Direct Tax

INCOME FROM OTHER

5
SOURCES

Question 1
Dhaval is in business of manufacturing customized kitchen equipments. He is also the Managing Director and
held nearly 65% of the paid-up share capital of Aarav (P) Ltd. A substantial part of the business of Dhaval
is obtained through Aarav (P) Ltd. For this purpose, Aarav (P) Ltd. passed on the advance received from its
customers to Dhaval to execute the job work entrusted to him. The AO held that the advance money
received by Dhaval is in the nature of loan given by Aarav (P) Ltd. to him and accordingly is deemed dividend
within the meaning of provisions of section 2(22)(e) of the Income-tax Act, 1961. The Assessing Officer,
therefore, made the addition by treating advance money as deemed dividend. Examine whether the action
of the AO is tenable in law.
[ICAI Module]
Answer
As per section 2(22)(e), in case a company, not being a company in which the public are substantially
interested, makes payment of any sum by way of advance or loan to a shareholder holding not less than 10%
of voting power, then, the payment so made shall be deemed to be dividend in the hands of such shareholder
to the extent to which the company possesses accumulated profits.

In the present case, Dhaval is holding 65% of the paid-up capital of Aarav (P) Ltd. Aarav (P) Ltd. has passed
on advance received from its customers to Dhaval for execution of job work entrusted to Dhaval.

Since Aarav (P) Ltd. is not a company in which public are substantially interested, the applicability of the
provisions of section 2(22)(e) in respect of such transaction has to be examined. In CIT v. Rajkumar (2009),
it was held that trade advance given to the shareholder which is in the nature of money transacted to give
effect to a commercial transaction, would not amount to deemed dividend u/s 2(22)(e). The Delhi High Court
ruling in CIT v. Ambassador Travels (P) Ltd. also supports the above view.

In the present case, the payment is made to Dhaval by Aarav (P) Ltd. for execution of work is in the course
of commercial business transaction and therefore, it cannot be treated as deemed dividend u/s 2(22)(e).
Hence, the action of the AO is not tenable in law.

Note –
This can also be answered on the basis of Circular No. 19/2017, dated 12.06.2017. The CBDT has, in its
circular clarified that it is a settled position that trade advances, which are in the nature of commercial
transactions, would not fall within the ambit of the word ' advance' in section 2(22)(e) and therefore, the
same would not to be treated as deemed dividend. Since, the payment is made to Dhaval by Aarav (P) Ltd.
for execution of work is in the course of commercial business transaction and therefore, the advance cannot
be treated as deemed dividend u/s 2(22)(e). Hence, the action of the AO is not tenable in law.

Income From Other Sources 5.1

 Direct Tax

Question 2
MNO (P) Ltd. is a company in which the public are not substantially interested. K is a shareholder of the
company holding 15% of the equity shares. The accumulated profits of the company as on 1.10.2024
amounted to Rs. 10,00,000. The company lent Rs. 1,00,000 to K by an account payee bank draft on 1.10.2024.
The loan was not connected with the business of the company. K repaid the loan to the company by an
account payee bank draft on 30.3.2025. Examine the effect of the borrowal and repayment of the loan by
K on the computation of his total income for the AY 2025-26.
[ICAI Module]
Answer
As per section 2(22)(e), any payment by a company, in which the public are not substantially interested, by
way of advance or loan to a shareholder, being a person who is the beneficial owner of shares holding not
less than 10% of the voting power, shall be treated as dividend to the extent to which the company possesses
accumulated profits.

In the instant case, MNO (P) Ltd. is a company in which the public are not substantially interested. The
company has accumulated profits of Rs. 10,00,000 on 1.10.2024. The loan given by the company to K was
not in the course of its business. K holds more than 10% of the equity shares in the company. Therefore,
assuming that K has voting power equivalent to his shareholding, section 2(22)(e) comes into play. Deemed
dividend of Rs. 1,00,000 u/s 2(22)(e) would be taxable in the hands of Mr. K at normal rates of tax.

Under section 2(22)(e), the liability arises the moment the loan is borrowed by the shareholder and it is
immaterial whether the loan is repaid before the end of the accounting year or not. Therefore, the
repayment of loan by K to the company on 30.3.2025 will not affect the taxability of the sum of Rs. 1,00,000
as deemed dividend.

