Introduction and Charging Section - Taxation | Income Tax for assessment (Inter Level) PDF Download

Section 56. Chargeability
(1) Income which is not chargeable to tax under any of the first four heads is chargeable under the head ‘Income from Other Sources’. Such income should not be exempt from tax.

Example : MP/MLA salary, Director’s Salary, Rent from vacant land

(2) It lays down the indicative list of incomes which are charged under the head ‘Income from Other Sources’.

Example : Personal Gifts, Profit from activity of owning maintaining race horses, Lottery income, Dividend

Note: Do remember if any of the incomes which does not fall under section 56(2) may fall under section 56(1) and such income shall be taxed under the head ‘Other Sources’.

(3) Following incomes charged under the head business.

Example : Profit from activity of owning and maintaining race camels or other than race horses, Remuneration and interest received by partner from that firm, professional gifts.

Section 57. Deductions Allowed
1. Any 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 is allowed as deduction.
2. Any reasonable expenses incurred for the purpose of realising dividend or interest on securities. (Collection charges)
3. Contribution to provident funds in the relevant acts.
4. Repairs, insurance and depreciation of building, plant machinery and furniture.

Section 58. Inadmissible Expenses
1. Personal expenses.
2. Interest and salary payable outside India, if tax is not paid or deducted at source.
3. Wealth tax.
4. Expenses of the nature defined u/s 40A.
5. Any expenditure or allowance in respect of winning from lotteries, crossword puzzles, races, card games, including horse race etc.

Note: Any allowances or expenses incurred in connection with activity of owning and maintaining race horses is allowed as deduction.

Section 56(2)(vii). Gifts [applicable from 1-10-2009]

Part A
1. Where an individual or a Hindu undivided family receives,
2. in any previous year,
3 from any person or persons
4. on or after the 1-10-2009
5 any sum of money,
6. without consideration,
7. the aggregate value of which exceeds Rs. 50,000,
8. the whole of the aggregate value of such sum is chargeable under the the head “Income from Other Sources”.

Note 1: If any of the above 7 conditions are not satisfied then such sum is not taxable since treated as capital receipt.
Note 2: Where the sum of money exceeds Rs. 50,000 in aggregate from person(s) in a previous year it is taxable. Mr. X receives Rs. 15,000 each from his 5 friends. Whole of Rs. 75,000 is taxable. However if the amount received is Rs. 10,000 each from his 5 friends it is not taxable.

However, this clause shall not apply to transactions of Part A, Part B, Part C or Part D. (Common Exception)
(a) Gifts received from any relative on any occasion not taxable. E.g. Gift received on birthday from a relative not taxable however gift received from a friend is taxable; or
(b) Gifts received from any person on the occasion of the marriage of the individual. E.g. gift received on marriage from a relative or a friend not taxable; or
(c) Gifts received under a will or by way of inheritance; or
(d) Gifts received in contemplation of death of the payer.
Mr. X is suffering from cancer. The doctor certified he shall live for 2 more months. He gifts Rs. 3,00,000 to his caretaker. This amount shall not be taxable.
(e) Money received from local authority.
(f) Money received from any fund, foundation, university, other educational institution, hospital, medical institution, any trust or institution referred to in section 10(23C).
(g) Money received from a charitable institute registered u/s 12AA.

Meaning of “relative”
(i) spouse of the individual,
(ii) brother or sister of the individual,
(iii) brother or sister of the spouse of the individual,
(iv) brother or sister of either of the parents of the individual,
(v) any lineal ascendant or descendant of the individual,
(vi) any lineal ascendant or descendant of the spouse of the individual, and
(vii) spouse of a person referred to in items (ii) to (vi) mentioned above.

Note 1 : Relative means in case of HUF, any member thereof.

Part B
Where an individual or a Hindu undivided family receives, in any previous year, from any person or persons on or after the 1-10-2009, any immovable property (being a capital asset),
(i) without consideration (Gift), the stamp duty value of which exceeds Rs. 50,000, the stamp duty value of such property is taxable under the head ‘Other Sources’
(ii) for a consideration (purchase) which is less than the stamp duty value of the property by an amount exceeding Rs. 50,000, the stamp duty value of such property as exceeds such consideration is taxable u/h ‘Other Sources’. (Stamp duty value – purchase price = exceeds 50,000, difference amount taxed u/s ‘OS’) [w.e.f 1-4-2013]

Note : If consideration or its part is paid in cheque before the date of agreement to sell then the Stamp Duty Value shall be taken prevailing on the date of agreement to sell. But if it is not so then stamp duty value is taken of the date of registration.

