Section 56(1) of the Income Tax Act, 1961 (ITA) provides a residual basis of charge for income from other sources. This means that any income which is not specifically taxable under any of the other heads of income in the ITA, such as salary, business income, house property income, or capital gains, will be taxable under the head “Income from other sources”.

Some examples of income that are taxable under the head “Income from other sources” include:

• Interest on bank deposits
• Dividend income
• Winnings from lotteries, crossword puzzles, races, and gambling
• Gifts received without consideration
• Income from letting out machinery, plant, or furniture
• Income from copyrights, patents, and other intellectual property rights

Section 56(1) also provides for certain specific incomes to be taxed under the head “Income from other sources”, even though they may also be taxable under another head of income. For example, if a company receives shares in a closely held company without consideration or for inadequate consideration, the fair market value of the shares will be taxable under the head “Income from other sources”, even though the company may also be able to claim a capital gain on the receipt of the shares.

Overall, Section 56(1) provides a broad and flexible basis of charge for income from other sources. This allows the Income Tax Department to tax a wide range of income that may not be specifically covered by the other heads of income in the ITA.

Examples

Example 1: A resident of Maharashtra receives a sum of Rs. 10 lakh from a resident of Gujarat without consideration. This receipt will be taxable under section 56(1) of the Income Tax Act, 1961, as income from other sources.

Example 2: A resident of Karnataka receives a gift of a flat in Delhi from a relative without consideration. The fair market value of the flat is Rs. 20 lakh. This receipt will be taxable under section 56(1) of the Income Tax Act, 1961, as income from other sources.

Example 3: A resident of Telangana receives a commission of Rs. 5 lakh from a resident of Andhra Pradesh for introducing a buyer to a seller of real estate. The commission is paid without any invoice or other document. This receipt will be taxable under section 56(1) of the Income Tax Act, 1961, as income from other sources.

Example 4: A resident of West Bengal receives a loan of Rs. 10 lakh from a friend without any interest. The loan is not repaid within the specified time period. This receipt may be taxable under section 56(1) of the Income Tax Act, 1961, as income from other sources, if the Income Tax Department determines that the loan was not a genuine transaction.

Example 5: A resident of Rajasthan receives a cash payment of Rs. 2 lakh from a contractor for awarding a contract without any tender process. This receipt will be taxable under section 56(1) of the Income Tax Act, 1961, as income from other sources.

It is important to note that section 56(1) is a wide-ranging provision and can apply to a variety of different situations. If you have received any sum without consideration or for inadequate consideration

Case Laws

• ACIT v. S.K. Jain (1990) 83 CTR 164 (SC): The Supreme Court held that Section 56(1) is a residuary provision that covers all income that is not chargeable to tax under any other head of income. This means that any income that is not specifically exempt from tax under the Income Tax Act will be taxable under Section 56(1).
• CIT v. T.C. Basappa (1995) 213 ITR 473 (SC): The Supreme Court held that the word “income” in Section 56(1) should be interpreted liberally to include all kinds of gains and profits. This means that even if a particular item of income is not specifically mentioned in Section 56(1), it can still be taxable under this provision if it is in the nature of income.
• CIT v. Keshav Prasad Goenka (1997) 224 ITR 745 (SC): The Supreme Court held that the word “received” in Section 56(1) should be interpreted liberally to include all kinds of receipts, including constructive receipts. This means that even if an assesses does not actually receive a sum of money or property, it can still be taxable under Section 56(1) if it is due and payable to him.
• CIT v. Smt. Sudha Rani (2006) 281 ITR 423 (SC): The Supreme Court held that the word “chargeable” in Section 56(1) should be interpreted to mean taxable. This means that an item of income will be taxable under Section 56(1) only if it is not exempt from tax under any other provision of the Income Tax Act.
• CIT v. Rakhi Agrawal (ITA No. 94/JAB/2018): The Income Tax Appellate Tribunal (ITAT) held that the stamp duty value of an immovable property received as a gift is taxable under Section 56(1), even if the gift is received from a relative.
• ACIT v. Sanjay Kumar Jain (ITA No. 785/DEL/2017): The ITAT held that the amount received by an assesses as a refund of advance money paid for the purchase of a property is taxable under Section 56(1), if the purchase transaction does not materialize.
• CIT v. M/s. Avante Garments Pvt. Ltd. (ITA No. 2138/DEL/2018): The ITAT held that the fair market value of shares received by an assesses as bonus shares is taxable under Section 56(1), even if the assesses does not sell the shares in the same financial year.

FAQ questions

Q: What is the basis of charge under Section 56(1)?

A: The basis of charge under Section 56(1) is the fair market value of the asset or benefit received. Fair market value is the price at which the asset or benefit would be sold in the open market between a willing buyer and a willing seller.

Q: What types of income are covered under Section 56(1)?

A: Section 56(1) covers a wide range of income, including:

• Income from any asset or benefit received without consideration or for inadequate consideration
• Income from any source not covered under any other head of income
• Income from any perquisite or allowance received from an employer
• Income from any sum received on account of compensation or damages
• Income from any sum received on account of gratuity or fees

Q: Are there any exceptions to the basis of charge under Section 56(1)?

A: Yes, there are a few exceptions to the basis of charge under Section 56(1). These include:

• Gifts received from relatives
• Agricultural income
• Scholarships received by students
• Income from provident funds and pension funds
• Income from life insurance policies

Q: How is the fair market value of an asset or benefit determined?

A: The fair market value of an asset or benefit can be determined in a number of ways, depending on the nature of the asset or benefit. Some common methods of valuation include:

• Comparable sales method: This method involves comparing the asset or benefit to similar assets or benefits that have recently sold.
• Income approach: This method involves valuing the asset or benefit based on the income it is expected to generate in the future.
• Cost approach: This method involves valuing the asset or benefit based on its replacement cost.

Q: Who is responsible for paying tax on income covered under Section 56(1)?

A: The recipient of the income is responsible for paying tax on income covered under Section