TAX :INCOME FROM OTHER SOURCES

CHAPTER VII

 

INCOME FROM OTHER SOURCES

 

            Income from other sources is a residuary head of income. Any item of income chargeable to tax but does not fall within the ambit of the other four specific heads of income shall be included under this head of income. According to Sec 56 (2), in particular, the following income shall be chargeable to Income Tax under the head Income from other sources.

 

·         Dividends

·         Lottery, crosswords puzzles.

·         Fund of employees

·         Interest on Securities.

·         Hire of machinery, plant etc.

·         Insurance Money.

·         Gift

·         Income from subletting

·         Income from Royalty.

·         Directors fees

·         Ground rent

·         Salary to MLAs and MPs

·         Examiner ship

·         Income from undisclosed sources.

·         Family pension

·         Income from Market, ferries and fisheries etc.

1. Dividends

In ordinary language dividend means the sum received by a share holder of a company on the distribution of its profit, whether out of taxable income or taxable income. It is imma­terial whether it is received in cash or in kind. For the purpose of Income Tax, dividends may be classified into Normal dividend, Deemed dividend and Interim dividend.

 

 Deemed dividend - Sec (22)-Deemed dividends includes

a)   Any distribution by a company of accumulated profit, if such distribution entails the release
      by the company to its shareholders of all or any part of the asset of the company,

b) any distribution to its shareholders by a company of debentures or deposit certificates in
     any form, and any distribution to its preference shareholders of shares byway of bonus, to
     the extent to which the company possesses accumulated profits;

c)  Any distribution made to the shareholders by a company on its liquidation, to the extent to
which the distribution it’s attributable to the accumulated profits of the company immediately before its liquidation;

d)  Any distribution to its shareholders by a company on the reduction of its share capital, to
    the extent to which the company possesses accumulated profits;

e)  Any payment by a company, not being a company in which the public are substantially        interested of any sum by way of advance of loan to a shareholder (holding not less than ten percent of the voting power and who is the beneficial owner of shares), or to a concern (HUF or a firm or an association of persons or a body of individuals or a company) in which such shareholder is a member /partner and in which he has a substantial interest, or any payment by any such company on behalf of or for the benefit of the shareholder to the extent to which the company possesses accumulated profits.

Taxation of Dividend (A.Y 2012-2013)

1. Dividends (including deemed dividends) distributed by a domestic company. It shall be treated under:

a) Dividend discussed U/s 2(22) (a to d) is exempt u/s 10(34). However, the company is    liable to pay tax on such dividend u/s 115-0.

b) Dividend discussed u/s 2(22)(e) on such dividend:

              (i)Tax shall be deducted at source.

              (ii)Gross amount shall be included in the income of person receiving it.

2. Dividends from a co-operative society. The amount received as dividends from the co-
operative society shall be included in the income. However, the society is not empowered
to deduct tax at source. Hence, the question of grossing up of dividends does not arise.

3. Dividends from a foreign company. .The dividends received from a foreign company is to be included 'net' in the income as there is no provision in the Act under which the deduction foreign tax is deemed to be income received.

             Whenever mere is a declaration of dividend or any distribution in the nature of dividend covered by sub-clauses (a) to (d) of clause (22) of section 2, the company is liable to pay tax U/s 115-0. Such dividend income is exempt in the hands of shareholders U/s 10(34). However, in the case if deemed dividend covered by sub-clause (e) of Sec 2(22) and dividend declared /distributed by a former company the share holder is chargeable to the character the head income from other source at sec. 115-0 does not apply to such dividend.

2. Lottery, Crossword puzzles etc

            Income from any winning from lotteries, crossword puzzles, races including horse races, card games and other games or any sort or from gambling or betting of any form or nature whatsoever. The assessee receives net amount after deducting tax at source at the prescribed rate 30% + surcharge, if any + Education cess on the amount of income tax and surcharge @ 2% (if the winnings exceeds from lottery etc. Rs. 5,000 and from horse race exceeds Rs. 2,500). The gross amount (amount received + tax deducted at source) is included in the income. The gross amount can be computed as under for A.Y 2012 -13.

