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