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1
ISSUES IN WEALTH TAX
CA. Sunil D Surana
Bangalore Branch of ICAI
Basic
The Wealth Tax Act - 1st April 1957.
The Wealth tax Act, 1957 is applicable to the whole
of India including Jammu and Kashmir.
The purpose of the introduction of Wealth tax Act:
To tax idle wealth and to de-motivate to hold idle
wealth
To support the revenue collection
The Regulatory Body - CBDT
2
Wealth tax – Coverage
Session can be divided into following:
Charging provisions
Exemption Provisions
Valuation provisions
Procedural & Compliances Provisions
Coverage of Wealth Tax
Charging Provisions
Section 2(ea) – Definition of an Asset
Section 2(q) – Valuation Date
Section 2(m) – Net Wealth
Section 3 – Charging Section
Section 4 – Deemed Asset
Section 5 – Exemption
Section 7 – Valuation of Assets
3
Coverage of Wealth Tax
Procedural Provisions
Section 14/14A/14B – Filing of Return of Net Wealth
Section 15 – Belated Return and Revised Return
Section 16 – Assessment
Section 16A – Reference to Valuation Officer
Section 17 – Wealth Escaping Assessment
Section 17A – Time Limit to Complete the Assessment
Section 17B – Interest for Late Payment and Late Filing of return
Section 18 - Penalties
Section 3 – Charging Section
Every Individual, HUF and Company,
to pay tax @ 1%
on net wealth (section 2(m))
exceeding Rs.30,00,000
on the corresponding valuation date (section 2(q))
(No Education Cess prescribed on Wealth tax)
4
Section 2(m) – Net Wealth
"net wealth" means
the amount by which the aggregate value computed in accordance with the provisions of this Act (Schedule III – Valuation Rules)
of all the assets, (Section 2(ea) – Definition of Asset)
wherever located, belonging to the assessee (section 6)
on the valuation date, (section 2(q))
including assets required to be included in his net wealth as on that date under this Act, (section 4 – Deemed Assets)
is in excess of the aggregate value of all the debts owed by the assessee on the valuation date which have been incurred in relation to the said assets. (Deduction allowed)
Asset (section 2(ea))
The definition of Wealth Tax is exhaustive (i.e.
exclusive).
Section 2(ea) defines an asset and contains 6 assets
liable to wealth tax.
Any asset owned, other than the six specified assets,
as per section 2(ea) as on valuation date is not
liable to wealth tax.
5
Section 2(ea)
6 assets are covered and liable for Wealth Tax:
1. Building
2. Motor Car
3. Jewellery
4. Yachts, Boats and Aircrafts
5. Urban Land
6. Cash in hand
Valuation Date - section 2(q)
‗valuation date‘ - the last date of the previous year
Existence of assets on the valuation date is a
necessary
Where there is change of ownership of assets on
the valuation date??
6
Assets brought by person of Indian
origin or Citizen of India
Money and assets brought by an assessee being a
person of Indian origin or a citizen of India, who was
ordinarily residing in a foreign country and has
returned to India on a permanent basis and the assets
acquired by him out of such money within one year
immediately preceding his date of return and at any
time thereafter shall not be included in wealth.
This exemption is available for 7 successive assessment
years following the date of his return to India.
Other Assessee‘s Wealth
Partnership Firm/LLP/AOP/BOI
As per section 3, Partnership Firm/LLP/AOP/BOI are
not liable to pay wealth tax.
However, Rule 15 and 16 of the Valuation Rules as per
Schedule III, prescribes the mechanism to club the net
wealth of the Partnership Firm/LLP/AOP/BOI in the
hands of partners/members in the proportionate
manner.
7
Valuation of interest in Firm or AOP Rule 15 and 16
Step 1: Compute Net Wealth of the Firm
Step 2: Allocate the Net Wealth equal to Capital to
Partners in Capital Ratio
Step 3: The balance net wealth of the firm or
association in dissolution ratio/ profit sharing ratio
Step 4: The sum total of amounts so allocated to a
partner or member under step (2) and step (3)
shall be treated as the value of the interest of that
partner or member in the firm or association.
