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    Section 56 of Income Tax Act, 1961

    Income from Other Sources

    (Section 56)

    Introduction:

    • Income that is taxable under the Income Tax Act 1961 (“Act”) shall fall under the Head “Income from Other Source” if it is not chargeable under any other heads of income.
    • Heads of Income covered under the act are as below:

     Income from:

    • Salaries (Sec. 15)
    • House Property (Sec. 22)
    • Profits and Gains of Business or Profession (Sec. 28)
    • Capital Gains (Sec. 45)
    • Income from Other sources (Sec. 56)

    From the above, it was clear that incomes not falling under first four heads as above shall b be charged under the head “Income from Other Sources”.

    The Taxability of Topics covered in the article:

    1. Gift
    2. Income from winnings
    • Share premium paid in excess of Fair Market Value
    1. Income from Dividends
    2. Income from Interest on compensation
    3. Advance forfeited
    • Hire charges

     

    1. Gift:

    Gift refers to sum of money or value of property received without any consideration or inadequate consideration. It is chargeable to tax in hands of recipient subjected to following criteria

    S No

    Nature

    Taxability

    1.

    Money (Aggregate)

    If aggregate value exceeds Rs. 50,000/- (F.Y)

     

    2.

    Movable Property

    (Aggregate)

    No consideration: If aggregate fair market value exceeds Rs. 50,000/- (F.Y)

     

    Inadequate consideration: Where the difference of fair market value and the consideration exceeds Rs. 50,000/- is subject to tax under OS

     

    3.

    Immovable property

    (Individual)

    No consideration: If stamp duty value of the property exceeds Rs. 50,000/-

     

    Inadequate: The difference between Stamp duty value and the consideration exceeds, Higher of the below:

    •       Rs. 50,000/-

    •       5 percent of the consideration. W.e.f from 1-4-19 (Finance act 2018)

     

     

    Determination of Value of Immovable Property:

    1. No consideration: Stamp Duty Value as on date of registration (DOR) is to be considered.
    2. Inadequate consideration: If Date of Agreement (DOA) and Date of Registration (DOR) are different and Part (or) Full Consideration is paid on (or) before Date of agreement (DOA) then value as on Date of agreement (DOA) be considered.

    Otherwise Date of Registration (DOR) should be considered.

    1. Payment should be made by Account Payee cheque or account payee draft or any electronic mode.

    If the Stamp Duty Value of immovable property is disputed by the assessee:

    The assessing officer may refer the valuation of such property to valuation Officer if such value is less than Stamp Duty Value, the same value as determined by valuation officer should be taken as consideration for the computation of income under this head.

    Example for transfer of Immovable property for inadequate consideration:

    Case-1 Mr. A transfer an Immovable property for Rs.1.00 Crore consideration on 2nd June 2019. The stamp duty value [“SDV”] of property as on the day is 1.04 Crores. Is it taxable?

    Ans: No.

    As per provision difference amount of Rs.50,000 (or) 5% of consideration, whichever is higher should be considered. Since the difference between Stamp Duty Value and Consideration is 4 lakhs So, 5% of value to be considered. Since the difference does not exceed 5% of the consideration it is not Taxable.

    Case-2 Mr. A transfer a Immovable property for 1 Crore consideration on 2nd June 2019. The stamp duty value of property as on the day is 1.06 Crores. Is it taxable?

    Ans: Yes.

    Herse, Difference between SDV and Consideration is 6.00 lakhs. Since the difference exceeded 5% of the consideration whole difference amount is Taxable. Hence, Rs.6.00 lakhs is taxable.

    Exceptions to gift: If gift is received from following persons it is completely exempt irrespective of the amount.

    • Relative: All these persons are covered under relative definition.

     

    • On occasion of marriage: If gift is received on occasion of marriage then it is fully exempt from tax.
    • In contemplation of death of donor or payer: Any sum of money or any property is received in contemplation of death is also exempt from gift tax.

    Example: Mr. A expected to die shortly due to cancer. Now, Mr. A transferred his property to Mr. B under contemplation of his death, then such transfer is not taxable.

    • Under any will Document
    • Trust or institution Registered under 12A or 12AA of the Act
    • By any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to Section 10.
    • From an individual by a trust created or established solely for the benefit of relative of the individual
    • By way of transaction not regarded as transfer under section 47 of the Act

    If gift is received from any fund any university or other educational institution or any hospital or other medical institution referred to Section 10.

    If gift is received from any Trust or institution Registered under 12A or 12AA of the Act.

     

    Property includes capital of the assessee

    • Immovable property being land or building or both
    • Shares and securities
    • Jewellery
    • Archaeological collections
    • Drawings
    • Paintings
    • Sculptures
    • Any art of work
    • Bullion

     

    1. Income from Winnings:

    Income earned by way of winnings from

    • Lotteries
    • Crossword puzzles
    • Races incl. (Horse races)
    • Card games
    • Gambling and betting
    • Entertainment shows

    All the income from winnings are subjected Tax @ 30% and Cess @ 4% at flat rate without considering the basic exemption limit of Rs.2,50,000/

    Under section 194B of the Act, 30% of tax is deducted on any prize money in excess of Rs 10,000 and other winnings from games, lotteries etc.