Question 3 
Mr. A, a dealer in shares, received following without consideration during P.Y. 24-25 from his friend Mr. B,
(1) Cash gift of Rs. 75,000 on his anniversary, 15th April, 2024.
(2) Bullion, the fair market value of which was Rs. 60,000, on his birthday, 19th June, 2024.
(3) A plot of land at Faridabad on 1st July, 2024, the stamp value of which is Rs. 5 lakh on that date.
Mr. B had purchased the land in April, 2009.

Mr. A purchased from his friend Mr. C, who is also a dealer in shares, 1000 shares of X Ltd. @ Rs. 400
each on 19th June, 2024, the fair market value of which was Rs. 600 each on that date. Mr. A sold these
shares in the course of his business on 23rd June, 2024.

Further, on 1st November, 2024, Mr. A took possession of property (building) booked by him two years
back at Rs. 20 lakh. The stamp duty value of the property as on 1st November, 2024 was Rs. 32 lakh and
on date of booking was Rs. 23 lakh. He had paid Rs. 1 lakh by account payee cheque as down payment on
the date of booking.

On 1st March, 2025, he sold the plot of land at Faridabad for Rs. 7 lakh.
Compute income of Mr. A chargeable under head “IFOS” and “Capital Gains” for A.Y.2025-26.
[ICAI Module]

5.2 Income From Other Sources

 Direct Tax

Answer
Computation of “Income from other sources” of Mr. A for the A.Y.2025-26
Particulars Rs.
(1) Cash gift is taxable u/s 56(2)(x), since it exceeds Rs. 50,000 75,000
(2) Since bullion is included in the definition of property, therefore, when bullion 60,000
is received without consideration, the same is taxable, since the aggregate
fair market value exceeds Rs. 50,000
(3) Stamp value of plot of land at Faridabad, received without consideration, is 5,00,000
taxable u/s 56(2)(x)
(4) Difference of Rs. 2 lakh in the value of shares of X Ltd. purchased from Mr. C, -
a dealer in shares, is not taxable as it represents the stock-in-trade of Mr. A.
Since Mr. A is a dealer in shares and it has been mentioned that the shares
were subsequently sold in the course of his business, such shares represent
the stock-in-trade of Mr. A.
(5) Difference between the stamp duty value of Rs. 23 lakh on the date of booking 3,00,000
and the actual consideration of Rs. 20 lakh paid is taxable u/s 56(2)(x) since the
difference exceeds Rs. 1 lakh being, the higher of Rs. 50,000 and 10% of
consideration.
Income from Other Sources 9,35,000

Computation of “Capital Gains” of Mr. A for the A.Y.2025-26

Particulars Rs.
Sale Consideration 7,00,000
Less: Cost of acquisition [deemed to be the stamp value charged to tax under
section 56(2)(x) as per section 49(4)] 5,00,000
Short-term capital gains 2,00,000

Note –
The resultant capital gains will be short-term capital gains since for calculating the period of holding, the
period of holding of previous owner is not to be considered

Question 4 
Discuss the taxability or otherwise of the following in the hands of the recipient u/s 56(2)(x) -
(i) Akhil HUF received Rs. 75,000 in cash from niece of Akhil (i.e., daughter of Akhil’s sister). Akhil is
the Karta of the HUF.
(ii) Nitisha, a member of her father’s HUF, transferred a house property to the HUF without
consideration. The stamp duty value of the house property is Rs. 9,00,000.
(iii) Mr. Akshat received 100 shares of A Ltd. from his friend as a gift on occasion of his 25 th marriage
anniversary. The fair market value on that date was Rs. 100 per share. He also received jewellery
worth Rs. 45,000 (FMV) from his nephew on the same day.
(iv) Kishan HUF gifted a car to son of Karta for achieving good marks in XII board examination. The fair
market value of the car is Rs. 5,25,000.
[ICAI Module]

