits to advance the requisite loan. Suggest from tax point of view, whether he should borrow from ABC Ltd. or the finance company? Answer = It is beneficial to take loan from the finance company. (if the loan is taken from ABC Ltd., total amount payable is 1,49,100 and if loan is taken from finance company, amount payable is 1,05,000) Problem 17. Mr. X has submitted information given below. i) Income from owning and maintaining of race horse 2,00,000. ii) Income from owning and maintaining of race camels 1,00,000. iii) iv) He had winning of 1,60,000 from horse race on 01.12.2013 and winning from camel race 1,80,000 on 07.12.2013. He purchased lottery tickets of 10,000 on 01.02.2014 and had winning of 2,00,000 on 12.02.2014. v) He has received Royalty of book of literary nature @ 50% of print price of 600 and total copies sold are 2,000 vi) He has paid advance tax as given below: Upto 15.09.2013 30,000 Upto 15.12.2013 80,000 Upto 15.03.2014 1,30,000 Balance was paid on 10.06.2014 Compute tax liability for the A.Y 2014-15 and interest under section 234A, 234B and 234C. Answer = Tax Liability: 2,43,080; Interest under section 234A: ; 234B: 3,390; 234C: 1,991
Income Under The Head Other Sources 59 SOLUTIONS TO PRACTICE PROBLEMS Solution 1: Income under the head other sources Gross interest from State Bank of India 15,500.00 Interest from Government securities {1,000 15} 985.00 Interest from ABC Ltd 3,970.00 {4,000 30} Interest on P.O.S.B (exempt u/s 10(15)) Interest on PPF (exempt u/s 10(15)) Interest from XYZ Ltd. (2,030.00) {Gross interest = 5,000 Less: Collection charges = 30 Less: Interest paid on loan = 7,000} Income under the head Other Sources 18,425.00 Income under the head House Property 2,30,000.00 Gross Total Income 2,48,425.00 Less: Deduction u/s 80TTA (15,500 or 10,000 whichever is less) 10,000.00 Total Income (rounded off u/s 288A) 2,38,430.00 Computation of tax liability Tax on 2,38,430 at slab rate 3,843.00 Less: Rebate u/s 87A (3,843 or 2,000 whichever is less) 2,000.00 Tax after rebate 1,843.00 Add: Education cess @ 2% 36.86 Add: SHEC @ 1% 18.43 Tax Liability 1,898.29 Rounded off u/s 288B 1,900.00 Solution 2: Income under the head Business/Profession 60,000 Less: Brought forward business loss 7,000 Income under the head Business/Profession 53,000 Income under the head Other Sources (horse races) 7,000 Gross Total Income 60,000 Less: Deductions u/s 80C to 80U Total Income 60,000 Computation of tax liability Tax on 7,000 @ 30% 2,100
Income Under The Head Other Sources 60 Tax on 53,000 at slab rate Less: Rebate u/s 87A (2,100 or 2,000 whichever is less) 2,000 Tax after rebate 100 Add: Education cess @ 2% 2 Add: SHEC @ 1% 1 Tax Liability 103 Rounded off u/s 288B 100 Carry forward loss from owning and maintaining race horses 7,000 Solution 3: Income under the head Other Sources 4,00,000 Gross Total Income 4,00,000 Less: Deductions u/s 80C to 80U Total Income 4,00,000 Tax on 4,00,000 at slab rate 20,000 Less: Rebate u/s 87A (20,000 or 2,000 whichever is less) 2,000 Tax after rebate 18,000 Add: Education cess @ 2% 360 Add: SHEC @ 1% 180 Tax Liability 18,540 Note: Loss from casual income has no tax treatment and hence it is dead loss. Solution 4: Income under the head Business/Profession 4,00,000 Gross Total Income 4,00,000 Less: Deductions u/s 80C to 80U Total Income 4,00,000 Tax on 4,00,000 at slab rate 20,000 Less: Rebate u/s 87A (20,000 or 2,000 whichever is less) 2,000 Tax after rebate 18,000 Add: Education cess @ 2% 360 Add: SHEC @ 1% 180 Tax Liability 18,540 Carry forward loss from owning and maintaining race horses 4,00,000 Solution 5: Income from House Property 90,000 Computation of income under the head Other Sources Dividend from UTI {exempt u/s 10(35)} Pension 75,000 Working Note: Received = 90,000 Exempt = 1/3 of pension or 15,000,whichever is less Taxable = 75,000 Interest on bank FD 14,000 Dividend from foreign company 36,000 Winning from lottery 70,000 Income under the head Other Sources 1,95,000 Income under the head Capital Gains (LTCG) 1,20,000