    In case of winnings from horse races exceeds Rs. 5,000/- for applicability of TDS under section 194BB of the Act is Rs 5000/-

    Example: Calculation of Tax on Income from Winnings:

    Mr. A has won the prize money of Rs 3 lakhs from a game show and he has an interest income of Rs 5 lakhs p.a. Calculate Tax liability of Mr. A.

    Ans: Tax on Rs 3 lakhs @ 30% + 4% H and Ed cess = 93,600/- and Tax on Rs 5 lakhs as per income tax slab rates after claiming the relevant deductions =13,000/-. The total tax liability is Rs. 1,06,600/-

    If prize is received in kind, Tax is to be paid on Fair Market Value of the prize.

    Example: Mr. X won an Alto car in a contest whose market value is Rs 4 lakhs, then tax @ 30% + 4% cess is to be paid on 4 lakhs, which is equal to 1,24,800.

     

    • Share premium paid in excess of Fair Market Value:

    As per section 56(2)(Viib) of the Act, Where a closely held company issues shares at a price which is more than its Fair Market Value then the amount received in excess of Fair Market Value is chargeable to tax.

    Exceptions:

    • Receipt of share application money from Non-resident applicants.
    • Issue price exceeding fair market value of shares but not exceeding face value of shares.
    • Consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund.
    • Consideration for issue of shares is received by a company from a class or classes of persons as may be notified by the Central Government in this behalf, till date no such person are notified by the central government.
    • Strat-up companies

    Determination of fair market value:

    Fair Market Value of the shares must be higher of the following methods:

    • Determined In accordance with the prescribed methods (or)

     

    • Substantiated by a company to the satisfaction of the assessing officer, based on value of its assets on the date of issue of the shares.

    For the calculation of value of the assets include the value of intangible assets such as goodwill, know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature.

    Rule 11UA prescribes two methods for calculating Fair Market Value of the assets

     (A-L) *(PV)

           PE

    1. Fair Market Value =

     

    • A = Book value of assets – Net taxes paid during year under Act + unamortized amount of deferred expenditure which does not represent the value of any asset;
    • L = Book value of liabilities – Paid up equity share capital – Amount set apart for payment of dividend – Reserves and Surplus - Provisions made, if any – contingent liabilities
    • PV = Paid up value of equity shares
    • PE = Total amount of paid up equity share capital as shown in the balance sheet
    1. The fair market value of the unquoted equity shares determined by a merchant banker as per the Discounted Free Cash Flow method.

    Example:

    Company

    No. of shares

    Face value

    F.M.V

    Issue Price

    Taxability

    A (P) Limited

    10000

    100

    120

    130

    Yes

    B (P) Limited

    10000

    100

    120

    110

    No

    C (P) Limited

    10000

    100

    90

    98

    No

    D (P) Limited

    10000

    100

    90

    110

    Yes

     

    1. Income from Dividends [Section(56)(2)(i)]:

    Definitions: Section 2(22A).

    Domestic company means an Indian company, or any other company which, in respect of its income liable to tax under this Act, has made the prescribed arrangements for the declaration and payment, within India, of the dividends (including dividends on preference shares) payable out of such income.

    Foreign company is a company other than domestic company.

    Dividends from the foreign companies:

    Dividends from the foreign companies are completely taxable.

    Dividend under section 115bbda:

    If Aggregate dividend income earned by specified assesse in excess of Rs. 10 lakhs, then such income in excess of Rs.10 lakhs is taxable @ 10% and applicable surcharge, if any.

    Specified assessee is a person other than Domestic company and a fund or institution or trust or any university or other educational institution or any hospital or other medical institution.

    Dividend received under Section 2(22)(e) is completely exempt in the hands of shareholders even if it exceeds Rs. 10 lakhs.

    Section 115BBDA excludes dividend received under Section 2(22)(e).

    Example: If Mr A’s total income is Rs. 20 lakhs, which includes dividend income of Rs. 15 lakhs during the financial year 2017-18, then he is liable to pay additional tax at 10 per cent on Rs. 5 lakh and under normal slab rates to the extent of Rs. 5.00 lakhs

     

    Deemed Dividends [Section 2(22)]: Deemed dividends are covered by sections 2(22)(a) to 2(22)(e).

    1. Distribution of accumulated profits:

    Any distribution of accumulated profits, whether capitalised or not, by the company to its shareholders is treated as deemed dividend

     

    1. Distribution of debentures, deposits certificates to shareholders and bonus to Preference shareholders:

    Any distribution of debentures, deposits certificates in any form, whether with or without any interest and bonus to Preference shareholders to extent of accumulated profits, whether capitalised or not, is treated as deemed dividend.

