Section 56

Section 56 — the law in short

What the courts have decided on section 56, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Secunderabad Club v CIT Supreme CourtHelps department
  Our club's surplus sits in fixed deposits with a bank that is itself a corporate member. Is the interest covered by mutuality?
  No. The Supreme Court held that the principle of mutuality does not apply to interest earned on fixed deposits made by a club with a bank, whether or not the bank is a corporate member of the club. The interest is ordinary income under s.2(24) and is taxed like any other income. The Court dealt in the same batch with income the clubs earned through their assets and resources from persons who are not members, and held that too is taxable.
• CIT v Shree Rama Multi Tech Ltd Supreme CourtHelps taxpayerValidity unconfirmed
  We parked public issue share application money in the statutory bank account and it earned interest before allotment. Is that interest taxable as income from other sources?
  No. The Supreme Court dismissed the revenue's appeal and held that interest accrued on the deposit of share application money is not taxable income. The money was kept in a separate account because the law required it to be, not to earn a return, so the interest was incidental to the share issue and was rightly set off against share issue expenses rather than assessed under the residuary head.
• CIT v Meghalaya Steels Ltd Supreme CourtHelps taxpayer
  My unit gets transport, power and interest subsidies from the State — does that money count as profit derived from the undertaking for section 80-IB or 80-IC?
  Yes. The Supreme Court held on 9 March 2016 that subsidies reimbursing elements of the cost of manufacturing or selling the undertaking's products have a direct nexus with its profits and qualify for deduction under sections 80-IB and 80-IC. Profits and gains in those sections mean net profit, arrived at after deducting the costs of making and selling the goods; if the State refunds part of those costs, the resulting profit is derived from the business. That the immediate source of the money is the Government makes no difference. Liberty India, which concerned an export incentive available only after manufacture, was distinguished, and the contrary Himachal Pradesh view was held wrongly decided.
• Totgars Co-operative Sale Society Ltd v ITO Supreme CourtHelps department
  My society invested surplus funds in short-term bank deposits. Is that interest covered by 80P?
  No. Interest on surplus funds not required for immediate business use is not attributable to providing credit to members or to marketing their produce. It is income from other sources under s.56 and outside s.80P(2)(a)(i).
• CIT v D.P. Sandu Bros. Chembur (P) Ltd Supreme CourtHelps taxpayerSuperseded by amendment
  The landlord paid my company to give up its tenancy. Is that taxable, and if it cannot be computed as a capital gain can the officer tax it as a casual receipt instead?
  No — he cannot move it to another head. A tenancy right is a capital asset and its surrender is a transfer, so s.45 is the only head that can reach the consideration. For assessment year 1987-88 the Court held the receipt escaped tax altogether because the cost of acquiring the tenancy could not be ascertained and s.48 therefore could not be worked, and it refused to let the department bring the same receipt back under s.10(3) read with s.56. Section 55(2) was amended with effect from 1 April 1995 to supply a cost of acquisition for a tenancy right, so the computation gap this case turned on is closed for later years — the head-of-income holding is what survives.
• CIT v V.P. Gopinathan Supreme CourtHelps department
  I borrowed from the same bank against my fixed deposit. Can I be taxed only on the interest earned less the interest I paid on that loan?
  No. The Supreme Court held that the interest received on the fixed deposit is income in the depositor's hands in full, and can be reduced only if some provision of law allows it. There is none here. It makes no difference in law that the loan came from the same bank in which the deposit was placed; if the loan had been from another bank nobody would suggest the income shrank. The Kerala High Court's view that this was a case of mutuality was set aside and the questions were answered in favour of the Revenue.
• CIT v Karnal Co-operative Sugar Mills Ltd Supreme CourtHelps taxpayer
  Before my plant started, I put money in the bank to open a letter of credit for the machinery and earned interest on it. Is that interest taxable income?
  No. The Supreme Court held that where the deposit is made to open a letter of credit for the purchase of plant and machinery under the agreement with the supplier, the deposit is directly linked with that purchase, and the interest earned on it is incidental to the acquisition of the assets. It is not a case of idle surplus share capital parked in a bank to earn interest. Tuticorin Alkali Chemicals therefore does not apply, and the case falls under Bokaro Steel. The Revenue's appeal was dismissed.
