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CA-Final (Income Tax)

Chapter
8

INCOME FROM OTHER SOURCES

8.1 INTRODUCTION

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.
(1) Chargeability Section 56
Income Chargeable only under this head
The following income shall be charged to tax only under the head Income from
Other Sources:
(1) Dividend income covered by sub-clause (a) to (e) of clause (22) of Section 2.
(2) Income by way of winnings from lotteries, cross word puzzles, races including
horse race, card games and other games of any sort, gambling, betting, etc. It
requires mention here that such winnings are chargeable to tax u/s 115BB at
a flat rate of 30%.
(3) Any sum of money, the aggregate value of which exceeds Rs.50, 000 received
from any person without consideration by an individual or Hindu Undivided
Family on or after 01.04.2006.
However, exemption is granted in respect of any sum of money received
(a) from any relative; or
(b) on the occasion of marriage of individual; or
(c) under a Will or by way of inheritance; or
(d) in contemplation of death of the payer or
(e) from a local authority; or
(f) from any fund, foundation, university, other educational institution, hospital,
medical institution, any trust or institution referred to in Section 10(23C); or
(g) From charitable institutions registered u/s 12AA.
In respect of above gifts, there is no ceiling limit and therefore, entire amount is
exempt from chargeability.
The
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)

defintion of the term relative for this purpose is as under :


husband or wife of individual;
brother or sister of the individual;
brother of husband of the individual;
brother of wife of the individual;
sister of husband of the individual;
sister of wife of the individual;
brother of father of the individual;
brother of mother of the individual;
sister of father of the individual;
sister of mother of the individual;
lineal ascendant of the individual (say, grandfather)
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CA-Final (Income Tax)


(l)
(m)
(n)
(o)
(p)
(q)

lineal descendant of the individual (say, son, grandson, daughter)


lineal ascendant of the husband of the individual
lineal descendant of the husband of the individual
lineal ascendant of the wife of the individual (say, wifes father)
lineal descendant of the wife of the individual;
wife or husband of the relatives listed at serial numbers (b) to (p)

Taxability of any sum received:


The objective of taxation of any sum received by an individual or HUF, without
any consideration is basically to bring into tax net the bogus transactions in the
name of gifts from unknown persons. Keeping this in mind, any gift received from
non-relatives, subject to exemptions listed above, has been subjected to tax u/s
56(2) (VI). Accordingly, any sum of money received by an individual or HUF during
the year, the aggregate of which is exceeding Rs.50,000, shall be subject to tax in
the hands of such individual or HUF.
It needs mention that the aggregate limit of Rs.50, 000 as provided in the
Section is not in the nature of basic exemption or a threshold limit. Accordingly, in
case an individual or HUF receives any sum of money exceeding Rs.50, 000, which
are not covered by exemptions, the whole of such sum shall be subject to tax under
the head Income from Other Sources. For example, in case where Mr. A receives
gift of Rs.75, 000 from 3 of his friends, the entire amount of Rs.75, 000 shall be
chargeable to tax. Assessee cannot claim exemption of Rs.50, 000 as the aggregate
sum of money received has exceeded Rs.50, 000 and therefore, whole of such sum
received as gift shall be brought to tax. On the other hand, in case the aggregate
amount of gift received is Rs.45, 000, the entire sum shall be exempted as such
aggregate amount does not exceed the limit of Rs.50, 000 prescribed under the law.
Further, since the expression used in the laws is any sum of money.
Therefore, it is to be understood that gifts-in-kind, movable and immovable, are not
liable to tax. They shall continue to be regarded as capital receipts not having the
character of income.
Though the law provides for chargeability of any gifts received by individual or
HUF, all the above clauses of the definition of the term relative is confined only
with reference to individuals. Therefore, an assessee, being a HUF, is not eligible to
claim exemption provided by clauses dealing with gifts received from relatives and
gifts received on the occasion of marriage as mentioned above.
8.2 INCOME CHARGEABLE UNDER THIS HEAD, ONLY IF NOT CHARGEABLE
UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION

