“Deduction of expenses from specific incomes” chargeable under the head Income From Other Sources under Income Tax Act, 1961: Section 57

^{As Per Income Tax Act 1961, “Deduction of expenses from specific incomes” chargeable under the head Income From Other Sources includes:}

Section 57:

i) In the case of dividends and interest on securities: Any sum paid by way of commission or remuneration to the banker or any other person for the purpose of realizing such dividend or interest on behalf of the assessee.

ii) In the case of Family pension: The amount deductible is Rs 15,000 or 33¹/₂% of such income, whichever is less.

iii) Any other expenditure for earning income:

If the following basic conditions are satisfied:

a. It should not be in the nature of Capital expenses

b. It should not be in the nature of personal expenses

c. It should be incurred in the relevant accounting year

d. The expenditure should be incurred for earning such income.

Related Cases:

• Section 17(3), 57, 56 of the Income-tax Act, 1961 — Salaries — Deduction — Profit in lieu of salary – Assessment year 1982-83. BHAGWATILAL G. SHAH. Vs. CIT [2005]; S. 57 of the IT Act, 1961—Income from other source—Whether the interest income derived by the respondent assessee can be set off as against the interest paid by the respondent assessee for taking a loan from the NABARD. It was held that the term referred to in clause (iii) of sec. 57 of 1961 Act, is related to the activity of the respondent assessee in earning income by extending loans to its employees. Insofar as, the deduction conceived of under clause (iii) of sec. 57 is concerned, the same is related only to expenditure incurred for the said purpose. It is not the case of respondent assessee, and in fact cannot be its claim that the interest being paid by the respondent assessee to the NABARD is an expenditure incurred by it for the purpose under reference. Thus respondent assessee can not be allowed to set off the interest income being derived by it for the welfare of the employees engaged by it as against the interest being paid by the respondent assessee to the NABARD—CIT vs. Punjab State Warehousing Corporation (P&H)

• S. 57, 4 of the IT Act, 1961—Income from other sources—Assessee is a public sector undertaking engaged in the construction of hydro-electric project for generation of power and irrigation. The deduction to the extent of 2.5 per cent towards administrative costs on the interest income on short-term deposits is allowable. The interest and rent received from its employees and outees in dam area would be treated in nature of capital receipt since the construction/business activities were not started—CIT vs. Tehri Hydro Development Corpn. (2009)

• S. 57 of IT Act, 1961—Income from other sources—The assessee, an exporter of jewellery, borrowed money and converted it into fixed deposits. There is a difference between the rate of interest in India and the interest rate outside India which is payable at the LIBOR (London Interbank Offered Rate). The assessee showed the interest earned on the fixed deposit receipts as “income from other sources” reducing the interest paid to the bank on the loans from the interest earned on the fixed deposits receipts. Hence, the interest paid has to be allowed under the provisions of S. 57(iii) of the Act—CIT vs. Taj International Jewellers (2011) 335 ITR 144 (Delhi)

• S. 57, r/w S. 58 of the IT Act, 1961—Income from other sources—The nexus between the expenditure and the income need not be direct and even an indirect connection can prove the nexus between the expenditure incurred and the income earned and therefore, such expenditure to be deductible. Thus, the deduction on the payment of interest as well as finance charges on loan borrowed for making investment in shares is allowable under S. 57(iii) of the Act—CIT vs. Smt. Sushila Devi Khadaria (2009)

• S. 57 of  IT Act, 1961—Income from other sources—In terms of S. 57(iii), the expenditure which is wholly and exclusively for the purpose of making or earning income may be deducted. The condition precedent to avail of the benefit to S. 57(iii) is that the investment must be proper and justified. Proper investment means correct investment with an intention to earn profit. Therefore, investment or expenditure made in a company where there is no hope of earning profit would not be covered by S. 57(iii) of the Act—CIT vs. Smt. Swapna Roy (2010)

• S. 57 of  IT Act, 1961—Income from other sources—The provisions of S. 57(iii) are not applicable on the money borrowed by the assessee from others wholly and exclusively for the purpose of earning interest income. Therefore, the claim of the assessee seeking deduction from its interest income is disallowable in computing interest income taxable under residuary head—Moral Trading  & Investment Ltd. vs. Dy. CIT (2010) 127 ITD 127 (ITAT-Delhi)

• S. 2(24), 28(iiia) to (iiie), 80HHC of IT Act, 1961—Deduction—If the funds of the business are parked for safe keeping or with a view to earn interest income de hors the main business activity, the interest resulting therefrom cannot assume the character of business income but would fall under the head “Income from other sources” and only the deduction permissible under S. 57 of the Act. Hence, such interest income cannot be considered for deduction under S. 80HHC of the Act—Topman Exports vs. ITO (2009) 318 ITR 87 (ITAT-Mumbai)

• S. 10(34), 14A, 36(1)(iii), 57, 115-O of IT Act, 1961—Exemption—Disallowance under S. 14A of the Act can be made in a year in which no exempt income has been earned or received by the assessee—Cheminvest Ltd. vs. ITO (2009) 317 ITR 86 (ITAT-Delhi)

