INCOME FROM OTHER SOURCES (IFOS)

CA Ameet Patel 28th May, 2012

Residuary Nature

It must be remembered that IFOS is only a residuary head of income. An income which is not taxable under any other head and which is not tax free will fall under this head

How to check if an income can be taxed under the head IFOS?

1. Is it exempt? 2. Is it taxable under any specific head of income? 3. Is it a capital receipt 4. If the answer to all the questions is “NO” then,

it is taxable under the head IFOS

Income from Other Sources – which sections apply?

• Section 56 lists down what can be taxed under the head of IFOS

• Section 57 lists down the deductions available under the head IFOS

• Section 58 lays down the amounts NOT deductible

• Section 59 lays down that Section 41(1) would apply to IFOS also

Section 56

• Dividends other than dividend exempt u/s. 10(34)/ 10(35) – for e.g. dividend from foreign companies/co-op. banks/co-op societies etc. & also deemed dividend;

• Winnings from lotteries, crossword puzzles, races, horse races, card games, other games of any sort, gambling or betting;

• income by way of interest on securities, if the income is not chargeable to income-tax under the head “Profits and gains of business or profession”

Section 56

• income from machinery, plant or furniture belonging to the assessee and let on hire (if its not chargeable to income-tax under the head “Profits and gains of business or profession”)

• where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting (if it is not chargeable to income-tax under the head “Profits and gains of business or profession”)

Section 56

• income referred to in sub-clause (xi) of clause (24) of section 2 (sum received under a Keyman Insurance Policy including bonus) if such income is not chargeable to income-tax under the head “Profits and gains of business or profession” or under the head “Salaries”

Section 56 - Gifts • where an individual or a Hindu undivided family receives from any person or persons on or

after 1st October, 2009,—

(a) any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum;

(b) any immovable property, without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property;

(c) any property, other than immovable property,—

(i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property;

(ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration:

Provided that where the stamp duty value of immovable property as referred to in sub-clause (b) is disputed by the assessee on grounds mentioned in sub-section (2) of section 50C, the Assessing Officer may refer the valuation of such property to a Valuation Officer, and the provisions of section 50C and sub-section (15) of section 155 shall, as far as may be, apply in relation to the stamp duty value of such property for the purpose of sub-clause (b) as they apply for valuation of capital asset under those sections

Section 56 - Gifts • Provided further that this clause shall not apply to any sum of

money or any property received—

(a) from any relative; or

(b) on the occasion of the marriage of the individual; or

(c) under a will or by way of inheritance; or

(d) in contemplation of death of the payer or donor, as the case

may be; or

(e) from any local authority as defined in the Explanation to clause

(20) of section 10; or

(f) from any fund or foundation or university or other

educational institution or hospital or other medical institution

or any trust or institution referred to in clause (23C) of section

10; or

(g) from any trust or institution registered under section

12AA.

Section 56 - Gifts • Explanation — For the purposes of this clause, “relative”

means —

(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;

(vii) spouse of the person referred to in clauses (ii) to (vi)

In case of HUF, relative would mean any member of the HUF

(retrospective amendment w.e.f. 1-10-2009)

Exempt gifts from relatives – 1st level

Donee

Father

Mother

Sister

Spouse

Children

Brother

Exempt gifts from relatives – 2nd level

Donee

Spouse’s brother

Spouse’s sister

Spouse’s sister’s

husband

Spouse’s brother’s

wife

Exempt gifts from relatives – 3rd level

Donee

Father’s sister

Father’s brother

Mother’s sister

Mother’s brother

Exempt gifts from relatives – 4th level

Donee

Lineal Ascendant

Lineal Descendant

Lineal Ascendant of spouse

Lineal Descendant of spouse

Exempt gifts from relatives – 5th level

Donee

Brother’s Wife

Sister’s Husband

Father’s / Mother’s

sister’s Husband

Father’s / Mother’s Brother’s

Wife Daughter-

in-law

Son-in-law

Grand Son-in-law

Grand Daughter-

in-law

Anomaly in definition of Relative

• If a nephew receives a gift from his uncle, he does not have a problem because uncle is a “relative”

• But if same uncle receives a gift from that nephew then it is taxable because nephew is not a “relative”

Section 56 - Gifts For the purposes of this clause

• “property” means the following capital asset of the assessee,

namely:—

(i) immovable property being land or building or both;

(ii) shares and securities;

(iii) jewellery;

(iv) archaeological collections;

(v) drawings;

(vi) paintings;

(vii) sculptures;