The following income shall be chargeable to tax under this head of income only
if it is not taxable under the head Profits and Gains of Business or Profession:
(a) Interest on securities (State and Central Government securities and
debentures);
(b) Any sum collected from employees towards their share of contribution to any
Welfare Fund Account :
(c) Income from letting of machinery, plant and furniture; and
(d) Income from letting of machinery, plant and Furniture together with building,
if the letting of the building is inseparable to the letting of other assets.
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CA-Final (Income Tax)


8.3 INCOME CHARGEABLE UNDER THIS HEAD ONLY IF NOT CHARGEABLE
UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION OR
UNDER THE HEAD SALARIES

Any sum received under a Keyman insurance policy including bonus is


chargeable under this head when it is received by any person other than the
employer who took the policy and the employee in whose name the policy was
taken.
Income not chargeable under other heads of income
All other income chargeable under Income Tax, Act, but not falling under any
other specific heads of income shall be chargeable to tax under the head Income
from Other Sources.
INCOMES EXEMPT FROM TAX [SECTION
Sec 10 Exempted Income
(10BC)
Compensation
received
or
receivable by an individual or
his legal heir on account of
disaster.

(10D)

(15)

(16)

(17)

10]:
Conditions/Remarks
(a) Such compensation is received or
receivable from the central/State
government or a local authority.
(b) Exemption is not available to the
extent such amount has been allowed
a deduction on account of any loss or
damage caused by such disaster under
this act.
Sum
received
under
life- Following are not exemptinsurance policy included sum (1) sums u/s 80DD(3) and 80DDA(3)
by way of bonus allocated on it. (2) sums under key man insurance
policy
(3) Sums received under insurance
policy issued on or after 1-4-2003 if in
any year the premium payable exceeds
20% of actual capital sum assured.
However sum received on death is
exempt.
(i) Interest, premium on redemption or other payments on securities,
bonds, deposits etc. issued or notified by central government subject to
prescribed conditions or limits.
(ii) In the case of an individual or a HUF, interest on notified capital
investment bonds and interest on notified relief bonds.
Education scholarship.
Note: (a) Recipient can be Indian or foreigner; whole amount need not be
spent on education.
(b) Scholarship granted to meet education cost of children of employee is
exempt.
Allowance to MLA and MP or Following are exemptmembers of any parliamentary (1) daily allowance;
or legislative committee.
(2) any allowance received under the
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CA-Final (Income Tax)

(19)

(26)

(26AAAA)

(34)

(35)
(39)

members of Parliament (constituency


allowance) Rules, 1986;
(3) any constituency allowance received
by any person by reason of his
membership of any state legislature
under any act or rules made by that
state legislature.
Family pension received by Death of such member has occurred in
widow/children or nominated course of operational duties and in
heir of member of Armed Forces prescribed
conditions
and
circumstances.
Income of member of Scheduled Tribes residing in specified areas/states,(a) from any source in that specified area or state; or (b) by way of
interest/dividends on securities.
Income of a sikkimese individual - (a) from any source in the state of
Sikkim; or (b) by way of dividend or interest on securities. However,
no exemption will be available to a sikkimese woman who marries a
non- sikkimese individual on or after 1-4-2008. (Inserted by the
Finance act, 2008 w.r.e.f. 1-4-1990)
Income by way of dividend However, dividends under section
referred to in-section 115-O
2(22)(e) and dividends from foreign
company are not exempt;
Income from units of UTI or Income from transfer of these units is
notified mutual funds
not exempt.
Any notified income arising from Such international sporting eventany
notified
international (1) is approved by the international
sporting event to the notified body regulating the international sport
person (s).
relating to the event; and
(2) Has participation by more than two
countries.