Income From Other Sources 5.3

 Direct Tax

Answer
Taxable/ Amount Reason
Non-taxable liable to
tax (Rs. )
(i) Taxable 75,000 Sum of money exceeding Rs. 50,000 received without consideration from
a non-relative is taxable u/s 56(2)(x). Daughter of Mr. Akhil‘s sister is
not a relative of Akhil HUF, since she is not a member of Akhil HUF.
(ii) Non-taxable Nil Immovable property received without consideration by a HUF from its
relative is not taxable u/s 56(2)(x). Since Nitisha is a member of the
HUF, she is a relative of the HUF. However, income from such asset would
be included in the hands of Nitisha under 64(2).
(iii) Taxable 55,000 As per provisions of section 56(2)(x), in case the aggregate fair market
value of property, other than immovable property, received without
consideration exceeds Rs. 50,000, the whole of the aggregate value shall
be taxable. In this case, the aggregate fair market value of shares (Rs.
10,000) and jewellery (Rs. 45,000) exceeds Rs. 50,000. Hence, the
entire amount of Rs. 55,000 shall be taxable.
(iv) Non-taxable Nil Car is not included in the definition of property for the purpose of section
56(2)(x), therefore, the same shall not be taxable.

Question 5
Mr. Hari, a property dealer, sold a building in course of his business to his friend Mr. Rajesh, who is a dealer
in automobile spare parts, for Rs. 90 lakh on 1.1.2025, when stamp duty value was Rs. 150 lakh. Agreement
was, however, entered into on 1.9.2024 when stamp duty value was Rs. 140 lakh. Mr. Hari had received a
down payment of Rs. 15 lakh by a crossed cheque from Mr. Rajesh on date of agreement. Discuss tax
implications in hands of Mr. Hari and Mr. Rajesh, assuming that Mr. Hari has purchased building for Rs. 75
lakh on 12th July, 2023.
Would your answer be different if Hari was a share broker instead of a property dealer?
[ICAI Module]
Answer
Case 1: Tax implications if Mr. Hari is a property dealer
In the hands of Mr. Hari In the hands of Mr. Rajesh
In the hands of Hari, the provisions of section 43CA Since Mr. Rajesh is a dealer in automobile
would be attracted, since the building represents his spare parts, the building purchased would be
stock-in-trade and he has transferred the same for a a capital asset in his hands. The provisions of
consideration less than the stamp duty value; and the section 56(2)(x) would be attracted in the
stamp duty value exceeds 110% of consideration. hands of Mr. Rajesh who has received
Under section 43CA, the option to adopt the stamp duty immovable property, being a capital asset,
value on the date of agreement can be exercised only if for inadequate consideration and the
whole or part of the consideration has been received on difference between the consideration and
or before the date of agreement by way of account stamp duty value exceeds Rs. 9,00,000,
payee cheque or draft or by use of ECS through a bank being the higher of Rs. 50,000 and 10% of
account or through credit card, debit card, net banking, consideration.
IMPS, UPI, RTGS, NEFT, and BHIM, Aadhar Pay on or
before the date of agreement. Therefore, Rs. 60 lakh, being the difference
between the stamp duty value of the
In this case, since the down payment of Rs. 15 lakh is property on the date of registration (i.e., Rs.

5.4 Income From Other Sources

 Direct Tax

received on the date of agreement by crossed cheque 150 lakh) and the actual consideration (i.e.,
and not account payee cheque, the option cannot be Rs. 90 lakh) would be taxable u/s 56(2)(x) in
exercised. Therefore, Rs. 75 lakh, being the difference the hands of Mr. Rajesh, since the payment
between the stamp duty value on the date of transfer on the date of agreement is made by crossed
i.e., Rs. 150 lakh, and the purchase price i.e., Rs. 75 cheque and not account payee cheque/draft
lakh, would be chargeable as business income in the or ECS or through credit card, debit card,
hands of Mr. Hari, since stamp duty value exceeds 110% net banking, IMPS, UPI, RTGS, NEFT, and
of the consideration. BHIM, Aadhar Pay.