• S. 57 of  IT Act, 1961—Income from other sources—In terms of S. 57(iii), the expenditure which is wholly and exclusively for the purpose of making or earning income may be deducted. The condition precedent to avail of the benefit to S. 57(iii) is that the investment must be proper and justified. Proper investment means correct investment with an intention to earn profit. Therefore, investment or expenditure made in a company where there is no hope of earning profit would not be covered by S. 57(iii) of the Act—CIT vs. Smt. Swapna Roy (2010)

• S. 57 of  IT Act, 1961—Income from other sources—The provisions of S. 57(iii) are not applicable on the money borrowed by the assessee from others wholly and exclusively for the purpose of earning interest income. Therefore, the claim of the assessee seeking deduction from its interest income is disallowable in computing interest income taxable under residuary head—Moral Trading  & Investment Ltd. vs. Dy. CIT (2010) 127 ITD 127 (ITAT-Delhi)

• S. 36(1)(iii), 37, 57(iii) of IT Act, 1961—Income from other sources—If some device has been used by the assessee to conceal true nature of the transaction, it is the duty of the taxing authority to unravel the device and determine its true character. However, the legal effect of the transaction cannot be displaced by probing into the “substance of the transaction”. The taxing authority must not look at the matter from their own facts. The exercise of jurisdiction cannot be stretched to hold a roving enquiry or deep probe—CIT vs. Rockman Cycle Industries Private Ltd. (2011) 331 ITR 401 (P&H)

• S. 28(i), 56, 57(ii), 57(iii) & 71 of IT Act, 1961—Income from other sources—Once department has accepted the position in earlier years and no corrective step has been taken then assessee cannot be blamed for offering the income from car hire charges under the head ‘Income from other sources’.

• Income-tax Act, 1961—sections 57(iii) and Explanation to section 73—Speculative loss—Set off against divident income—Income from other sources—While dismissing the appeal, the Income Tax Appellate tribunal, Admedabad ‘D’ Bench held that:—

(i) Explanation to S. 73 was clearly applicable and the loss suffered by the assessee company in its share trading transactions inclusive of interest paid on borrowed monies attributable to that business was rightly treated, by the Tribunal as a loss in speculative business.

(ii) Once it is held that the shares held by the assessee as a stock-in trade and the income whether directly or incidentally from holding of such shares as stock-in-trade, would be business income, then it cannot be said that the dividend income would fall as an income from other sources as contemplated under S. 56 of the Act and that set-off under S. 72 of the Act in a subsequent year would not be permissible.

(iii) What has been held by the Supreme Court and High Courts and the Tribunals is that income from dividend would be business income if the shares are held as stock-in-trade and the loss incurred by the assessee in business transactions would be set-off against the same. However, in those cases, the provisions of S. 73 were either not in existence or not considered. Explanation to S. 73 as stated above deems an assessee to be carrying on speculation business to the extent to which the business consists of purchase and sale of such shares. It is only this part of the activity i.e. purchase and sale of shares, which is held to be speculative nature. Torrent Finance (P) Ltd. Vs. Joint Commissioner of Income Tax (ITAT, Ahmedabad)

• S.57,of IT Act, 1961— Income from other sources —Tribunal would have the power to go into issues which had not been raised by the Assessing Officer, on a proper additional ground being taken before the Tibunal with its leave — CIT Vs. J.B.Roy  (2013)

• S.57 of IT Act, 1961 — Income from other sources — Interest received and interest paid can be set off against each other and only the balance, being the excess interest can be brought to tax under the head ‘income from other sources’. — CIT Vs. UK Bose [2013]

• S. 57, r/w s. 28(i) of IT Act, 1961—Income from other source—It is well settled that an income received by the assessee can be taxed under the head ‘income from other sources’ only if it does not fall under any other head of income as provided in S. 14 of the Act. The head ‘income from other source’ is a residuary head of income. Interest earned from fixed deposits made out of funds borrowed for business purposes, is taxable under “income from other sources”.—Kakinada SEZ (p.) Ltd. A. CIT. [2013] 141 ITD 635 (ITAT-HYDERABAD)

Reference:

As Per Section 57, of the Income Tax Act, 1961-

The income chargeable under the head “Income from other sources” shall be computed after making the following deductions, namely:—

(i) in the case of dividends, [other than dividends referred to in section 115-O,[or interest on securities], any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of realizing such dividend [or interest] on behalf of the assessee ;

(ia) in the case of income of the nature referred to in sub-clause (x) of clause (24) of section 2 which is chargeable to income-tax under the head “Income from other sources”, deductions, so far as may be, in accordance with the provisions of clause (va) of sub-section (1) of section 36 ;

(ii) in the case of income of the nature referred to in clauses (ii) and (iii) of sub-section (2) of section 56, deductions, so far as may be, in accordance with the provisions of sub-clause (ii) of clause (a) and clause (c) of section 30, section 31 and [sub-sections (1) and (2)] of section 32 and subject to the provisions of [section 38] ;

 (iia) in the case of income in the nature of family pension, a deduction of a sum equal to thirty-three and one-third per cent of such income or fifteen thousand rupees, whichever is less.

1. —For the purposes of this clause, “family pension” means a regular monthly amount payable by the employer to a person belonging to the family of an employee in the event of his death ;]

(iii) any other 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;

 (iv) in the case of income of the nature referred to in clause (viii) of sub-section (2) of section 56, a deduction of a sum equal to fifty per cent of such income and no deduction shall be allowed under any other clause of this section.