8.4 DIVIDEND

(a)

(b)

(c)

Section 2(22) defines Dividend to include


any distribution by a company to its shareholders to the extent of accumulated
profits whether capitalized or not resulting in the release of all or any part of
the assets of the company,
any distribution to its shareholders by a company
(i)
Of debentures, debenture-stock or deposit-certificates with or without
interest;
(ii) Distribution of bonus shares to the preference shareholders by the
company, to the extent of accumulated profits, whether capitalized or not,
any distribution made to the shareholders by a company on its liquidation to
the extent to which the distribution is attributable to the accumulated profits
of the company, whether capitalized or not,

CA-Final (Income Tax)

(d)

(e)

Note: Where the liquidation is consequent on the compulsory acquisition of


the undertaking of the company by the Government or by any Corporation
owned or controlled by the Government under any law in force, the
accumulated profits shall not include any profits of the company prior to three
consecutive previous years immediately preceding the previous year in which
such acquisition took place.
Any distribution by a company to its shareholders on account of reduction of
share capital to the extent of which the company possesses accumulated
profits, whether capitalized or not.
any payment to the extent of accumulated profits by a company, not being a
company in which public are substantially interested, of any sum by way of :
(i)
Loan or advance to a shareholder who holds the beneficial ownership of
equity shares carrying not less than 10% voting power,
(ii) loan or advance to any concern (HUF, firm, AOP, Body of Individuals or a
company) in which such shareholder is a member or partner holding
substantial interest (20% or more beneficial interest at any time during
the previous year),
(iii) Any payment on behalf of or for the individual benefit of any such
shareholder made to any person.

Exceptions:
(1) Any advance or loan to a shareholder or the concern in which the shareholder
has substantial interest by a company will not be deemed as dividend, if the
loan or advance is given during the normal course of its business provided the
lending of money is a substantial part of the business of the company.
(2) 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, shall not be regarded as dividend. Such buyback of shares attracts
capital gains tax liability in the hands of the shareholder u/s 46A.
(3) Any distribution of shares pursuant to a demerger by the resulting company to
the shareholders of the demerged company (whether or not there is a reduction
of capital in the demerged company) shall not be treated as dividend.

Diagram page 447

CA-Final (Income Tax)


Explanation:
X Ltd. is a closely held company as it is not covered by Section 2(18) of the
Income Tax Act. Mr. A is a shareholder holding 10% voting rights in the company.
He also holds substantial interest in AB and Sons, a partnership firm, where his
share of profit is not less than 20%. In this background, Section 2(22) (e) may get
attracted under 3 situations indicated above:
1
Loan or advance is given to Mr. A by the company. To the extent of
accumulated profits of the company such loan or advance shall be deemed to
be dividend in the hands of Mr. A.
2
Loan or advance is given to a concern (proprietary concern, firm, HUF,
company, etc.) in which the shareholder holding 10% voting rights has
substantial interest. Here, X Ltd. gives loan to AB and Sons. A holds 10%
voting rights in X Ltd. and 20% or more share of profit in AB and Sons. As
this nexus exists, the loan given by X Ltd. to AB and Sons shall be deemed as
dividend in the hands of Mr. A.
3
Where payment is made to any person for and on behalf of the shareholder
holding 10% voting rights shall be deemed dividend. In this case, A owes
payment to Z for any benefit received or to be received towards which X Ltd.
makes payment, such payment shall be deemed to be dividend in the hands of
Mr. A. In order to determine 10% of the voting rights, only the interest owned
by the assessee alone has to be considered.
Notes:
(i)
If A holds 9% voting rights in X Ltd. and even 90% in AB and Sons, then
2(22)(e) will not be attracted. Similarly, if A holds 90% voting rights in X Ltd.
but 19% in AB and Sons, then deemed dividend as per situation 2 above will
not attract.
(ii) In order to determine 20% voting rights/share of profit of the shareholder in a
firm or AOP or company, etc., the interest held by the shareholder in such
firm, AOP, Company, etc. is alone relevant.
Whenever there 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 at 12.5% u/s 115-O. Such dividend income is exempt in the
hands of shareholders u/s 10(34). However, in the case of deemed dividend covered
by sub-clause (e) of Section 2(22) and dividend declared/distributed by a foreign
company, the shareholder is chargeable to tax under the head Income from Other
Sources as Section 115-O does not apply to such dividend.