Case 2: Tax implications if Mr. Hari is a share broker

In the hands of Mr. Hari Mr. Rajesh
In case Mr. Hari is a share broker and not a property dealer, the building would There would be no
represent his capital asset and not stock-in-trade. In such a case, the provisions difference in the
of section 50C would be attracted in the hands of Mr. Hari, since building is taxability in the
transferred for a consideration less than the stamp duty value; and the stamp hands of Mr. Rajesh,
duty value exceeds 110% of consideration. whether Mr. Hari is a
property dealer or a
Thus, Rs. 75 lakh, being the difference between the stamp duty value on the stock broker,
date of registration (i.e., Rs. 150 lakh) and the purchase price (i.e., Rs. 75 lakh) (except where the
would be chargeable as short-term capital gains. property
transferred in a
residential unit
It may be noted that u/s 50C, the option to adopt the stamp duty value on the
fulfilling the
date of agreement can be exercised only if whole or part of the consideration
stipulated conditions,
has been received on or before the date of agreement by way of account payee
which is not so in this
cheque or draft or by use of ECS through a bank account or through credit card,
case).
debit card, net banking, IMPS, UPI, RTGS, NEFT, and BHIM, Aadhar Pay on or
before the date of agreement. In this case, since the down payment of Rs. 15
lakhs has been received on the date of agreement by crossed cheque and not
account payee cheque, the option cannot be exercised.

Question 6 [Interest on enhanced compensation and 50% deduction]

Interest on enhanced compensation received by Mr. G during the PY 2024-25 is Rs. 5,00,000. Out of this
interest, Rs. 1,50,000 relates to the PY 2019-20, Rs. 1,65,000 relates to PY 2020-21 and Rs. 1,85,000
relates to PY 2021-22. Discuss the tax implication, if any, of such interest income for A.Y.2025-26.
[ICAI Module]
Answer
The entire interest of Rs. 5,00,000 would be taxable in the year of receipt, namely, P.Y.2024-25
Particulars Rs.
Interest on enhanced compensation taxable u/s 56(2)(viii) 5,00,000
Less: Deduction u/s 57(iv) @50% 2,50,000
Interest chargeable under the head “Income from other sources” 2,50,000

Income From Other Sources 5.5

 Direct Tax

Question 7 [Deemed dividend u/s 2(22)(e) for advance given for benefit of any SH] 
Parimal, Managing Director of Heavens Engg. Pvt. Ltd. holds 70% of its paid up capital of Rs. 20 lakhs. The
balance as at 31.03.2024 in General Reserve was Rs. 6 lakhs. The company on 1.04.2024 gave an interest-
free loan of Rs. 5 lakhs to its Supervisor having salary of Rs. 4,000 p.m., who in turn on 15.4.2024 advanced
the said amount of loan so taken from the company to Shri Parimal. The AO had treated the amount of
advance as deemed dividend. Is the action of AO correct?
[ICAI Module, MTP Nov 22 - 4 marks]
Answer
The company had advanced a loan to an employee who in turn had advanced the same to the Managing
Director of the company holding 70% of its capital. By virtue of the provisions of section 2(22)(e), the same
shall be treated as the payment by a company in which public are not substantially interested, on behalf of,
or for individual benefit of any such share holder (who holds not less than 10% of the voting power), to the
extent to which the company possesses accumulated profits.

In this case, the company has reserves of Rs. 6 lakhs on 31st March of the preceding year and the amount
of loan advanced on 1st April is Rs. 5 Lakhs. Therefore, the payment is to be treated as deemed dividend.
The amount of interest-free loan of Rs. 5 lakhs given by the company to the supervisor who in turn had
given the same to Mr. Parimal, shall be construed as the amount given for the benefit of Mr. Parimal and
would be treated as deemed dividend. This has been held by the Supreme Court in the case of L.
Alagusundaram Chettiar v. CIT (2001)

Question 8 [Deemed dividend u/s 2(22)(e)] 

Mr. Santhanam holding 25% voting power in VKS Manufacturing Private Limited permitted his own land to
be mortgaged to a bank for enabling the company to obtain a loan. Mr. Santhanam requested the company
to release the property from the mortgage. The company failed to do so, but for retaining the benefit of
bank loan it gave an advance of Rs. 10 lakhs to Mr. Santhanam, which was authorized by a resolution passed
by the Board of Directors. The company's accumulated profit on the date of payment of advance was Rs.
50 lakhs. The AO proposes to treat the amount of Rs. 10 lakhs as deemed dividend by invoking the provision
of section 2(22)(e). Is the proposition of the AO correct in law?
[ICAI Module, May’24 – 4 marks]
Answer
The issue under consideration is whether loan or advance given to a shareholder by the company, in return
of an advantage or benefit conferred on the company by the shareholder, can be deemed as dividend u/s
2(22)(e) of the Income-tax Act, 1961 in the hands of the shareholder

The facts of the case are similar to the facts in Pradip Kumar Malhotra v. CIT (2011), wherein the above
issue came up before the Calcutta High Court.

