Introduction
1.1 Understanding the Scope of Income from Other Sources
The Income Tax Act, 1961, categorizes income under five broad heads, and the residual income that does not fall under Salaries, House Property, Business or Profession, or Capital Gains is classified under “Income from Other Sources” (Section 56).
To ensure taxpayers are taxed only on their net income, Section 57 allows for specific deductions against such income. Understanding these deductions is crucial for effective tax planning and compliance.
This note provides a comprehensive analysis of Section 57, detailing allowable deductions, judicial interpretations, practical applications, and key differentiations based on case laws.
2. Section 57 – Deductions Allowed
As per the Income Tax Act, the following deductions are permissible under Section 57:
[57(i)] Commission/remuneration paid for realizing dividends (other than dividends covered under Section 115-O) or interest on securities.
[57(ia)] Deduction related to employee contributions to welfare funds.
[57(ii)] Deductions for income earned from hiring machinery, plant, or furniture (with or without a building).
[57(iia)] Deduction in respect of family pension received.
[57(iii)] Other expenses incurred exclusively for earning income under this head (excluding capital expenditure).
[57(iv)] Deduction of 50% of interest received on compensation or enhanced compensation.
3. Detailed Analysis of Each Deduction under Section 57
3.1 Section 57(i) – Deduction for Realizing Dividend or Interest on Securities
Key Provision:
Taxpayers can claim deductions on expenses incurred for realizing dividends or interest on securities, provided these are not covered under Section 115-O (Dividend Distribution Tax).
Examples:
Mr. A earns dividend income of ₹50,000 and pays ₹2,000 to his banker for collection services. The net taxable income will be:
Taxable Income = ₹50,000 - ₹2,000 = ₹48,000
Judicial Precedent:
CIT v. Dr. V.P. Gopinathan (2001) 248 ITR 449 (SC)
Facts: The taxpayer had borrowed money to invest in Fixed Deposits (FDs) and paid interest on the loan. He claimed a deduction under Section 57(i).
Held: The Supreme Court disallowed the deduction, stating that interest paid on borrowed capital does not qualify under Section 57(i).
Key Differentiation:
✔ Allowed – Commission or remuneration for collecting dividends. ❌ Disallowed – Interest paid on a loan taken to earn interest income.
3.2 Section 57(ia) – Deduction for Employee Contributions to Welfare Funds
Key Provision:
Employers who collect employee contributions towards Provident Fund (PF), Superannuation Fund, ESI, etc., can claim a deduction only if the amount is deposited within the due date prescribed under labor laws.
Judicial Precedent:
CIT v. Alom Extrusions Ltd. (2009) 319 ITR 306 (SC)
Facts: The employer deposited employee contributions after the statutory due date but before filing the Income Tax Return.
Held: The Supreme Court allowed the deduction if the amount was deposited before the due date of filing ITR.
Key Differentiation:
✔ Allowed – If deposited before filing ITR. ❌ Disallowed – If not deposited within the prescribed due date.
3.3 Section 57(ii) – Deduction for Letting out Machinery, Plant, or Furniture
Key Provision:
If an assessee earns rental income from machinery, plant, or furniture (with or without a building), they can claim deductions for:
Repairs and maintenance
Insurance premium
Depreciation
Judicial Precedent:
CIT v. D.P. Sandhu Bros. (2005) 273 ITR 1 (SC)
Facts: The taxpayer sub-let a rented property and claimed deductions for repairs and depreciation.
Held: The Supreme Court ruled that rental income from sub-letting falls under Income from Other Sources, and deductions under Section 57(ii) are valid.
✔ Allowed – Repair, insurance, and depreciation. ❌ Disallowed – If rental income is taxed under “Profits and Gains from Business or Profession.”
3.4 Section 57(iia) – Deduction for Family Pension
Key Provision:
Family pension recipients can claim the lower of:
33.33% of pension received
₹15,000 (or ₹25,000 under the new regime).
Example:
Widow receives ₹1,20,000 per annum as family pension.
Deduction = ₹15,000
Taxable Income = ₹1,05,000
3.5 Section 57(iii) – Other Expenditures Wholly and Exclusively for Earning Income
Key Provision:
Deductions allowed only if directly related to earning income under this head.
Capital expenditures are not allowed.
Judicial Precedent:
Rajendra Prasad Moody v. CIT (1978) 115 ITR 519 (SC)
Facts: The taxpayer borrowed money to invest in shares but did not receive dividends.
Held: The Supreme Court allowed the deduction for interest even if no income was earned.
✔ Allowed – Interest on loans for purchasing income-generating assets. ❌ Disallowed – Expenses unrelated to income generation.
3.6 Section 57(iv) – Deduction for Interest on Enhanced Compensation
Key Provision:
50% of interest received on compensation/enhanced compensation is deductible.
Judicial Precedent:
CIT v. Ghanshyam (HUF) (2009) 315 ITR 1 (SC)
Facts: The taxpayer received enhanced compensation for land acquisition and claimed the full interest as a deduction.
Held: The Supreme Court ruled that only 50% of interest is deductible.
✔ Allowed – Deduction of 50% of interest on enhanced compensation. ❌ Disallowed – If a taxpayer claims 100% deduction.
Conclusion
As the financial year comes to a close, salaried individuals should pay particular attention to income earned from other sources, as TDS is generally deducted only on salaries, leading to shortfall in tax payments on such incomes. Estimating and accounting for taxes on dividends, interest, rental income, family pensions, or compensation is crucial to avoid penalties and interest charges. Proper tax planning, leveraging available deductions under Section 57, and ensuring compliance with legal provisions and judicial precedents can help taxpayers optimize their tax liability and file returns accurately