• CIT v Bokaro Steel Ltd Supreme CourtHelps taxpayer
  While my plant is still being built I recover rent, hire charges and interest from my own contractors. Is that taxable income before the business starts?
  No, where the receipts are inextricably linked with setting up the plant. The Supreme Court held that rent charged to contractors for housing their workers, hire charges for plant and machinery lent to them, interest on advances made to keep their work moving, and royalty for stone excavated from the company's own land are all capital receipts that go to reduce the cost of construction. They arise from arrangements intrinsically connected with building the plant, not from any independent source. Tuticorin Alkali was distinguished: interest on surplus borrowed funds parked in short-term deposits is an independent source and remains taxable.
• CIT v Podar Cement (P) Ltd Supreme CourtCuts both ways
  I have paid for the flat and I am in possession, but the conveyance was never registered. Am I the owner for s.22?
  Yes. For s.22 the Supreme Court read 'owner' as the person entitled to receive the income from the property in his own right, not the person holding a registered title. A buyer who has paid the whole consideration and is in possession is therefore assessable on the rent under the house property head even though no conveyance has been registered — which is why the assessee here, who had returned the rent under s.56 and argued it was not the owner, lost. The Court also held the deemed-ownership clauses inserted in s.27 by the Finance Act 1987 to be declaratory and retrospective.
• Emil Webber v CIT Supreme CourtHelps department
  My Indian contract says my pay is free of Indian tax and the Indian company pays the tax for me. Is that tax itself taxable in my hands?
  Yes. The Supreme Court held that tax paid by an Indian company on an expatriate's salary, under an obligation to pay him free of Indian tax, is itself income of the expatriate. The definition in section 2(24) is inclusive and does not rob income of its natural meaning; anything properly described as income is taxable unless exempted. The payment was made for and on behalf of the assessee, was not gratuitous, and had an integral connection with the salary he received. Since he was not an employee of the company that paid, it fell under section 56 as income from other sources. The appeals were dismissed.
• Rama Bai v CIT Supreme CourtHelps taxpayerValidity unconfirmed
  The court enhanced my land acquisition compensation years later and awarded interest from the date possession was taken. Is all that interest taxable in the year of the order?
  No, on the law as it then stood. The Supreme Court held that interest on enhanced compensation cannot be taken to have accrued on the date of the court's order granting the enhancement. It accrues year after year, from the date possession of the land was delivered until the date of that order, and must be assessed accordingly. The question had divided the High Courts and came up on references made directly to the Court under section 257. The Court held the point concluded by its own decision in T.N.K. Govindarajulu Chetty, supported by Khorshed Shapoor Chenai, and allowed the appeals.
• CIT v Rajendra Prasad Moody Supreme CourtHelps taxpayer
  I borrowed to buy shares and paid interest, but the shares paid no dividend this year. Can I still deduct the interest?
  Yes, on the section as it then stood. The Supreme Court held that section 57(iii) looks to the purpose of the expenditure, not to its result. The expenditure must be laid out wholly and exclusively for the purpose of making or earning income, but nothing in the section requires that purpose to fructify into a return, and it does not say the expenditure is deductible only if income is in fact made. The plain construction of the words is that no income need actually have been earned. The Court rejected the Revenue's argument that the narrower wording of section 57(iii), compared with section 37(1), makes the deduction conditional on income arising.
• S.G. Mercantile Corporation (P) Ltd v CIT Supreme CourtHelps taxpayer
  My company took a market on a long lease, spent money rebuilding it and sublets the shops and stalls. Is that rent business income or income from other sources?
  Business income. The Supreme Court held that the company's income from subletting stalls in Taltolla Bazar was assessable under section 10 of the 1922 Act, not under the residuary head. The company was not the owner, so the property head could not apply. Its memorandum authorised taking property on lease and dealing with it commercially; within a fortnight of incorporation it took the market on a fifty-year lease, undertook to spend Rs 5 lakhs remodelling it, and for three years did nothing but develop the premises and let out shops, stalls and ground space. Taking the lease and subletting was its trading activity.