The High Court observed that the phrase "by way of advance or loan" appearing in section 2(22)(e) must be
construed to mean those advances or loans which a shareholder enjoys simply on account of being a person
who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with
or without a right to participate in profits) holding not less than 10% of the voting power.

In case such loan or advance is given to such shareholder as a consequence of any further consideration
received from such a shareholder which is beneficial to the company, such advance or loan cannot be a
deemed dividend within the meaning of the Act.

Thus, gratuitous loan or advance given by a company to a shareholder, who is the beneficial owner of shares
holding not less than 10% of the voting power, would come within the purview of section 2(22)(e) to the

5.6 Income From Other Sources

 Direct Tax

extent of accumulated profits of the company but not the cases where the loan or advance is given in return
for an advantage conferred upon the company by such shareholder.

In this case, advance of Rs. 10 lakhs was given by VKS Manufacturing (P) Ltd. to Mr. Santhanam holding
25% of voting power in lieu of non-release of his personal property from mortgage thereby enabling the
company to retain the benefit of loan obtained from bank. Therefore, applying the rationale of the Calcutta
High Court ruling in Pradip Kumar Malhotra’s case, such advance cannot be brought within the purview of
section 2(22)(e), since it was not in the nature of gratuitous advance but was given to protect the int erest
of the company.

The proposition of the AO to treat the amount of Rs. 10 lakhs as deemed dividend by invoking the provisions
of section 2(22)(e) in this case is, therefore, not correct.

Question 9 
An enterprise engaged in manufacturing of steel balls discontinued its activities and decided to lease out
its factory building, plant and machinery and furniture from 1.4.2024 on a consolidated lease rent of Rs.
50,000 per month. Compute the income for AY 2025-26 of the assessee from following information:

[Link]. Description Amount (₹)

(i) Interest received on deposits 1,00,000
(ii) Brokerage paid on hundi loan taken 2,000
Interest paid on hundi and other loans which were given as deposits, including 75,000
(iii) interest to others
(iv) Expenses incurred on repairs of building, plant, and machinery 15,000
(v) Fire insurance premium of plant and machinery and furniture 12,000
(vi) Depreciation for the year 1,47,500
(vii) Legal fees paid to an advocate for drafting and registering the lease agreement 1,500
(viii) Factory licence fees paid for the year 1,000
(ix) Unabsorbed depreciation of Assessment Years 2023-24 and 2024-25 2,75,000
Interest paid includes an amount of ₹25,000 remitted to a non-resident outside 25,000
(x) India on which tax was not deducted at source (included in (iii))
[ICAI Module]
Answer
The income derived from leased assets shall be chargeable to tax as 'Income from other sources' u/s
56(2)(iii) but the computation thereof shall be made after allowing deductions specified under sections 30,
31 and 32 subject to section 38. This is as per the provisions of section 57(ii) and 57(iii).

Computation of income under the head “Income from other sources”

Particulars Rs. Rs.
(A) Lease Rent for 12 months @ Rs. 50,000 p.m. 6,00,000
Less: Expenses and deductions allowable u/s 57(ii) & 57(iii):
Repairs 15,000
Fire Insurance Premium 12,000
Legal expenses for drafting of lease agreement Factory 1,500
Licence fee 1,000
Depreciation for the year 1,47,500
Unabsorbed depreciation of earlier assessment years – eligible

Income From Other Sources 5.7

 Direct Tax

for deduction (Note 1) 2,75,000 4,52,000

1,48,000
(B) Interest on Deposits 1,00,000
Less: Expenses allowable u/s 57(i)
Brokerage Rs. 2,000
Interest on hundi loans (Note 2) Rs. 50,000 52,000 48,000
Total Income 1,96,000

Notes:
(1) Unabsorbed depreciation of Rs. 2,75,000 pertains to earlier assessment years. The unabsorbed
depreciation shall form part of the current year depreciation and can be set off against any other
head of income. Accordingly, the amount of Rs. 2,75,000 is adjustable/ allowed to be set off
against 'Income from other sources'.
(2) Since deposits are made by investing amount received on hundi and other loans, the interest on
hundi and other loans would be eligible for deduction from the income arising on such deposits.
However, interest paid to non-resident is not eligible for deduction as the tax has not been
deducted at source.

