Understanding “Income from Other Sources”
Income from Other Sources is the residuary head of income under the Income Tax Act, 1961. When an income cannot be taxed under Salary, House Property, PGBP, or Capital Gains, it is assessed under this head. This makes it one of the most widely applicable and academically important chapters of tax law. The Supreme Court in CIT v. Govinda Choudhury & Sons held that Income from Other Sources acts as a “safe net” to ensure that no taxable income escapes assessment simply because it doesn’t fit neatly into any specific head.
This head is governed by Sections 56 to 59 of the Act and contains both specific and general charging provisions. For law students, understanding this chapter is essential because many exam questions focus on classification disputes—i.e., whether an income should fall under PGBP, Capital Gains, or be finally taxed under Other Sources.
“Tip: If an income does not clearly belong to any specific head, evaluate Section 56 first before concluding classification.”
Section 56(1): The General Charging Section
Section 56(1) provides that income of every kind is chargeable under this head if it is not chargeable under any other head. Courts have interpreted this provision widely. In Dr. K. George Thomas v. CIT, the Supreme Court held that even casual incomes can fall here if they do not fit elsewhere. The residual nature of this head ensures comprehensive taxation.
However, before applying Section 56(1), one must always examine if the income has a closer relation to another head. For instance, interest earned by a business trader on delayed payment from customers is business income, as held in CIT v. Paramount Premises Pvt. Ltd. Only when no such proximate relation exists does the residuary provision apply.
Section 56(2): Specific Incomes Taxable Under This Head
Section 56(2) lists specific categories of income mandatory assessable under “Other Sources.” Each of these has distinct rules and judicial interpretations.
Dividend Income
Dividend income is one of the most common incomes under this head. After the abolishment of DDT in 2020, dividends are now taxed in the hands of shareholders. In Dalhousie Investment Trust v. CIT, the Supreme Court held that dividend retains its character as income regardless of distribution mechanism.
“Tip: Remember that dividend is always taxable as ‘Other Sources’ unless specifically exempt under Section 10.”
Interest on Securities
Interest on government securities, debentures, bonds, and treasury bills typically falls here, unless held as stock-in-trade by a dealer in securities. In United Commercial Bank Ltd. v. CIT, the Supreme Court clarified that interest from securities not integrally linked to business is taxable under this head.
Winnings from Lotteries, Puzzles, and Games
Section 56(2)(ib) covers winnings from lotteries, crossword puzzles, games, gambling, horse races, and similar sources. These incomes are taxed at the flat rate of 30% under Section 115BB. The Court in CIT v. Manjoo & Co. noted that such incomes are windfalls and do not require the application of slab rates.
Gifts and Sum of Money/Property Received Without Consideration
Section 56(2)(x) is one of the most important anti-abuse provisions. Any sum of money or property received without consideration or for inadequate consideration is taxable if it exceeds ₹50,000, except for specified exemptions. In Balaji Traders v. CIT, courts emphasized scrutinizing transactions to ensure they are genuine and not disguised gifts for tax evasion.
Rent from Letting of Plant, Machinery, or Furniture
If such assets are not part of the assessee’s business, income from their letting is taxable under Other Sources. In CIT v. B.M. Kharwar, the Supreme Court held that substance prevails over form—mere label of a business activity does not change the classification.
Sub-letting Income
If a taxpayer sublets a property and earns income from it, that income is taxable here, not under House Property. Courts have repeatedly upheld this distinction.
Interest on Compensation or Enhanced Compensation
Section 56(2)(viii) taxes interest received on enhanced compensation (such as land acquisition awards). As held in Ghanshyam (HUF) v. CIT, such interest is taxable in the year of receipt, not accrual.
Deductions Allowed Under Section 57
Deductions under this head are restricted and allowed only if specifically mentioned. Section 57 lists permissible deductions:
1. Reasonable Commission/Remuneration
If a person incurs commission for realising dividend or interest, such commission is deductible. Courts in CIT v. Raman affirmed that only actual and reasonable expenses qualify.
2. Repairs, Insurance, and Depreciation
For letting of plant, machinery, or furniture, expenses on repairs and depreciation are allowed.
3. Deduction for Family Pension
A standard deduction of one-third of pension or ₹15,000, whichever is lower, is allowed under Section 57(iia). This provision has been upheld consistently as a welfare measure for dependents.
4. Interest on Borrowed Capital
Where money is borrowed to invest in income-yielding assets (like securities), the interest is allowed as a deduction.
“Tip: Deductions under Section 57 are extremely limited; always apply the rule—‘if not allowed, then not deductible.’”
Amounts Not Deductible Under Section 58
Section 58 prohibits certain deductions, ensuring that taxpayers do not claim unjust benefits.
Prohibited deductions include:
- Personal expenses
- Interest paid outside India without TDS
- Salaries paid outside India without TDS
- Expenditure related to winnings from lotteries
In Lachhman Dass v. CIT, the Supreme Court stressed that expenditure must be wholly and exclusively for earning income under this head to be deductible.
Section 59: Deemed Income on Recovery of Earlier Deductions
Section 59 ensures that if an assessee recovers any sum earlier allowed as deduction, it becomes taxable in the year of recovery. This maintains consistency and prevents double benefit. Judicial precedents affirm that Section 59 complements Sections 57 and 58 as part of a unified mechanism.
Common Classification Issues
Many exam and practical questions revolve around whether income should be classified under this head or another. Some examples include:
- Interest on Fixed Deposits → Always Other Sources unless FD is business stock
- Sub-letting → Always Other Sources
- Hiring personal assets (not used for business) → Other Sources
- Interest on delayed salary → Taxable under Salary, not Other Sources
- Family pension → Other Sources (specific rule)
“Tip: When confused, ask—‘Is this income directly linked to business, employment, or property?’ If not, it likely falls under Section 56.”
Conclusion
Income from Other Sources acts as a final catch-all category ensuring that no taxable income escapes the tax net. Sections 56 to 59 form a complete code dealing with classification, specific inclusions, deductions, and recovery. Courts have consistently interpreted these provisions to maintain fairness and prevent abuse. For law students, mastering this head is critical because of its wide application, frequent exam presence, and substantial interpretative case law.