• Public Political Party v Deputy Commissioner of Income Tax High CourtHelps departmentValidity unconfirmed
  My client's s.80GGC deduction has been disallowed because the recipient party is alleged to be an entry provider. Has any High Court decided what the party's own position is, and does that finding bind my client?
  Yes as to the party, no as to your client. The Delhi High Court dismissed the party's own appeals, holding that the Tribunal's finding that it issued bogus donation receipts to enable donors to claim deductions under s.80GGB and s.80GGC, and paid the money back to the persons from whom it was purportedly received, is a finding of fact not open to interference under s.260A. The party also lost its s.13A exemption for failing to file the report required by the second proviso to s.13A. The Court decided nothing about any identified donor: the finding is that this party issued bogus receipts and paid the money back, not that any particular donor received a refund.
• Bannanje Grahakara Vividhoddesha Sahakara Sangha Ltd v CIT (Appeals), NFAC High CourtCuts both waysValidity unconfirmed
  The Tribunal remanded the nominal member issue to the Assessing Officer but recorded findings on the merits while doing so, leaving the officer nothing to decide. Is there anything I can do about that in the High Court?
  Yes. The Karnataka High Court declined to interfere with the order of remand itself, but accepted that the Tribunal's observations on the merits might prejudice the assessee and clarified that the remand proceedings are to be considered independently, uninfluenced by any observations or findings recorded by the Tribunal on merits, strictly in accordance with Mavilayi Service Co-operative Bank and having regard to the relevant provisions of the Karnataka Co-operative Societies Act.
• Thiruvananthapuram District Electricity Board Employees Co-operative Society Ltd v ITO High CourtCuts both waysHigh Courts differ
  Our employees' credit society earns interest from the District Co-operative Bank and also from the treasury. The Commissioner (Appeals) refused s.80P(2)(d) on both. Where does the Kerala High Court stand?
  The Kerala High Court quashed the appellate orders so far as they refused the deduction, holding that the entitlement to deduct interest received by a co-operative society from its investments with other co-operative societies is settled in the assessee's favour by its own Division Bench decision in Pr. CIT v Peroorkada Service Co-operative Bank Ltd. (2022) 442 ITR 141 (Ker). Interest from a District Co-operative Bank was therefore deductible; interest from the treasury was not, and the year in which treasury interest was received was sent back for re-examination.
• K.2058 Saravanampatti Primary Agricultural Co-operative Credit Society Ltd v ITO High CourtHelps taxpayerValidity unconfirmed
  The Assessing Officer taxed our interest on deposits under s.56 by simply citing Totgars, without answering our case that the deposits are a statutory reserve we are obliged to maintain and that the interest we paid on borrowings should be netted against it. Is that order sustainable?
  No. The Madras High Court set aside the assessments as non-speaking and passed without application of mind, holding it a fatal flaw that the Assessing Officer had brushed aside, in a single line, the society's arguments that the deposits were a statutory reserve and not surplus funds, that Nawanshahar Central Cooperative Bank applied, and that at worst the interest received should be netted against the interest paid. The Court expressed no opinion on the merits and remanded for a speaking order.
• PSTS Heavy Lift and Shift Ltd v DCIT (heard with CeeDeeYes IT Parks P Ltd) High CourtHelps taxpayerValidity unconfirmed
  My company's only business is letting its warehouses and its IT park. The Assessing Officer has taxed the rent as income from house property and knocked out my depreciation. Can I get it assessed as business income?
  Yes, where letting the property is the company's sole and exclusive business. The Madras High Court held that once the property is a business asset and the exclusive business of the company or firm is to earn rental or lease money, that rent can only be business income, and it answered the question of law in the assessee's favour for both a warehousing company and an IT park company.
• Lalitamba Pattina Souharda Sahakari Niyamita v ITO High CourtHelps taxpayerValidity unconfirmed
  The Tribunal refused my society's s.80P(2)(a)(i) claim on bank fixed deposit interest saying it had already been given s.80P(2)(d). Can the two clauses be treated as interchangeable, and if the interest really is income from other sources, what happens to my cost of funds?
  No, they cannot. The Karnataka High Court held that s.80P(2)(a)(i) and s.80P(2)(d) are entirely different and distinct provisions, that a deduction given under (d) does not disentitle a society from claiming under (a)(i), and that the authorities cannot reject an (a)(i) claim by mixing up the two. It further held that even if the interest is assessable under s.56, the Tribunal, as the last fact finding authority, was obliged to examine the proportionate cost of funds and administrative expenses deductible under s.57, and it remanded the matter to the Assessing Officer.