(i) In case of an individual and such income does not exceed Rs. 10, 00,000

         Amount received X 100/70

(ii) In case of an individual and such income exceed Rs. 10, 00,000:

 

3. Gift

           Any sum of money exceeding Rs. 25,000 is received without consideration by an individual or a HUF from any person on or after 1 -9-2004; the whole of such sum. But it does not apply to any sum of money received.

    (a) From a relative; or

(b) under a will or by way of inheritance or

(c)  on the occasion of the marriage of the individual or

(d) In contemplation of death of the payer.

 

 4.1nterest on Securities

       Income by way of interest on securities is taxable under the head 'Income from other sources,' if the same is not taxable as business income under section 28.

The word security' denotes a debt or claim the payment of which is secured. Securities include Central or State Government bonds, debentures of a company, debentures issued by statutory corporations etc.

Kinds of securities

For income tax purposes, the securities can be classified into:

(a) Securities of the Central Government or a State Government;

(b) Tax-free Commercial Securities;

(c) Less-tax Commercial Securities.

 

 

 

(a) Government Securities

          Such securities are issued either by the Central Government or a State Government No tax is deductible on such securities. Hence the interest on such securities will not be grossed up. The amount received or due as the case may be, will be added in the income.

 

(b)        Tax-free Commercial securities

         Such securities are issued by companies. In fact these securities are not tax-free. These securities are called tax-free from the point of view of the investor. The investor is not liable to pay tax on the interest on .such securities. -The invested company pays interest at a fixed rate as mentioned on the face of the security to the investor and the tax to the Govern­ment' at the rate in force' from its own pocket on behalf of the investor. However, the amount of tax paid by the company on this interest is deducted from the total tax payable by the assessee ( as per his own individual separate assessment) and the balance of amount left is payable by the assessee as tax.

 

(c) Less-tax commercial Securities

        All securities if they are not tax-free, are less -tax securities whether the word 'less-tax' is mentioned on the face of the security or not. Generally, 'less-tax' is not mentioned on the security. The word' less-tax' signifies that before making the payment of interest the tax at the rate in force shall be deducted at source and deposited in the treasury on behalf of the investor.

 

Grossing up of interest on Securities

         The assessee is liable to pay income tax on the full income from the securities and not only on the interest received on securities. Hence, in the income the gross amount (interest received +tax deducted at source or paid by the investee company to the government on behalf of the investor) is included. The following are rules for grossing up interest on securities.

(i) In case of tax-free commercial securities, the interest is always grossed up:

(ii)In case of less-tax securities, if interest received is given it is always grossed up.

           (iii)In case of less-tax securities, if the rate of interest and amount of investment (on
          the basis of face value of the security) are given, it is not grossed up as it is already       the gross amount of interest

           (iv) In case of Government securities the interest is not grossed up.

  The following formulae maybe used to find out the gross amount of interest on securities in different circumstances for the assessment year 2009-10.

 

In the case of a person other than a company.

         Where the individual is resident in India and such income does not exceed Rs /     10.00,000

      (i) Interest received on Debentures of a company listed in a recognized stock exchange in India: (interest received x 100)/90

(ii)Interest received on other debentures and securities: (Interest received x 100)/90

 

Bond washing transaction Sec. 94(1)

Bond washing transaction is defined as a transaction which consists of selling securi­ties (to a friend or relative) sometime before the due date of interest and acquiring back the same (or similar) securities after the due date is over. This practice is generally adopted by high income group assessees to evade the tax by transferring securities to low income group assesses on the eve of the due date of payment of interest. If this practice is not checked interest is includable in the total income of the transferee as interest is chargeable in the hands of the person who is legal owner of securities on the due date of payment of interest To prevent the avoidance of tax in this manner, section 94(1) provides that where a security owner transfers, the securities on the eve of the due date of interest the amount of interest received by the transferee will be deemed as the income of the transferor and accordingly it will be included in the total income of the transferor and not of the transferee.

 

4. Fund of Employees

Any sum received by the assessee from his employees as contribution to any provi­dent fund or superannuation fund or any fund under Employee's State Insurance Act, 1948 or any other fund for the welfare of such employees, if such income is not chargeable to tax under the head 'Profits and Gains of Business or Profession'

 

5. Hire of Machinery, Plant etc.

Income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income tax under the head 'Profits and Gains of Business or Profession. If the business as a whole is let, out, the income (rent) would be assessable as income from other sources. If only the commercial assets are leased out, the income would be income from business.