Other Assessee‘s Wealth
Trust
Any property held under trust or other legal obligation
for any public purpose of a charitable or religious
nature in India is exempt from Wealth Tax u/s 5.
Thus, any property held by a trust for the purpose other
than a charitable or religious purpose, will be taxable,
to the same manner and extent to an individual
8
Building
- Any building or land appurtenant thereto,
- whether used for residential or commercial purposes
or for the purpose or maintaining a guest house or
otherwise,
- including a farmhouse situated within 25 kilometres
from local limits of any municipality (whether known
as Municipality, Municipal Corporation or by any
other name) or a cantonment Board,
- but does not include:
Building - exclusions
a. a house meant exclusively for residential purposes and which is allotted by a company to an employee or an officer or a director who is in whole time employment, having a gross annual salary of less than Rs.10,00,000/-
b. any house for residential or commercial purposes which form part of stock-in-trade.
c. any house which the assessee may occupy for the purpose of any business or profession carried on by him.
d. any residential property that has been let out for a minimum period of 300 days in the previous year.
e. any property in the nature of commercial establishments or complexes
9
Building
Definition of Building - not defined in the Act
General Dictionary meaning of Building: a structure
with a roof and walls, such as a house or factory
Definition of Farm House – not defined in the Act
Building – Exemptions (Sec. 5)
any one building in the occupation of a Ruler, being
a building which was his official residence by virtue
of a declaration by the Central Government.
one house or
part of a house or
a plot of land (comprising an area of five hundred
square metres or less) belonging to an individual or
a Hindu undivided family.
10
Building
To sum up, following building are not taxable to Wealth Tax:
Any commercial building or part of the commercial building (irrespective of use)
Farm house situated beyond 25 kms from the municipality limits
Building held as stock in trade
Building used for business or profession
House property let out for 300 days or more during the previous year
Residential house owned by company and provided for accommodation to the employees drawing annual salary less than Rs.10,00,000
One residential house / land (for Individual and HUF)
On residential house (palace) of Ex Ruler
Building - Valuation
Rule 3 to 8 of the Valuation Rules prescribe the
procedure of Valuation of Building
Pegging Down value Concept
Deduction of Unearned Increase of Leased Assets
Adjustment for Excess of Un-built Area over a
Specified Area.
If not covered by Rule 3 to 8, buildings has to be
valued as per Residuary Rule 22 – (Market Value)
11
Valuation of Property as per Rule 3,4
and 5 of Schedule III
1. Compute Gross Maintainable Rent (Rent, Repairs,
interest on deposit, premium, Perk and other
obligations)
2. Arrive at Net Maintainable Rent (GMR – taxes –
15% of GMR)
3. Valuation by Capitalisation
4. Adjustment for unbuilt area
5. Unearned increase in value of land.
Building – Issues
Is ―Farm House‖ liable to wealth Tax?
Whether incomplete building is liable for wealth tax?
CIT v. Smt. Neena Jain (2011) 330 ITR 157 (P & H)
[2010] 189 TAXMAN 225 (KER.) Apollo Tyres Ltd.
[2007] 107 ITD 451 (COCHIN) Federal Bank Ltd.
Whether residential flat used for the purpose of business or profession liable for Wealth tax? Tracstar Investments (P.) Ltd. [2008] 23 SOT 290 (MUM.)
[2009] 123 TTJ 945 (Mumbai)
12
Building - Issues
Whether a temporary shed on plot be construed as asset liable for Wealth Tax?
Whether vacant shop, office, godown, warehouse, not being used for the purpose of business or profession be treated as an ―asset‖ for Wealth Tax purpose?
Can assessee claim exemption of all the residential house properties for Wealth tax purpose?
Whether a house owned by the partner, which is being used for the purpose of business or profession by the partnership firm is also an asset?