Question 10
In July 2024, Mr. Pervez employed as Marketing Manager in a Pharma company, received a Maruti car as
gift from a distributor of the company. The value of the gifted car is estimated at Rs. 2,60,000. Is the
value of car taxable as income? If so, under what head it is taxable?
[ICAI Module]
Answer
Mr. Pervez, an employee of a Pharma company, has received a car as a gift from a distributor of the company.
Since there is no employer-employee relationship in this case between the distributor and Mr. Pervez, the
value of gift is not a perquisite chargeable to tax under the head ―Salaries.

Section 56(2)(x) brings within its scope the value of any property received by any person. For this purpose,
property means immovable property being land or building or both, shares and securities, jewellery,
archaeological collections, drawings, paintings, sculptures, any work of art or bullion.

Therefore, for the purpose of attracting the provisions of section 56(2)(x) for chargeability under the
head “Income from Other Sources”, an individual should be in receipt of property as defined therein. Since,
car is not included in the definition of “property”, the provisions of section 56(2)(x) would not be attracted
in the hands of Mr. Pervez.

Question 11 
Discuss the taxability or otherwise of the following transactions:
(i) Mr. A purchased 10 acres of agricultural land from Mr. B at the rate of Rs. 2 lakh per acre on 10-05-
2025. The guideline value of the land on the date of the transaction was Rs. 3 lakhs per acre. However,
he had entered into an agreement for purchase of the land on 10-03-2025 when the guideline value
was Rs. 2.20 lakhs per acre. He had paid a token advance of Rs. 1 lakh by account payee cheque.
(ii) Mr. A received cash gift of Rs. 4.75 lakhs from B on the occasion of his 61st birthday which was
celebrated like marriage as per tradition, and Rs. 25,000 from C. Both B and C are his distant relatives.
Discuss the taxability of the transaction.
(iii) Mr. Dileep contributed Rs. 2 lakhs to a Trust created for the purpose of marriage of his friend's
daughter.
[May 2018]

5.8 Income From Other Sources

 Direct Tax

Answer
(i) Agricultural land is not a capital asset and hence, there would be no tax implications in the hands of
the seller, Mr. B In the hands of the buyer, Mr. A, the provisions of section 56(2)(x) would be attracted
where any property is received without consideration or for inadequate consideration. “Property”
means a capital asset, namely, immovable property being land or building or both. In this case, since
agricultural land is not a capital asset, it would not fall within the definition of property to attract the
provisions of section 56(2)(x). Therefore, the provisions of section 56(2)(x) would not be attracted in
the hands of Mr. A.

Note - If it is assumed that the agricultural land is an urban agricultural land, the tax implications
would be as follows:
Mr. B, the seller, can consider the stamp duty value of Rs. 2.20 lakhs per acre on 10.3.2025, being the
date of agreement, as the full value of consideration as per section 50C for computation of capital
gains (instead of the stamp duty value of Rs. 3 lakhs per acre on 10.5.2025, being the date of sale),
since he has received an advance of Rs. 1 lakh by account payee cheque at the time of entering into an
agreement.

In the hands of the buyer, Mr.A, no amount would be taxable u/s 56(2)(x) as “Income from other
sources”, as the difference between the stamp duty value (2.20 lakhs per acre on 10.3.2025) and the
actual purchase price (Rs. 2 lakh per acre) does not exceed higher of Rs. 50,000 or 10% of the amount
of consideration [i.e., 10% of Rs. 2 lakhs = Rs. 20,000 per acre)].

(ii) Since the question mentions that B and C are Mr. A’s distant relatives, it is assumed that they do not
fall within the definition of “relative” u/s 56(2).

Since cash gift exceeding Rs. 50,000 in aggregate from non-relatives, B & C, was received, not on the
occasion of marriage but on the occasion of Mr. A’s 61st birthday, the said sum of Rs. 5 lakhs [i.e., Rs.
4.75 lakhs from B and Rs. 25,000 from C] is taxable u/s 56(2)(x) as “Income from Other Sources” in
the hands of Mr. A.

(iii) Section 56(2)(x) excludes from its scope, any sum of money received from an individual by a trust
created or established solely for the benefit of relative of the individual.