8.5 WINNINGS FROM LOTTERY, ETC. Section 115BB

Where the total income of an assessee includes any income by way of winnings
from any lottery or crossword puzzle or race including horse race or card game and
other game of any sort or from gabling or betting of any form, tax shall be
calculated at the rate of 30% of such income plus surcharge.
The taxability of income in the nature of winnings from any lotteries,
crossword puzzles, race, etc. are subject to the following:
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CA-Final (Income Tax)


(a)
(b)
(c)

No expenditure or allowance can be allowed against such income;


No deduction under Chapter VI-A can be allowed;
No benefit of carry forward and set off of loss/unabsorbed depreciation
allowance is available against such income; and
(d) No basic exemption limit is available.
This provision does not apply to income derived from owning and maintaining
race horses in respect of which normal rates of tax shall apply. Loss derived from
this source shall be governed by the provisions of Section 74A.

Lottery includes winnings from prizes awarded to any person by draw of lots
or by chance or in any other manner whatsoever, under any scheme or
arrangement by whatever name called.
Card game and other game of any sort includes any game show, an
entertainment programme on television or electronic mode, in which people
compete to win prizes or any other similar game.
8.6 DEDUCTIONS ADMISSIBLE IN COMPUTING INCOME FROM OTHER SOURCES
[SEC. 57];

Income included and the section 56


Deduction
(1) Dividends, other than exempt Any reasonable sum paid by way of
dividends, or interest on securities.
commission or remuneration to a banker
or any other person for realising such
dividend or interest on behalf of the
assessee.
(ia) sum received by employer from Amount out of such sum credited by the
employees as contribution to certain assessee to the employee's account in
funds.
the relevant fund of funds on or before
the due date as per section 36(1) (va).
(ii) Letting on hire of machinery, plants, Repairs, insurance and depreciation on
furniture or buildings as given under such assets as per section 30, 31 and
section 56(2) (ii)/ (iii).
32.Deduction shall be subject to the
provisions of section 38.
(iia) family pension i.e. regular monthly Reduction shall be lower of the followingamount payable by employer to a family (i) one-third of such family pension; or
member of an employee on his death.
(ii) Rs 15,000.
General deduction [section 57(iii)]: any other expenditure (not being capital
expenditure), which is laid out or expanded wholly and exclusively for the purpose
of making or earning such income is deductible.
Expenditure deductible even if income not actually earned: the expenditure
satisfying the conditions under section 57(iii) is allowed as a deduction even if the
income for which it is incurred is not actually earned. Thus interest on loan
borrowed to purchase investments, is deductible even if there is no income derived
from the investments in a particular year.

CA-Final (Income Tax)


8.7 INADMISSIBLE EXPENSES Section 58

(i)
(ii)

Personal expenses
Interest and salary payable outside India, if tax has not been paid or deducted
at source
(iii) Wealth-tax
(iv) Expenses of the nature described in Section 10A
(v) No deduction shall be allowed in respect of winnings from lotteries, cross word
puzzles, card games, races including horse race, gambling, betting, etc.
However, in respect of the activity of owning and maintaining racehorses, 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.
Students may not that in addition to the above, section 14A read with the rule 8D
prescribes disallowance of any expenditure incurred in relation to exempt income.
In a case where dividend, interest or any other income which are exempt by virtue
any of the sub-sections of section 10 and wherea) the assessing officer, having regard to the accounts, is not satisfied with the
correctness of the claim of the assessee in respect of expenditure in relation to
exempt income; or
b) The assessee claims that no expenditure has been incurred by him in relation to
the exempt income.
In the above circumstances, the assessing officer shall determine the correct
amount of expenditure incurred in relation to exempt income in accordance with
the manner prescribed under rule 8D for disallowance of such expenditure.
MANNER OF COMPUTATION OF DISALLOWANCE
A. Rule 8D of the income tax Rules prescribes the manner of computation of
disallowance of expenditure, which is claimed as deduction against exempt income.
This rule shall be made applicable in a case where the assessing officer, having
regard to the accounts of the assessee is not satisfied with the:
i) Correctness of the claim of the expenditure made by the assessee; or
ii) Claim made by the assessee that no expenditure has been incurred.
in relation to the exempt income. In such cases, the assessing officer shall
determine the amount of such expenditure in relation to exempt income in
accordance with the manner prescribed in rule 8D(2)
B. according to rule 8D(2), the manner of computation of expenditure relating to
exempt income shall be as follows:

CA-Final (Income Tax)


Description
Amount of expenditure directly relating to exempt income.
Amount of interest expenditure incurred by the assessee, which
is not directly attributable to any particular income (Refer note1 below for computation).
Amount equal to 0.5% of the average value of investment,
income in respect of which is exempt from tax.
Total amount disallowable u/s.14A

Amount in Rs.
A
B

C
A+ B+ C

Note:
1. The amount disallowable in respect of interest expenditure as referred above
shall be computed in the following manner:
X*Z
Y
Where:
X= Total amount of interest other than those considered in item A above.
Y= the average of the total assets in the balance sheet as on the first day and the
last day of the previous year.
Z= the average value of investment, income from which does not or shall not form
part of the total income as appearing in the balance sheet as on the first day and
the last day of the previous year.
2. Average value of investments is the investments as on the first and last of the
previous year as on the balance sheet, which income is exempt from tax.
3. Total assets means total assets as appearing in the balance sheet excluding the
increase on account of revaluation of assets but including the decrease on account
of revaluation of assets.
Illustration:
Mr. Jagadeesh is a chartered accountant in practice. The income & expenditure
account for the year ended March 31, 2009 read as follows:Expenses
To Employees cost
To Traveling and
Conveyance
To Administration & office
expenses
To Interest
To Demat charges

Rs.
Income
1,50,000 By Professional earnings
50,000 By Dividend income
- from shares
4,00,000 - from equity oriented
mutual funds
1,50,000
10,000

Rs.
12,00,000
2,00,000
1,00,000

CA-Final (Income Tax)


To Net profit
Total

7,40,000
15,00,000

Total

15,00,000

Other information:
a.) Entire dividend income is claimed as exempt from taxation by virtue of section
10 (34) and 10 (35).
b.) Jagadeesh claims that no expenditure has been incurred against the dividend
income, which is claimed as exempt from tax.
c.) The value of investment in shares as on the first day and the last day of the
previous year is Rs 2,50,000/-and 7,00,000/- respectively.
d.) The value of investment in units of mutual funds as on the first day and the last
day of the previous year is Rs 5,00,000 and 2,00,000 respectively.
e.) All expenditure including interest expenditure of Rs.1,50,000 incurred by
Jagadeesh are relating to taxable and non-taxable income. Demat charges are
directly attributable to exempt income.
f.) The value of the total assets as appearing in the balance sheet of the assessee as
on the first day and last day of the previous year is Rs. 50,00,000 and Rs.60,00,000
respectively.
You are required to compute the taxable income of Jagadeesh for the assessment
2009-10.

Answer: Computation of taxable income


Particulars
Income from Profits and Gains of Business or Profession
- As per working note 1.
Income from other sources
- As per working notes 2.
Total
Add: Disallowance u/s. 14A
- As per working note 3.
Taxable Income

Working Note 1 - profits and gains of business or


profession
Net profit as per income and expenditure account
Less: Income considered under other heads
- Dividend Income from shares
- income from UTI
Taxable Professional Income

A.Y 2009-10
Rs.
4,40,000
Nil
4,40,000
36,625
4,76,625

Rs.