Motor Car
other than those used by the assessee in the business
of running them on hire or as stock-in-trade
13
Motor Car
Definition of Motor car – not defined under the Act
As per Webster‘s Dictionary a motor car is an
automobile which produces motion through the help of
engine operating on gasolene.
Indian Rayon & Industries Ltd. [2002] 81 ITD 47 (MUM.)
Motor Car – Exemption (Sec.5)
No specific exemption provided for any type of
Motor Car in Section 5.
14
Motor Car - Valuation
No specific rule provided for the valuation of Motor
car in Schedule III – Valuation Rules
Thus Residuary Rule 22 will apply (Market Value as
on the Valuation Date)
Motor Car - Issues
Whether the motor car used for the purpose of profession or business liable for Wealth Tax?
Whether the vehicles other than Motor cars are assets?
Whether buses and trucks are covered by the definition of an asset? Whether delivery vans or display vans will be covered by the definition of an asset?
15
Jewellery
Jewellery, bullion, furniture, utensils or any other
article
made wholly or partly of gold, silver, platinum or any
other precious metal or any alloy containing one or
more of such precious metals,
Provided that where any of the said assets is used by
the assessee as stock-in-trade, such asset shall be
deemed as excluded from the assets specified
Jewellery
"jewellery" includes—
ornaments made of gold, silver, platinum or any other
precious metal or any alloy containing one or more of
such precious metals, whether or not containing any
precious or semi-precious stones, and whether or not
worked or sewn into any wearing apparel
precious or semi-precious stones, whether or not set in any
furniture, utensils or other article or worked or sewn into
any wearing apparel
16
Jewellery – Exemption (Sec 5)
Jewellery in the possession of any Ex-Ruler,
not being his personal property,
which has been recognized by the Central
Government as his heirloom or the Board may,
subject to any rules, recognise as his heirloom
Jewellery - Valuation
Rule 18 and 19 of Valuation Rules as per Schedule III
The value of jewellery shall be taken to the price which
it would fetch if sold in the open market on the
valuation date.
Return of Net Wealth shall be supported by –
A statement in the prescribed form where the value of
jewellery on valuation date does not exceed Rs.5,00,000
A Report of a registered valuer in the prescribed form
where the value of jewellery on valuation date exceed
Rs.5,00,000
17
Jewellery - Valuation
As per Circular No. 646 issued by CBDT, it has been
decided that the report of the registered valuer
obtained for one assessment year can also be used
in the subsequent 4 assessment years subject to the
adjustments of gold and silver rate applicable as
on relevant valuation date.
Jewellery - Issues
Whether missing jewellery is includible in the net wealth?
Seized Jewellery – wealth??
Is jewellery in the nature of ―Stri Dhan‖ exempt from Wealth Tax?
Is silver utensils owned by assessee liable to Wealth Tax?
Is bullion kept as deposit (which bears interest) with the Jeweler be treated as an asset for Wealth Tax purpose?
Is gold and silver bought as ETF‘s, bonds and on MCX Commodity be subject to Wealth tax?
18
Yachts, boats and aircrafts
Yachts, boats and aircrafts
(other than those used by the assessee for commercial
purposes)
It does not include – Ship, Vessels, Cruise Lines
Yachts, boats and aircrafts –
Exemption (sec 5)
No specific exemption provided for any type of
Yachts, boats and aircrafts in Section 5.
19
Yachts, boats and aircrafts – Valuation
No specific rule provided for the valuation of
yachts, boats and aircrafts in Schedule III –
Valuation Rules
Thus, Residuary Rule 22 will apply (Market Value as
on the Valuation Date)
Yachts, boats and aircrafts – Issues
Any boat or yacht owned by the company for
business purpose – marketing, advertisement
purpose – be considered as an asset liable for
Wealth Tax?
Any aircraft owned by the company for the
Director‘s personal use be subject to Wealth tax?