• PCIT v Totagars Co-operative Sale Society High CourtHelps department
  My society earns interest on deposits with a co-operative bank. Is it deductible under 80P(2)(d)?
  On the Karnataka view, no. Interest on idle or surplus funds keeps its character as income from other sources whether the depositee is a scheduled bank or a co-operative bank, and clause (d) speaks only of 'any other co-operative society' — the words 'co-operative banks' are absent from it.
• CIT v Green Infra Ltd High CourtCuts both waysValidity unconfirmed
  The officer says nobody would pay this premium for shares in my company. Is that a ground for taxing it under s.68?
  No. Even if the premium at which the shares are issued defies commercial prudence, the receipt cannot be assessed as an unexplained credit where the identity of the payer, the genuineness of the transaction and the capacity of the subscriber are not disputed. Whether to subscribe at a heavy premium is the shareholder's decision, not the officer's.
• Punjab State Cooperative Federation of House Building Societies Ltd v CIT-II High CourtHelps departmentValidity unconfirmed
  We lost on s.80P before the Tribunal. Can we raise the s.57 cost of funds point for the first time in the High Court, and does interest we charge our own employees qualify under s.80P(2)(a)(i)?
  No on both counts, on this decision. The Punjab and Haryana High Court refused to entertain questions on s.57(iii) and on deduction of costs against interest assessed under s.56 because no such plea had been argued before the Tribunal, holding that they did not arise from the Tribunal's order and raised no substantial question of law. It also upheld the Tribunal's view that s.80P(2)(a)(i) is available only in respect of the society's core activities, so that interest from other banks and interest received from employees who are not members does not qualify.
• Tumkur Merchants Souharda Credit Co-op Ltd v ITO High CourtHelps taxpayer
  The AO cites Totgars against my credit society's deposit interest. Can I still claim 80P?
  Yes, if the deposits arose in the course of the credit business. 'Attributable to' is wider than 'derived from', so interest on short-term deposits of funds not immediately needed for lending remains within s.80P(2)(a)(i).
• CIT v J.K. Investors (Bom.) Ltd. High CourtHelps taxpayerValidity unconfirmed
  I charge rent under one agreement and service charges for air-conditioning and building facilities under another. Which head do the service charges fall under?
  It depends on whether the service agreement can stand on its own feet. The Bombay High Court held the test to be whether the service agreement could stand independently of the rent agreement. On these facts it could not. The amenities charged for - the staircase, the lift, the common entrance, the main road through the compound, drainage, the open space in and around the building and air-conditioning - were not separately provided but went along with the occupation of the property. Rs 1.23 crores of service charges was therefore part of the rent, taxable under section 22 as income from house property and not as income from other sources.
• CIT v Nitin Soni High CourtHelps taxpayer
  I returned income for my trucks under s.44AE. The officer says my real income was higher and has taxed the difference. Can he?
  No, not on the facts of this case. The High Court held that the words 'shall be deemed' in s.44AE indicate a legislative intent that tax is chargeable on the presumptive income computed under sub-section (2). The presumptive income, which may be less or more than the truth, is what is taxable; such an assessee is not required to maintain books at all; and so even where the actual income in a given case is more than the figure computed under sub-section (2), it cannot be taxed. The addition of Rs 29,21,738 made under the head income from other sources was deleted, and the Revenue's appeal was dismissed summarily. Two limits matter. The officer had identified no other source in the assessment order, and it was not disputed that s.44AE applied. A genuinely separate source of income remains taxable in the ordinary way.
• Venus Parkland Co-Op Housing Service Society Ltd v ITO ITATHelps taxpayerValidity unconfirmed
  The Assessing Officer has taxed our society's bank FD interest as income from other sources and refused to allow the maintenance expenditure against it. Is there an answer?