    Bonus shares given to equity shareholders is not treated as deemed dividend

     

    1. Distribution on liquidation:

    Any distribution made to shareholders of a company on its liquidation, to the extent of accumulated profit, whether capitalised or not, is treated as deemed dividend.

     

    1. Distribution on reduction of capital:

    Any distribution made to shareholders of a company on reduction of capital, to the extent of accumulated profit, whether capitalised or not, is treated as deemed dividend.

     

    1. A company in which public are not substantially interested extends loans or an Advance:

    If it extends loans or advances to following persons;

    • Shareholders who has more than 10% of voting power or
    • To any concern in which such shareholder is substantially interested or
    • To individual benefit of such share holder or
    • On behalf of such shareholder

    Exceptions to Section 2(22)(e):

    1. If loan is granted in ordinary course of business and lending of money is the substantial part of company’s business.
    2. Where loan is treated as dividend and subsequently, the company declares and distributes dividend and such loan is set off by company against dividend declared.
    3. Any payment made by a company on purchase of its own shares from a shareholder
    4. Any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company

    Example: ABC Pvt Ltd. is a company, in which public are not substantially interested. Hari an individual being one of the shareholders having 15% voting power. The company has accumulated profits of Rs. 25 lakhs as on 31 March 2018. The company granted a loan of Rs. 100,000 to Hari, by way of an account payee cheque. He repaid the amount on 5 May 2018.

    Ans: In this case, even if the loan has been repaid by Hari, the loan amount granted to the extent of accumulated profits are treated as deemed dividend.

    Accumulated profits:

    • All the profits of the company up to the date of distribution or payment of Dividends

    In case of liquidation:

    • Accumulated profits include all profits up to the date of liquidation.
    • When liquidation is consequent to compulsory acquisition of government or any corporation owned by government, then accumulated profits does not include any profits prior to 3 years preceding the previous year in which such acquisition takes place.

    Dividend Distribution Tax:

    Any income earned by way of dividends, is exempted in hands of shareholders under section 10(34) as companies are liable to Dividend distribution tax at the rate of 15% and cess and applicable surcharge, if any. However, Dividend distribution tax in case of Section 2(22)(e) is 30% and cess and applicable surcharge, if any.

    It should be noted that exemption under section 10(34) is not applicable in case of Dividend taxable under Sec.115bbda.

    1. Income from Interest on compensation:

    Any amount received as interest on compensation or enhanced compensation on compulsory acquisition by government is chargeable to tax under income from other source.

    However, 50% deduction can be claimed under Sec.57

    1. Advance forfeited:

    Any sum received by way of advance or any other course of negotiations for transfer of capital asset and such amount is forfeited and such negotiation did not result to transfer of such asset then such income is chargeable to tax under income other source.

    • Hire charges:

    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” then it is chargeable under income from other sources.

    If an assessee lets on hire plant or furniture, machinery and building and letting of that building is inseparable from such letting of plant or furniture, machinery then such income is taxable under IFOS. If there is letting of Building as well amenities but without any letting of Assets, then this section is not applicable & the whole of such Income earned will be taxed under Income from House Property.

    Example: Theatre Building and its Furniture is taxable under the head Income from Other Sources, if not charged as Business Income.

    Summary

    Gift:

    Without consideration: If value exceeds Rs.50,000/-, then completely taxable

    Inadequate consideration:

    • For movable Property: Difference between FMV and consideration exceeds Rs. 50,000/-
    • For immovable property: If difference exceeds higher of Rs.50,000/- or 5% of consideration

    Determination of value of property (Immovable property):

    No consideration        Value as on Date of Registration

    Inadequate consideration:

    DOA and DOR on different dates      DOA*

    *part or full payment should be made by account payee cheque or account payee draft on or before DOA.

    Share premium paid in excess of fair market value:

    Conditions:

    • Shares issued by closely held companies
    • Issued at premium

    Result:

    • Amount received over and above the fair market value is taxable in the hands of company

    Exceptions:

    • Start-up companies
    • Shares subscribed by Non-Residents
    • Consideration is received by venture capital company venture capital undertaking

     

    Dividends:

    In Hands of Shareholders

    Taxable Dividends:

    • Dividends from foreign companies
    • Section 115bbda: Dividend Received in excess of Rs. 10 lakhs by specified assessee.
    • Section 115BBDA excludes dividend received under Section 2(22)(e).

    Exempted dividends: (section 10(34))

    • Dividends under section 2(22)(a) to section 2(22)(d) not exceeding Rs 10 lakhs
    • Dividend under section 2(22)(e)

    In Hands of company:

    • Dividend under section 2(22)(a) to 2(22)(e) are subjected to dividend distribution tax
    • Dividend declared by all domestic companies are subjected to dividend distribution tax
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