[2013] 37 taxmann.com 348 (Delhi) Jay Pee Ventures
Ltd
20
Urban Land
"urban land" means land situate—
in any area which is comprised within the jurisdiction of a
municipality (whether known as a municipality, municipal
corporation, notified area committee, town area
committee, town committee, or by any other name) or a
cantonment board and which has a population of not less
than ten thousand; or
Urban Land
in any area within the distance, measured aerially,—
not being more than two kilometres, from the local limits of any municipality or cantonment board referred to in sub-clause (i) and which has a population of more than ten thousand but not exceeding one lakh; or
not being more than six kilometres, from the local limits of any municipality or cantonment board referred to in sub-clause (i) and which has a population of more than one lakh but not exceeding ten lakh; or
not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in sub-clause (i) and which has a population of more than ten lakh,
21
Urban Land
but does not include land classified as agricultural land in the records of the Government and used for agricultural purposes or
land on which construction of a building is not permissible under any law for the time being in force in the area in which such land is situated or
the land occupied by any building which has been constructed with the approval of the appropriate authority or
any unused land held by the assessee for industrial purposes for a period of two years from the date of its acquisition by him or
any land held by the assessee as stock-in-trade for a period of ten years from the date of its acquisition by him.
Urban land – Exemption (sec 5)
one house or part of a house or a plot of land
(comprising an area of five hundred square
metres or less) belonging to an individual or a
Hindu undivided family.
No other specific exemption provided for any type
of Urban Land in Section 5.
22
Urban Land
To sum, following lands are not liable for Wealth tax:
Agricultural land (as per records and used for agricultural purpose)
Land situated in rural area (as per discussed territorial limits)
Stock in trade for less than 10 years
Land occupied by legally constructed building
Vacant land upto 2 years for industrial purpose
Land on which construction is not permissible (No development Zone)
Plot (Area less than 500 square metres)
Urban Land - Valuation
Rule 22 of the Valuation Rules as per Schedule III,
specifically provides that the Urban Land shall be
valued as per Market Value on the Valuation Date
23
Urban land - Issues
Is agricultural land situated in ―Urban Area‖, liable to wealth tax; prior to A.Y 2014-15, where exemption has been claimed by the assessee and additions being made in the Assessment Orders?
[2013] 36 taxmann.com 547 (Amritsar - Trib.) Bawa Yadwinder Singh
Is N.A. plot used for the purpose of agricultural activities (produce) will be liable to Wealth tax?
Whether a land on which unauthorized building was being constructed, the construction of which has been stopped by local authorities, can be excluded from ―asset‖ for the purpose of wealth tax on the ground that the construction is not permitted on such land?
DCM Ltd. [2005] 147 TAXMAN 42 (DELHI)
Urban land - Issues
Whether incomplete building on urban land will be an asset for Wealth Tax purpose? CIT v. Smt. Neena Jain (2011) 330 ITR 157 (P & H)
[2010] 189 TAXMAN 225 (KER.) Apollo Tyres Ltd.
[2007] 107 ITD 451 (COCHIN) Federal Bank Ltd.
Whether a piece of Urban Land, on which temporary shed is being constructed and used for the purpose of business, will be subject to Wealth tax? [2012] 19 taxmann.com 29 (Delhi) Sohna Forge (P.) Ltd.
24
Urban land - Issues
An assessee transferred its immovable property before its valuation date but the same was not registered in favor of the buyer. Can the same be included in the net wealth of the assessee on the ground that he still is the legal owner of the property?
Whether holding development rights for the land amount to asset as per Wealth tax?
[2006] 7 SOT 101 (MUM.) Irani Foods & Investment Co. (P.) Ltd.
Whether the Right to Purchase an asset (land) given by the Court amount to asset as per Wealth Tax Act?
[2010] 326 ITR 451 (BOM.) Ardeshir Behram Dubash
Cash in hand
Cash in hand, in excess of fifty thousand rupees, of
individuals and Hindu undivided families
and in the case of other persons any amount not
recorded in the books of account.