Rs.
7,40,000

2,00,000
1,00,000

3,00,000
4,40,000
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Working Note 2 - Income from other sources
1. Dividend Income from shares
Less: Exempt under sec. 10(34)
2. Income from units in Mutual Funds
Less: Exempt under sec. 10(35)
Taxable income from other sources

Rs.
2,00,000
2,00,000
1,00,000
1,00,000

Working Note 3 - Disallowance u/s 14A


a) Amount of expenditure directly relating to exempt income (other
than interest)
b) Amount of interest incurred by way of expenditure other than those
included above (1,50,000* 8,25,000/55,00,000)
c) Amount equal to 0.5% of the average value of investments
(8, 25,000 * 0.5%)
Total amount disallowed u/s. 14A[(a) + (b) + (c)]

Rs.
Nil
Nil
Nil

Rs.
10,000
22,500
4,125
36,625

Note:
1. Average value of investments = ( 7,50,000 + 9,00,000) /2 = Rs.8,25,000/2. Average value of total assets = ( 50,00,000 + 60,00,000) /2 = Rs.55,00,000/Deemed Income Section 59:
Any amount received or benefit derived in respect of expenditure incurred or
loss or trading liability allowed as deduction shall be deemed as income in the year
in which the amount is received or the benefit is accrued. This provision is similar
to that of Section 41(1) under the head Profits and Gains of Business or
Profession.

Method of Accounting Section 145


Income chargeable under the head Income from Other Sources shall be
computed in accordance with cash system of accounting or mercantile system of
accounting regularly employed by the assessee. The only exception to this general
rule is deemed dividend income covered by sub-clause (e) of clause (22) of Section 2
which is chargeable to tax on payment basis as prescribed u/s 8 of the Income Tax
Act and not on the basis of method of accounting followed.

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Income during construction period
Interest income earned on deposits made out of surplus funds before
commencement of business is taxable as income from other sources. The interest
income so derived from out of investment in the nature of deposit cannot be
reduced from the cost of construction as it has no nexus with the construction of
the plants - Tuticorin Alkali Chemicals and Fertilizers Ltd. Vs. CIT (SC), 227 ITR
172; CIT vs. Coromandel cements Ltd., (SC) 234 ITR 412; similarly, where loan is
borrowed from bank and placed in short-term deposits till the money is paid to
supplier of plant and machinery, the interest earned thereon cannot go to reduce
the cost of plant and machinery but will be charged under Income from other
sources - CIT vs. Autokast Ltd., 248 ITR 110 (SC).
On the contrary, if the receipts during construction period have close nexus with
such construction, the amount shall go to reduce the construction cost of the plant.
The Supreme Court, in the case of CIT vs. Bokaro Steel Ltd., 236 ITR 315, held that
the following income of the assessee-company derived during construction period is
not taxable:
i) rent charged from its contractors for housing workers and staff employed by
contractor for construction work of assessee;
ii)hire charges for plant and machinery given to contractors for use in
construction work;
iii) Interest from advances made to contractors for the purpose of facilitating the
work of construction; and
iv) Royalty for excavation and use of stones lying on assessees land for
construction work.
Thus, the above items should go to reduce the cost of the plant. However, in the
same decision the Supreme Court held that interest on bank deposits is taxable
under income from other sources as the same has no nexus to the construction of
the plant. It may be appreciated that Bokaro Steels Ltd. Decision affirms and
distinguishes the decision in Tuticorin Alkali case but does not over rule the same.
Any amount deposited to open letter of credit for purchase of plant and machinery
required for setting up a plant, interest of such amount is directly connected and
incidental to construction of plant. Therefore, interest receipt is capital in nature
and it would go to reduce the cost of asset. CIT vs. Karnal Co-operative Sugar Mills
Ltd., 243 ITR 2 (SC). Similar view has been upheld in CIT vs. Karnataka Power
Corporation, 247 ITR 268 (SC) and Bongaigaon Refinery and Petrochemicals Ltd. vs.
CIT 251 ITR 329 (SC).