P1: Compute the amount charged under the head “Income from Other Sources”
a. Mr. X gifts immovable property to Mr Y. Its stamp duty value is Rs. 15,00,000. Market price Rs. 20,00,000.
b. Mr. X sells his immovable property to Mr Y for Rs. 25,00,000. Its stamp duty value is Rs. 30,00,000.
c. Mr. Y has received gift of agricultural land having stamp duty value of Rs. 45,000 from Mr. A and also a residential house from Mr. B having a stamp duty value of Rs. 2,00,000.
d. Mr. Y has received gift of industrial land having stamp duty value of Rs. 6,00,000 from his grandson.
e. Mr. X gifts immovable property to D Ltd. Its stamp duty value is Rs. 35,00,000. Market price Rs. 60,00,000.
f. X purchases building for Rs. 5,00,000 having stamp duty value of Rs. 5,50,000.

Ans: (a) 15,00,000; (b) 5,00,000 (c) 2,00,000. (d) nil (e) Not taxable under the head OS but taxed u/h PGBP (f) nil

Part C
Where an individual or a Hindu undivided family receives, in any previous year, from any person or persons on or after the 1-10-2009, any specified movable property [JAD PB SAS], being capital asset —
(i) without consideration (Gifts), the aggregate fair market value of which exceeds Rs. 50,000, the whole of the aggregate fair market value of such property is taxable u/h ‘Other Sources’
(ii) for a consideration (Purchase) which is less than the aggregate fair market value of the property by an amount exceeding Rs. 50,000, the aggregate fair market value of such property as exceeds such consideration
(Prescribed FMV – purchase price = exceeds 50,000, whole amount taxed u/s ‘OS’ ).

Note 1: Movable property means the following capital asset of the assessee namely (a) jewellery; (b) archaeological collections; (c) drawings; (d) paintings; (e) Bullion w.e.f. 1-6-2010 (f) sculptures; (g) any work of art (h) shares and securities. [JAD PB SAS]
Note 2: Fair market value means the value determined in accordance with the prescribed method.

P1R (Page 8.3): Compute the amount charged under the head “Income from Other Sources”
a. Mr. X gifts shares to Mr Y. Prescribed FMV is Rs. 4,00,000.
b. Mr. X sells his jewellery to Mr Y for Rs. 8,00,000. Prescribed FMV is Rs. 9,00,000.
c. Mr. X sells his M. F. Hussain paintings to Mr Y for Rs. 7,00,000. Prescribed FMV is Rs. 7,30,000.
d. Mr. Y has received gift of jewellery having prescribed FMV of Rs. 30,000 from Mr. A and also shares whose prescribed FMV Rs. 40,000 from Mr. B.
e. Mr. Y has received gift of M. F. Husain paintings having prescribed FMV of Rs. 80,000 from his father.
f. Mr. X received Rs. 50,000 by cheque from Mr. A. Immovable property of Rs. 30,000 from Mr. B. Jewellery of Rs. 35,000 from Mr. C.
g. Mr. X gifted jewellery worth Rs. 2,00,000 to his friend’s daughter on the occasion of her marriage. After 2 years, he gifted diamond of Rs. 50,000 on the birth of their first child.
h. Mr. X gifts Rolls Royce car to Mr Y. Prescribed FMV is Rs. 3.5 Cr.
i. Mr. Y has received gift of jewellery having prescribed FMV of Rs. 50,000. Mr. Y has purchased shares of Rs. 2,00,000 whose prescribed Fair Market Value is Rs. 2,50,000.

Ans: (a) 4,00,000; (b) 1,00,000; (c) nil; (d) 70,000. (e) nil (f) nil. (g) Rs. 2,00,000 not taxable since marriage and also Rs. 50,000 not taxable since FMV do not exceeds 50,000. (h) Not taxable (i) Not taxable.

Part D
Section 56(2)(vii a). Gifts of shares of closely held company to firm or to closely held company. Refer extra topics