25
Cash in hand –
Deemed Asset (sec 4)
(5A) Where a gift of money from one person to another is made by means of entries in the books of account maintained by the person making the gift
or by an individual or a Hindu undivided family or a firm or an association of persons or body of individuals with whom or which he has business or other relationship,
the value of such gift shall be liable to be included in computing the net wealth of the person making the gift
unless he proves to the satisfaction of the Assessing Officer that the money has actually been delivered to the other person at the time the entries were made.
Cash in hand - Issues
Does advances given in cash as on Valuation Date, which is found out by A.O., not to be genuine, subject to Wealth Tax?
Whether cash in hand held for business purpose liable for wealth tax (whereby, a valid evidence is produced to substantiate that the cash is held for business purpose)?
[2010] 229 CTR 52 (KER.) Smt. K.R. Ushasree
[2007] 13 SOT 446 (COCHIN TRIB) A.A. Salam
Whether cash held in Foreign Currency will be subject to wealth tax?
26
Deemed Assets (section 4)
In case of Individual, assets held –
by the spouse of such individual to whom such assets have been transferred by the individual, directly or indirectly, otherwise than for adequate consideration or in connection with an agreement to live apart, or
by a minor child, not being a minor child suffering from any disability of the nature specified in section 80U of the Income-tax Act or a married daughter, of such individual,
by a person or association of persons to whom such assets have been transferred by the individual otherwise than under an irrevocable transfer,
by the son's wife, of such individual, to whom such assets have been transferred by the individual, directly or indirectly, otherwise than for adequate consideration,
Deemed Assets (section 4)
An assessee who is a partner in a firm or a member of an AOP, there shall be included, as belonging to that assessee, the value of his interest in the assets of the firm or AOP determined in the manner laid down in Schedule III
An individual being a member of a Hindu undivided family, any property having been the separate property of the individual has been converted by the individual into property belonging to the family or been transferred by the individual, directly or indirectly, to the family otherwise than for adequate consideration
27
Deemed Assets (section 4)
The holder of an impartible estate shall be deemed to be the individual owner of all the properties comprised in the estate.
Where the assessee is a member of a co-operative society, company or other association of persons and a building or part thereof is allotted or leased to him under a house building scheme of the society, company or association, as the case may be, the assessee shall be deemed to be the owner of such building or part .
Deemed Assets (section 4)
Where a gift of money from one person to another is made by means of entries in the books of account maintained by the person making the gift or by an individual or a Hindu undivided family or a firm or an association of persons or body of individuals with whom or which he has business or other relationship, the value of such gift shall be liable to be included in computing the net wealth of the person making the gift unless he proves to the satisfaction of the Assessing Officer that the money has actually been delivered to the other person at the time the entries were made.
28
Deemed Assets (section 4)
A person—
who is allowed to take or retain possession of any building or part thereof in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882
who acquires any rights (excluding any rights by way of a lease from month to month or for a period not exceeding one year) in or with respect to any building or part thereof by virtue of any such transaction as is referred to in clause (f) of section 269UA of the Income-tax Act, 1961
Return of Net Wealth
The due date to file wealth tax return is similar to section 139(1) i.e. either 31st July or 30th September of the Assessment Year, depending upon the due date to file Income Tax return. (section 14)
The Wealth Tax Return can be filed belated (like 139(4)) within one year from end of relevant assessment year or completion of assessment whichever is earlier. (section 15)
The Wealth Tax Return can be revised, if any mistake apparent from record, within one year from end of relevant assessment year or completion of assessment whichever is earlier. (similar to section 139(5) of Income Tax Act) (section 15)
29
Return of Net Wealth
A return of net wealth which shows the net wealth
below the maximum amount which is not chargeable
to tax shall be deemed never to have been
furnished.
However, a return can be filed any time in response
to valid notice issued u/s 17 (similar to section 148
of Income Tax Act)
The new section 14B (w.e.f. 01.06.2013) says about
filing wealth tax return online.
Wealth Tax Return & Challan
Wealth Tax return has to be filed in Form BB w.e.f.
23.06.2014 [CBDT Notification 32/2014]
Wealth Tax can be paid manually or online vide
Form No. 282.