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8.8 COMPUTATION SEQUENCE TO BE REMEMBERED

(1)

(2)
(3)

(4)
(5)
(6)

(7)

Identify income chargeable under this head of income and include them. In
respect of dividend income, year of chargeability should be decided by applying
Section 8.
If net amount after tax deducted at source is given, include the gross amount.
If the income so identified is eligible for exemption u/s 10, avail the exemption
and include only the balance amount. E.g. in respect of interest on certain
notified securities, deposits and bonds qualify for exemption u/s 10(15).
If income is clubbed from minor children, claim exemption u/s 10(32) in
respect of such income upto a maximum of Rs.1, 500 per child.
Expenses and deductions qualifying u/s 57 should be claimed.
Claim deductions, if any, available under Chapter VI-A to the extent applicable
after arriving at the gross total income and not under this head of income.
Deductions cannot exceed the amount of such income included in the gross
total income.
If the total income includes winnings from lotteries, crossword puzzles,
gambling, betting, etc., apply flat rate of 30% for calculating the income tax
payable on such income u/s 115BB.

Illustration:
Shri Ratanlal, a businessman, presents to you the following statements of
account relating to the year ending 31.3.2007 for computation of his gross total
income.
Capital Account
Rs.
Rs.
To Entertainment Exps.
12,000 By Balance b/f
32,000
To Gift to Son
3,000 By Profit
1,31,200
To Shares purchased
50,000 By Race Winnings
12,000
To Drawings
1,30,000 By LIC Policy matured
1,57,920
1,93,120 By Bad Debts recovered
5,000
To Balance c/f
By Loan for Investment
50,000
3,88,120
3,88,120

To
To
To
To
To
To
To
To
To

Salaries
Rent
Bonus
Subscriptions
Drawings
Conveyance
Bad Debts
Advertisement
Travelling

Profit &
Rs.
26,000
10,800
1,200
5,000
11,000
7,500
3,000
16,000
15,500

Loss A/c
By Gross Profit
By Discounts received from
wholesalers
By Interest on Deposits
(TDS Rs.1,000)
By Income Tax Refund
By Interest on Income Tax
Refund
By Profit on Sale of Personal

Rs.
1,93,000
2,500
9,000
5,000
1,200

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CA-Final (Income Tax)


To Profit
transferred
Capital A/c

to

1,31,200

Motor Car

16,500

2,27,200

2,27,200

Additional Information:
(a) Entertainment Expenses relate to business.
(b) Bad Debts recovered relate to deduction allowed in 2003-04.
(c) The LIC policy is for a assured sum of Rs.1, 50,000. Annual premium @
Rs.47, 000 each for 3 years.
Ans: Computation of Gross Total Income for the assessment year 2007-08
Rs.
I.
Profits and gains of business or profession Note 1
1,03,500
II. Income from Other Sources Note 2
40,120
Gross Total Income Rs.
1,43,620

Note 1 : Computation of Business Income


Net Profit as per Profit & Loss A/c
Add : 1. Inadmissible expenses Drawings
2. Income not credited but taxable
- Bad Debts recovered
Less : 1. Income credited to be considered separately
a) Interest on Deposits
b) Income-tax Refund (not an income)
c) Interest on I.T. Refund
d) Profit on sale of personal motor car (not taxable)
2. Expenses deductible but not debited Entertainment Expenses
Taxable Business Income

Note 1 : Income from Other Sources


(i)
Interest (including TDS) on deposits
(ii) Interest on I.T. Refund
(iii) Race Winnings
(iv) Maturity proceeds of LIC (Refer Note 4)
Taxable Income from Other Sources

Rs.

Rs.
1,31,200

11,000
5,000

16,000
1,47,200

9,000
5,000
1,200
16,500
12,000

Rs.

43,700
1,03,500

Rs.
10,000
1,200
12,000
16,920
40,120

Note 3: out of the gross total income of Rs.1, 43,620, a sum of Rs.12, 000 being
race winnings is taxable at a flat rate of 30% u/s 115BB.
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CA-Final (Income Tax)


Note 4: The exemption u/s 10(10D) is not available in respect of maturity of LIC
policy where the premium payable on such policy for any year exceeds 20% of the
capital sum assured. In the given case, premium payable for one year is Rs.47, 000
being 31% of capital sum assured. Therefore, exemption u/s 10(10D) is not
available. The amount taxable under the head Income from Other Sources is
Rs.16, 920 being maturity proceeds of Rs.1, 57,920 less premium paid for 3 years
Rs.1, 41,000.

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