Income Under The Head Other Sources 61 Gross Total Income 4,05,000 Less: Deduction u/s 80C 35,000 Total Income 3,70,000 Computation of Tax Liability Tax on Long term capital gain 1,00,000 (1,20,000 20,000) @ 20% u/s 112 20,000 Tax on casual income 70,000 @ 30% u/s 115BB 21,000 Tax on 1,80,000 at slab rate Tax before education cess 41,000 Less: Rebate u/s 87A (41,000 or 2,000 whichever is less) 2,000 Tax after rebate 39,000 Add: Education cess @ 2% 780 Add: SHEC @ 1% 390 Tax Liability 40,170 Solution 6: Tax payable by Mr. Sumit Monga [Section 10(34)] Additional Income Tax Payable by ABC Ltd. Dividend 12,00,000.00 Additional income tax @ 15% of 12 lakhs 1,80,000.00 Add: Surcharge @ 10% 18,000.00 Add: Education cess @ 2% 3,960.00 SHEC @ 1% 1,980.00 Additional income tax 2,03,940.00 Solution 7: Share of Mr. Varun Talwar 25,00,000 / 10,000 x 100 25,000 Dividend out of 25,000 (1% of 10,00,000) 10,000 Solution 8: In this case dividends under section 2(22)(e) in the hands of the shareholder shall be 8 lakhs i.e. to the extent of the accumulated profits of the company excluding capitalized profits. Solution 9: In this case dividend in the hands of the shareholder is nil and in hands of the firm are 5 lakhs as per section 2(22)(e). Solution 10: In this case deemed dividends in the hands of Ranjeet Sharma are 2 lakhs and in the hands of Saurabh Gupta are 1 lakh, because for the purpose of sec 2(22)(e), accumulated profits shall get reduced by the amount of dividend already charged u/s 2(22)(e) as decided in: CIT v G. Narasimhan, (1979) (Mad) Solution 11: In this case dividend in the hands of Prince Manchanda shall be 3 lakhs. Because if any loan is taken it is dividend, even if it is repaid in the same year or at any other time as decided in Tarulata Shyam v CIT (1977) (SC) Solution 12: In this case there will be deemed dividend of 7 lakhs and tax liability 72,100 and further section 10(34) is not applicable with regard to such dividends and also section 115-O is not applicable with regard to such dividend. i.e. dividends are taxable in the hands of shareholder. Tax liability 72,100.
Income Under The Head Other Sources 62 Solution 13: In this case, deemed dividend in the hands of partnership firm shall be 3 lakhs and tax liability 92,700 {3,00,000 x 30% + Education cess @ 2% + SHEC @ 1%} Solution 14: In this case dividends in the hands of 1 st shareholder shall be 7 lakh and tax liability 72,100 and dividend in the hands of 2 nd shareholder shall be 3 lakh and tax liability 8,240 Solution 15: In the given case there will be deemed dividend under section 2(22)(e) to the extent of 4 lakhs and the shareholder shall be liable to pay tax and there are no tax implication in the hands of company. Solution 16: If Mr. Vibhor Gupta has taken loan from the company, he has to pay interest of 77,000 and also entire loan amount shall be considered to be dividend and accordingly tax payable by him shall be 72,100 i.e. total amount payable shall be 1,49,100 If the loan is taken from finance company, interest payable by him shall be 1,05,000. It is beneficial to take loan from the finance company. Solution 17: Computation of Total Income for the A.Y 2014-15 Income under head Other Source Income from owning and maintaining race horse 2,00,000 Income from Royalty 6,00,000 Income from winning horse race (casual income) 1,60,000 Income from winning camel race (casual income) 1,80,000 Income from lottery income (casual income) 2,00,000 Income under head Other Sources 13,40,000 Income under head Business/Profession Income from owning and maintaining race camel 1,00,000 Gross Total Income 14,40,000 Less: Deduction u/s 80QQB (WN 1) 1,80,000 Total Income 12,60,000 Computation of Tax Liability Tax on 7,20,000 at slab rate 74,000 Tax on casual income i.e. 5,40,000 @ 30% 1,62,000 Tax before education cess 2,36,000 Add: Education cess @ 3% 7,080 Tax Liability 2,43,080 Interest u/s 234A Interest u/s 234B 2,43,080 1,30,000= 1,13,080 = 1,13,000 x 1% x 3 3,390 Interest u/s 234C