30
Interest on Late Payment of tax
Interest is leviable u/s 17B for delay
Interest is payable at the rate of 1% PM
The interest has to be calculated on the total
amount of tax payable on the net wealth and
should be paid before filing the return.
No advance tax is payable under the wealth tax.
Thus, no provisions similar to section 234B and 234C
in Wealth Tax Act.
Penalty for non-filing of Return of Net
wealth (Section 18)
There is no penalty for non-filing of return as per section 14 or for late filing of return u/s 15.
However, if the assessee is liable to file wealth tax return (where net wealth is exceeding Rs.30,00,000/-) and does not file return before issuing notice u/s 17 or assessment u/s 16 or 17, then tax liability arising in assessment will be said to be tax sought to be evaded. Penalty in such case would be ranging from 100% to 500% of tax sought to be evaded. (section 18(1)(c))
No penalty to be levied if the assessee proves that there was reasonable cause for the delay or non-filing of return.
31
Penalty for non-filing of Return of Net
wealth (Section 18)
Concealment
Explanation 4.—Where the value of any asset returned
by any person is less than seventy per cent of the value
of such asset as determined in an assessment under
section 16 or section 17, such person shall be deemed
to have furnished inaccurate particulars of such asset
within the meaning of clause (c) of this sub-section,
unless he proves that the value of the asset as returned
by him is the correct value
Time limit to issue notice for Assessment
u/s 16
The time limit to issue notice for assessment u/s 16 is
within 12 months from the end of the month in which
return is furnished.
Notice shall be served within expiry of 12 months from
the end of the month in which return is furnished.
Wherein, the return of net wealth is not furnished
u/s 14 (return within due date) or 15 (Revised
Return or Belated Return), the Assessing Office may
serve, a notice to file return of wealth
32
Assessment - Issues
Is there any time limit for issuance of notice U/s. 16(2) of the Wealth Tax Act, 1961?
Whether service of notice u/s 143(2) under Income Tax Act tantamount to service of notice u/s 16(2) of the Wealth Tax Act?
Whether non-filing of return of wealth (either u/s 14/15 of in response to notice u/s 16) will deter the A.O. from Assessment?
Time limit to issue notice for
Reassessment u/s 17
Notice for wealth escaped from assessment u/s 17 can be issued only if A.O. has reason to believe that wealth has escaped from assessment. Time limit to issue notice is as follows:
If Net Wealth believed to escape from assessment is upto Rs.10,00,000/- - within 4 years from the end of relevant assessment year.
If Net Wealth believed to escape from assessment is above Rs.10,00,000/- - within 6 years from the end of relevant assessment year.
If any asset related to Net Wealth located outside India - within 16 years from the end of relevant assessment year.
33
Time limit to issue notice for
Reassessment u/s 17
The findings of A.O. during income tax assessment
u/s 143(3) or 147 or any other proceeding can be
a valid reason to believe for wealth escaped from
assessment.
Time limit to pass an order u/s 16/17
– section 17A
Time limit to pass an order u/s 16 – within 24
months from the relevant Assessment Year
Time limit to pass an order u/s 17 – within 12
months from the end of the financial year in which
notice is served
34
Reference to Valuation Officer –
Section 16A
Where the assessment is pending;
The A.O. may refer the matter to Valuation Officer
In case where Value of Asset has been estimated by a Registered Valuer – if the A.O. considers that the estimate made by the Registered Valuer is less than its fair market value,
In other cases – if the A.O. considers its necessary to do so on account of the nature of the asset and other relevant considerations;
Or, if he is of the opinion that the fair market value of the asset exceeds the value of the asset as returned by more than 33% of the assets as returned or more than Rs.50,000
Reference to Valuation Officer –
Section 16A
Valuation Rules are binding on Valuation Officer to
follow
Assessing Officer shall complete the assessment in
conformity with the estimate of the Valuation officer.
35
Queries, if any…
--------------------------------------------------------------------------------------------------
CA. Sunil D Surana
Hand Phone – 0 99720 70607
Or
Mail me at – sdsurana@gmail.com
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