Deemed Income Under Income Tax Act, 1961.

Introduction
The requirement of each countrys economy and society requires taxation of some other
type of receipt which may not be a income under its normal definition. This is known as
deemed income.

Extended definition of income

The term income in section 2(24) of the income-tax act is an inclusive definition by which
the normal definition of income is extended to include some other type of receipt as
income. The capital receipts like capital gain, voluntary contributions received by
trust, compensation on termination of employment (termed as profit in lieu of salary u/s 17)
are also included as income. Similarly surplus from mutual activities like insurance business
and income of cooperative society is also included as income. Even windfall gain and casual
receipts are included as income.

The receipts which are deemed as income under the income tax act
are as follows : -

1. Deemed Dividend

Under section 2(22) of the income-tax act, dividend includes:

a) Distribution by a company of accumulated profit in the form of release of assets to

the shareholders
b) Distribution by a company of debentures, debenture stock or deposit certificate to
its shareholders and bonus shares to preference shareholders to the extent of
accumulate profit.
c) Distribution by company on liquidation to the extent of accumulated profit.
d) Distribution by a company to shareholder on the reduction of capital to the extent
of accumulated profit.
e) Payment by closely held company by way of advance or loan to a shareholder or to a
person on behalf of shareholder to the extent of accumulated profit. This will not
apply where the money is advanced in the ordinary course of business of the
company who is in the business of money lending. This is a very important provision
because if it is seen that a closely held company has advanced loan to a shareholder
then it would be deemed as dividend.

Point to be kept in mind

The payment or distribution under the aforesaid clauses can be treated as dividend
only to the extent of accumulated profits of the company.
Loans and advances received by assessee out of share premium account cannot be
treated as deemed dividend CIT v. MAIPO India Ltd. [2008] 24 SOT 42 (Delhi).
 Distribution in kind may also be termed as a deemed dividend.
When, a company issues bonus shares capitalizing its profits then there is no release
of assets and, consequently, bonus shares are not taken as dividend.
Reorganization of Capital No reduction of capital in the aggregate, section 2(22)(d)
will not apply.

2. Clubbing of Income
Under the provisions of the income tax act, income of some other person like spouse,
minor child can also get taxed as the income of the individual though it is not his own
income.
The Following are the circumstances where the income of the other person is
included in the income of the assessee.

i. Transfer of income without the transfer the transfer of asset (Sec 60).

ii. Revocable transfer of assets (sec 61)

iii. Irrevocable transfer of assets for a specified period (sec 62)

iv. Transfer and revocable transfer defined. (Sec 63)

v. Income of an individual to include income of spouse, minor child etc. (Sec 64)
Remuneration of a spouse from a concern in which the other spouse has
substantial interest. [Sec 64(1)(ii)]
Income from assets transferred to the spouse. [64(1)(iv)]
Income from assets transferred to sons wife [ 64(1)(vi)]
Income from assets transferred to a person for the benefit of Spouse of the
transferor[64(1)(vii)]
Income from assets transferred to a person for the benefit of sons wife of
the transferor [64(1)(viii)]
Clubbing of income of a minor child [64(1A)]
Income from self acquired property converted to joint family property.
vi. Liability of person in respect of income included in the income of another person.

3. Gifts
Under section 56(2)(vii), when an individual or HUF, in any previous year, receives from any
person or persons, on or after 01.10.2009:
Property received Amount liable to tax
Any sum of money, without consideration, Whole of the aggregate value of money
aggregate value of which exceeds Rs. 50,000. received.
any immovable property
without consideration, the stamp duty
value of which exceeds Rs.50000
for a consideration which is less than its
stamp duty value by an amount exceeding
Rs. 50,000.
any property other than immovable
property, -
without consideration, the aggregate
FMV of which exceeds Rs. 50,000;
for a consideration which is less than the
aggregate FMV of the property by an
amount exceeding Rs. 50000
Stamp duty value of immovable property
Difference between the stamp duty value
and consideration
whole of the aggregate of FMV (as per
prescribed method) of movable property
aggregate of FMV (as per
prescribed method) of movable property in
excess of consideration

Exemption is provided to the extent that gift received from relative, gift on the occasion of
the marriage of the individual, receipt under a will or in contemplation of the death of the
donor is not covered by this section.

Relative for the purpose of this section means, spouse, brother, sister, brother of spouse,
sister of spouse, brother of mother/father, sister of mother/father, any lineal ascendant or
descendant of individual or his/her spouse and spouse of all brothers and sisters listed
before. Gifts from local authority or from any registered/approved charitable fund or
institution or educational institution or hospital are also exempted.

Under Section 56(2)(viia)

Where a firm or a company being a closely held company receives in any previous year,
from any person or persons on or after the 1st day of June, 2010 :-

any property being shares of closely held

company, -
without consideration, the aggregate
FMV of which exceeds Rs. 50,000;
for a consideration which is less than the
aggregate FMV of the property by an
amount exceeding Rs. 50000
whole of the aggregate of FMV (as per
prescribed method) of movable property
aggregate of FMV (as per
prescribed method) of movable property in
excess of consideration

Provided that this clause shall not apply to any such property received by way of a
transaction not regarded as transfer under clause (vi a) or (vi c) or (vi cb) or (vi) or (vii) of
section 47.

Section 56(2)(viib)
Where a company, being closely held company receives, in any previous year, from any
person being Resident, any consideration for issue of shares that exceeds the face value of
such shares, the aggregate consideration received for such shares as exceeds the fair market
value of the shares.

This clause shall not apply where the consideration for issue of shares is received
by a Venture Capital Undertaking from a Venture Capital Company or Fund
 by a Company from a class or classes of persons as may be notified by the Central
Government in this behalf.

4. Cash Credit (section 68)

If there is some credit (deposit) in the books of the assessee, then the assessee has
to prove the identity of the payer, creditworthiness of the payer and genuineness of
transaction, otherwise the credit will be deemed as the income of the assessee.

5. Unexplained Investments (section 69)

If the assessee has made an investment which is not recorded in the books and for
which no satisfactory explanation has been provided, the value of investment is the deemed
income of the assessee.

6. Unexplained money (section 69A)

If the assessee has found to be in possession of money, bullion, jewellery or valuable
article which is not recorded in the books and for which no satisfactory explanation has
been provided, the money and the value of the bullion, jewellery or valuable article is
deemed income of the assessee.

7. Amount of investment not fully disclosed in books (section 69B)

If the assessee has made investment or he is found to be in possession of money,
bullion, Jewellery or valuable article and this is not fully recorded in the books and no
satisfactory explanation has been provided, the excess is deemed income of the assessee.

8. Unexplained expenditure (section 69C)

If the assessee has incurred any expenditure and he does not give satisfactory
explanation about the source of such expenditure, the unexplained part is deemed as the
income of the assessee and is also not allowed as deduction as expenditure under any head
of income.

9. Amount borrowed or repaid on hundi (section 69D)

If assessee borrows any amount on hundi or any amount due is repaid otherwise
than through an account payee cheque, the amount so borrowed or repaid is deemed as
income of the assessee.

10. In addition, the following amount is also deemed as income of

the assessee:
 Employers contribution to recognized provident fund in excess of 12% of salary.
Interest credited on the balance to the credit of the employee in an account of
recognized provident fund, in excess of 9% per annum.
An amount representing interest and employers contribution transferred from
unrecognized provident fund to recognized provident fund or paid out from
unrecognized provident fund.
Payment from recognized provident fund in case the total period of contribution is
less than 5 years.
In the case of pension fund (section 80CCC) or pension scheme (section 80CCD), any
amount is received on maturity, it is taxable.