In this case, this exclusion would not apply, since Rs. 2 lakhs was received from Mr. Dileep by a trust
created for the benefit of his friend’s daughter and not his relative. Thus, Rs. 2 lakhs would be
chargeable to tax in the hands of the trust.

Question 12 [Case Law - PCIT v. Dr. Ranjan Pai]

On 1st May 2024, M Sudarshan, a resident individual, received 1,500 bonus shares from Sugam Pvt. Ltd. in
which he held 3,000 equity shares. The Assessing Officer held that since the assessee has not paid any
consideration for bonus shares, he was under an obligation in law to offer the market value as income from
other sources under section 56(2)(x) of the Act. The Assessing Officer computed the fair value of these
bonus shares and added the amount to the income of M Sudarshan as "Income from other sources".
Whether the decision of the Assessing Officer is correct in law?
[MTP May 24, May 22, May 18 – 4 marks]

Income From Other Sources 5.9

 Direct Tax

Answer
Issue Involved: The issue under consideration is whether bonus shares received by shareholders would be
taxable under the head ‘Income from other sources’ as per the provisions of section 56(2)(x), as they are
received without consideration.

Provision Applicable: Section 56(2)(x) brings to tax any sum of money or value of property received by any
person without consideration or for inadequate consideration from any person.

Analysis: When a shareholder gets bonus shares, the value of the original shares held by him goes down and
the market value as well as intrinsic value of the two shares put together will be the same or nearly the
same as the value of original share before the issue of bonus shares. Thus, any profit derived by the
assessee shareholder on account of receipt of bonus shares is adjusted by depreciation in the value of
equity shares originally held by him.

Conclusion: Accordingly, the action of the AO in including the fair value of bonus shares as Income from
other sources of D. Venkatswami is incorrect.

Note – The facts given in the question are similar to the facts in PCIT v. Dr. Ranjan Pai (2021), wherein
the issue came up before the Karnataka High Court. The above answer is based on the rationale of the
Karnataka High Court in the said case.

Question 13 [2(22)(e) and Clubbing u/s 64]

Mr. Kumar held 18% equity shares in PQR (P) Ltd. He gifted all the shares held by him in PQR (P) Ltd., to
his wife Sowmya on 17.7.2024. The transfer was made without adequate consideration. On 18.9.2024,
Sowmya obtained a loan of Rs. 2 lakh from PQR (P) Ltd., when the company's accumulated profit was Rs.
1,50,000. Examine the tax implications of the above transactions.
[MTP May 2018]
Answer
Under section 2(22)(e), any payment by a closely-held company by way of loan or advance to its shareholder,
being a person who is the beneficial owner of shares, holding not less than 10% of the voting power, is
deemed as dividend to the extent to which the company possesses accumulated profits.

Therefore, in order to attract the deeming provisions u/s 2(22)(e), the recipient of loan should be a
registered shareholder as well as the beneficial owner of shares. Accordingly, in this case, Rs. 1,50,000
(i.e., loan to the extent of accumulated profits of PQR (P) Ltd.) would be deemed as dividend in the hands
of Sowmya, who holds 18% equity shares in PQR (P) Ltd., u/s 2(22)(e).

Thereafter, the clubbing provisions u/s 64(1)(iv) would be attracted, as per which, income as arises, directly
or indirectly, from asset transferred to spouse, otherwise than for adequate consideration, would be
included in the hands of the transferor.

If the assets so transferred are shares in a company, the loan taken from the company is deemed as dividend
income of the shareholder u/s 2(22)(e) to the extent to which the company possesses accumulated profits.
Thus, on account of this deeming provision, such loan is treated as income arising from the shares. It was
so held by the Madras High Court in CIT v. Vimalan (A.) (1975).

Accordingly, as per section 64(1)(iv), such income arising in the hands of the shareholder, Sowmya, by virtue
of section 2(22)(e) (i.e., deemed dividend of Rs. 1,50,000) would be included in the total income of Mr.
Kumar, who had transferred the said shares to Sowmya without consideration.