  On these facts, yes - but read what the Tribunal actually did before relying on it. The Ahmedabad Bench held that a co-operative housing service society's fixed deposit interest was directly linked to the activity of maintaining the society, so the receipts had to be set against the maintenance expenditure they funded rather than taxed gross. The addition of Rs 24,31,919 on the fixed deposit interest was deleted, and the rent and other small receipts were treated the same way, leaving the net surplus of Rs 4,64,486 that the society had itself shown. The Tribunal then directed the Assessing Officer to allow the deduction of Rs 50,000 claimed under section 80P(2)(c)(ii). The reasoning ran through the principle of mutuality as stated by the Supreme Court in Venkatesh Premises Co-operative Society, and it did not deal with the Secunderabad Club decision on which the Commissioner (Appeals) had relied.
• ACIT, Central Circle-26 v Ashok Kumar ITATHelps taxpayerValidity unconfirmed
  I do not own the property. I hold it on a lease running since 1989 and I sub-let it. The Assessing Officer says sub-letting income is income from other sources under section 56 and has denied me the thirty per cent under section 24(a). What is the answer?
  The Commissioner (Appeals) held, and the Tribunal proceeded on the footing, that where the lease is for a term of not less than twelve years section 27(iiib) read with section 269UA(f) makes the lessee the deemed owner of the property for sections 22 to 26, so that the sub-letting receipt is income from house property and the section 24(a) deduction follows; the Tribunal recorded that conclusion in its own words at paragraph 19 without separately construing the section. The Tribunal held that the Revenue, having assessed the rent under the house property head, could not deny the statutory deduction unless it was proved on record that the original owner had also claimed the benefit, and the Revenue's appeal was dismissed.
• Aditya Balkrishna Shroff v ITO ITATHelps taxpayerValidity unconfirmed
  I lent a relative dollars and the rupee moved. Is the extra rupee amount I got back taxable?
  No, on these facts. The Tribunal held the rupee surplus on repayment of an interest-free loan advanced in foreign currency was a capital receipt: the loan was a transaction in the capital field, exactly the same number of dollars came back, the accretion was on account of exchange fluctuation and not interest, and a capital receipt is outside the charge unless a provision brings it in. It also held that whether the loan was permissible under the exchange control law is not for the income-tax authorities to adjudicate. The addition of Rs 22,04,568 made under income from other sources was deleted.
• Dynacon Equipments Pvt Ltd v ACIT ITATHelps taxpayerValidity unconfirmed
  My client's factory has been shut for years and the land, building and two generators are let out on one rent. The officer has taxed the whole of it as income from other sources. Can it be house property?
  Yes, on this decision. The Tribunal held that where the lease deed shows that the predominant objective is to let out the land and building along with the plant installed in it in order to earn rental income, and there is no visible intention to carry on organised and systematic business activity, the income is assessable under the head income from house property. It relied on the structure of section 14: income is to be assessed under the correct specific head, and only income that cannot be brought under any of the prescribed heads because of its nature falls to the residuary head of income from other sources.
• Kohinoor Industrial Premises Co-operative Society Ltd v ITO ITATHelps taxpayerValidity unconfirmed
  My society lets space on the terrace to cellular operators for their towers and antennae. The Assessing Officer says that is income from other sources and has disallowed the thirty per cent under section 24(a). Is he right?
  No, on these facts. The Tribunal held that the terrace is part of the house property, that letting space on it for installing and operating a mobile tower or antenna is letting a part of the house property itself, and that the receipt is therefore income from house property on which the section 24(a) deduction is allowable.
• Jagtar Singh Purewal v CIT Advance RulingHelps taxpayerSuperseded by amendment
  My tenant has paid me a lump sum of back rent after a long-delayed rent revision. Is that taxable as house property income in the year I receive it?
  No - on the law as it stood in 1994, and only then. The Authority ruled that Jagtar Singh Purewal, a non-resident with a one-sixth share in a Jalandhar building let to Madras Rubber Factory Ltd, was not liable to tax on his Rs. 1,05,083 share of arrears of rent for periods up to 31 March 1992, received on 6 July 1992. Income from house property computed under s.23 cannot exceed the actual rent for the previous year in question, and the Act as it then stood made no provision for taxing the excess referable to earlier years. Nor could the sum be taxed as income from other sources, on the principle in Nalinikant Ambalal Mody. Parliament has since reversed the outcome by enacting a specific charge on arrears of rent.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.