(viii) any work of art; or

(ix) bullion

Section 56 - Gifts

• For the purposes of this clause

“fair market value” of a property, other than an immovable property, means the value determined in accordance with the method as may be prescribed see Rule 11U and 11UA

Section 56 - Gifts

• In respect of gifts to spouse, please

remember the provisions of section 64 for clubbing

Section 56 • where a firm or a company not being a company in which the

public are substantially interested, receives, in any previous

year, from any person or persons, on or after 1st June, 2010,

any property, being shares of a company not being a

company in which the public are substantially interested,—

(i) without consideration, the aggregate fair market value of

which exceeds Rs. 50,000, the whole of the aggregate fair

market value of such property;

(ii) for a consideration 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 :

Section 56 Provided that this clause shall not apply to any such

property received by way of a transaction not regarded as

transfer under clause (via) or clause (vic) or clause (vicb) or

clause (vid) or clause (vii) of section 47 (amalgamation,

demerger)

Explanation.—For the purposes of this clause, “fair market

value” of a property, being shares of a company not being a

company in which the public are substantially interested,

shall have the meaning assigned to it in the Explanation to

clause (vii) (the one dealing with gifts received by

individuals)

Section 56

• income by way of interest received on compensation or on enhanced compensation referred to in clause (b) of section 145A (interest on compensation / enhanced compensation)

Gifts

• Traditionally, gifts have been a major source of untaxed money in India

• Now, it has become difficult to use this method for converting black money into white

• But it can still be used

• So, it is important to understand how to unearth a fictitious gift

Gifts from relatives

• What questions to ask?

– What is the relationship between donor and donee

– Is the relationship covered in the definition of “relatives”

– Is there a history of gifts between the same donor and donee

– Are there cross gifts between same donor and donee or between their relatives?

Gifts from relatives

• What questions to ask?

– The basic facts can still be inquired into :

Identity of the donor

Capacity of the donor

Genuineness of the gift

Source of the gift

– You cannot question source of source

Gifts from relatives

• General inquiries to be made:

– PAN of the donor

– Confirmation from the donor

– Bank statement/pass book of the donor

– Statement of income of the donor

– Check with the AO of the donor if you have doubts

– Gift deed – not necessary in all cases – stamp duty issue

Gifts - summary

Gift from

Relative

Genuine

Not Taxable irrespective of

amount

Non genuine

Taxable irrespective of amount

Non Relative

Genuine

Taxable if it exceeds limit unless it falls in

any of the exemptions

Non genuine

Taxable irrespective of amount

Section 57

• This section allows a tax payer to claim deductions from IFOS

Deductions from Dividend/Interest on securities

• Any reasonable sum paid by way of

commission or remuneration to a banker

or any other person for the purpose of

realising such dividend or interest on

behalf of the assessee

Deductions from Rental Income

• Current Repairs

• Rent, Rates and Taxes

• Insurance Premium

• Depreciation

Deductions from Family Pension Income

• Standard deduction of 331/3% of such

income or Rs. 15,000 whichever is less

• Here, family pension means a regular

monthly amount payable by the employer

to the legal heir of a deceased employee

Deductions from Interest on Compensation

• Standard deduction of 50% of such

income

• No other deduction would be available

from this income

Deductions from Lottery winnings, races, gambling etc.

• As per Section 58, no deduction would be allowed from income by way of any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature, whatsoever

Other Deductions from IFOS

• Any other revenue expenditure incurred

wholly and exclusively for the purpose of

making or earning such income

Section 58 – Amounts not deductible

• Personal Expenses

• Interest payable outside India and from which TDS is not paid or deducted

• Salary payable outside India and from which TDS is not deducted or paid

• Wealth-tax

• Section 40A would also apply – mainly – 40A(2) and 40A(3)

Unexplained money

• Refer to sections 68, 69, 69A, 69B, 69C, 69D – unexplained cash credits, money, investments, expenditure etc – could be taxed under the head IFOS

Set off & carry forward of losses

• Section 70 allows loss from any source under the head IFOS to be set off against income under from any other source under the same head

• Section 71 allows loss under the head IFOS to be set off against income under any other head

• Loss under the head IFOS is not allowed to be carried forward except in specific case mentioned in section 74A

Assessment Related Issues

• How to find out if assessee has any IFOS

• Bank Summary/Books of Account/P&L

• Method of accounting – cash v/s. accrual – the main reason for mismatch

• Matching of TDS with AIR

• Interest on NSCs

• Interest on Bank FDs (sweep accounts)

Thank you

patelameet@hotmail.com