5.10 Income From Other Sources

 Direct Tax

Question 14 [Case Law - Gopal & Sons (HUF) v. CIT]

Aadarsh HUF holds 35% shares of M/s. Best Fertilizers (P.) Ltd., a closely held company. During the
P.Y.2024-25, it received loans and advances from the company. Its return was scrutinized by the AO who
treated the loans and advances as deemed dividend u/s 2(22)(e). As per the company’s annual return, the
HUF is the shareholder. However, the share certificates were issued in the name of the HUF’s Karta, Mr.
Aadarsh. Thus, there was some dispute as to who was the shareholder - the Karta, Mr. Aadarsh or the HUF,
as share certificates were issued in the name of the former but the annual return mentioned the latter.
Aadarsh HUF contended that as a HUF cannot be a registered or beneficial shareholder of a company, the
amount of loan cannot be taxed as deemed dividend.
Examine whether loan given by a closely held company to a HUF is taxable as deemed dividend u/s 2(22)(e).
[RTP Nov 2018]
Answer
When a loan is given by a closely held company, it is chargeable to tax as deemed dividend if the loan is
given to:
(i) a shareholder (having 10% or more voting power in the company) or
(ii) a concern in which such shareholder is a member or partner and in which he has substantial interest
(entitled to 20% of the income of such concern).

The issue under consideration in this case is whether loan to HUF by a closely held company is chargeable
to tax as deemed dividend, where the share certificates were in the name of the Karta of the HUF but the
annual return mentioned the HUF as a shareholder.

This issue came up before the Supreme Court in Gopal & Sons (HUF) v. CIT (2017), wherein it was observed
that, in either scenario, section 2(22)(e) would be attracted. If the HUF was the shareholder, as it held
more than 10% voting power, the provisions of section 2(22)(e) would be covered under (i) above. If the
Karta was the shareholder, the HUF would be the concern in which the Karta is a member, and hence, the
case would be covered under (ii) above.

As per Explanation 3 to section 2(22)(e), “concern” has been defined to mean a HUF, or a firm or an AOP
or a BOI or a company. The Supreme Court, accordingly, held that the loan to HUF is to be assessed as
deemed dividend u/s 2(22)(e).

Applying the rationale of the above Supreme Court ruling to the case on hand, the loan given by Best
Fertilizers (P.) Ltd. to Aakash HUF would be deemed as dividend u/s 2(22)(e).

Question 15 [Case Law - CIT v. Sree Rama Multi Tech Ltd.]

PQR Ltd. is engaged in the manufacture of multi-layer tubes and other speciality packaging and plastic
products. It came out with an initial public issue of shares during the year 2024-25 and deposited the share
application money received in banks till the allotment of shares was completed. The company earned interest
of Rs. 75 lakhs on such deposits, which it set off against the public issue expenses, while computing total
income for A.Y.2025-26. Accordingly, the company paid the tax on total income, after adjusting tax
deducted at source and advance tax paid, and filed its return of income in September, 2025. On scrutiny,
the AO contended that interest of Rs. 75 lakhs is not eligible for set-off against public issue expenses but
is taxable under the head ‘Income from Other Sources’. Examine the correctness of contention of the
Assessing Officer.
[RTP Nov 19]

Income From Other Sources 5.11

 Direct Tax

Answer
The issue under consideration is whether the interest income from share application money is taxable under
the head ‘Income from Other Sources’, or can the same be set- off against public issue expenses.
This issue came up before the Supreme Court in CIT v. Sree Rama Multi Tech Ltd. [2018]. The Supreme
Court observed that the assessee-company was statutorily required to keep share application money in a
separate account till the allotment of shares was completed. Part of the share application money would
normally have to be returned to unsuccessful applicants, and therefore, the entire share application money
would not ultimately be appropriated by the company. The interest earned was inextricably linked with the
requirement of raising share capital.

The Supreme Court further observed that any surplus money deposited in the bank for the purpose of
earning interest is liable to be taxed as “Income from Other Sources”; however, in this case, the share
application money was deposited with the bank not to make additional income by earning interest but to
comply with the statute. The interest accrued on such deposit is merely incidental. Moreover, the issue of
shares relates to capital structure of the company and hence, expenses incurred in connection with the
issue of shares are to be capitalized. Accordingly, the Supreme Court held that the accrued interest on
deposit of share application money is eligible to be set-off against public issue expenses.

Applying the rationale of the Supreme Court ruling to the case on hand, the contention of the AO that
interest income is taxable under the head “Income from Other Sources” is not correct.

5.12 Income From Other Sources