Wealth
tax
1
Introduction
Wealth
tax is not a very important or high revenue tax in view of various
exemptions. Wealth tax is a socialistic tax. It is not on income but
payable only because a person is wealthy.
Wealth tax is payable on net
wealth on ‘valuation date’. As per Section 2(q), valuation date is
31st March every year. It is payable by every individual, HUF and
company. Tax rate is 1% on amount by which ‘net wealth’ exceeds Rs
15 lakhs. No surcharge or education cess is payable.
No wealth-tax is
chargeable in respect of net wealth of any company registered under
section 25 of the Companies Act, 1956;
any co-operative society; any social club; any political party; and a
Mutual fund specified under section 10(23D) of the Income-tax Act
[section 45]
Net
wealth = Value of assets [as defined in section 2(ea] plus deemed assets (as
defined in section 4) less exempted assets (as defined in section 5),
less debt owed [as defined in section 2(m)].
Debt
should have been incurred in relation to the assets which are included
in net wealth of assessee. Only debt owed on date of valuation is
deductible.
In
case of residents of India, assets outside India (less corresponding
debts) are also liable to wealth tax. In case of non-residents and
foreign national, only assets located in India including deemed assets
less corresponding debts are liable to wealth tax [section 6].
Net wealth in excess
of Rs. 15,00,000 is chargeable to wealth-tax @ 1 per cent (on surcharge
and education cess).
Assessment
year - Assessment year means
a period of 12 months commencing from the first day of April every year
falling immediately after the valuation date [Section
2(d)]
All.).
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Assets
Assets
are defined in Section 2(ea) as follows.
Guest house,
residential house or commercial building - The following are treated
as “assets” - (a) Any building or land appurtenant thereto whether
used for commercial or residential purposes or for the purpose of guest
house (b) A farm house situated within 25 kilometers from the local
limits of any municipality (whether known as a municipality, municipal
corporation, or by any other name) or a cantonment board [Section
2(ea)(i)]
A residential house is not asset, if it is meant
exclusively for residential purposes
of employee who is in whole-time employment
and the gross annual salary of such employee, officer or director
is less than Rs. 5,00,000.
Any
house (may be residential house or used for commercial purposes) which
forms part of stock-in-trade of the assessee is not treated as
“asset”.
Any
house which the assessee may occupy for the purposes of any business or
profession carried on by him is not treated as “asset”.
A
residential property which is let out for a minimum period of 300 days
in the previous year is not treated as an “asset”.
Any
property in the nature of commercial establishments or complex is not
treated as an “asset”.
Motor cars -
Motor car is an “asset”, but not the following - (a) motor cars used
by the assessee in the business of running them on hire (b) motor cars
treated as stock-in-trade [Section 2(ea)(ii)]. In the case of a leasing
company, motor car is an asset.
Jewellery,
bullion, utensils of gold, silver, etc. [Section 2(ea)(iii)] - Jewellery, bullion, furniture, utensils and 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 are treated as “assets” [Section 2(ea)(ii)]
For this purpose, “jewellery”
includes ornaments made of gold, silver, platinum or any other precious
metal or any alloy containing one or more of such precious metals, and also precious
or semi-precious stones, whether or not set in any furniture, utensils
or other article or worked or sewn into any wearing apparel.
Where
any of the above assets (i.e., jewellery, bullion, utensils of
gold, etc.) is used by an assessee as stock-in-trade, then such asset is
not treated as “assets” under section 2(ea)(iii).
Yachts,
boats and aircrafts -
Yachts, boats and aircrafts (other than those used by the assessee for
commercial purposes) are treated as “assets” [Section 2(ea)(iv)]
Urban
land -
Urban land is an “asset” [Section 2(ea)(v)]
Urban
land means land situated in the area which is comprised within the
jurisdiction of a municipality and which has a population of not less
than 10,000 according to the last preceding census.
Land occupied by any
building which has been constructed with the approval of the appropriate
authority is not ‘asset’.
Any unused land held by the assessee for
industrial purposes for a period of 2 years from the date of its
acquisition by him is not an asset. Any land held by the assessee as
stock-in-trade for a period of 10 years from the date of its acquisition
by him is also not an asset.
Cash
in hand -
In case of individual and HUF, cash
in hand on the last moment of the valuation date in excess of Rs. 50,000
is an ‘asset’. In case of companies, any amount not recorded in
books of account is ‘asset’ [Section
2(ea)(vi)]
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Deemed assets
Often,
a person transfers his assets in name of others to reduce his liability
of wealth tax. To stop such tax avoidance, provision of ‘deemed
asset’ has been made. In computing the net wealth of an assessee, the
following assets will be included as deemed assets u/s 4.
Assets
transferred by one spouse to another - The asset is transferred
by an individual after March 31, 1956 to his or her spouse, directly or
indirectly, without adequate consideration or not in connection with an
agreement to live apart will be ‘deemed asset’ [Section 4(1)(a)(i)]
If
an asset is transferred by an individual to his/her spouse, under an
agreement to live apart, the provisions of section 4(1)(a)(i)
are not applicable. The expression “to live apart” is of wider
connotation and even the voluntary agreements to live apart will fall
within the exceptions of this sub-clause.
Assets
held by minor child -
In computing the net wealth of an individual, there shall be included
the value of assets which on the valuation date are held by a minor
child (including step child/adopted child but not being a married
daughter) of such individual [Section
4(1)(a)(ii)]
The net wealth of
minor child will be included in the net wealth of that parent whose net
wealth [excluding the assets of minor child so includible under section
4(1)] is greater.
Assets
transferred to a person or an association of persons - An asset transferred by an
individual after March 31, 1956 to a person or an association of person,
directly or indirectly, for the benefit of the transferor, his or her
spouse, otherwise than for adequate consideration, is ‘deemed asset’
of transferor [Section 4(1)(a)(iii)]
Assets
transferred under revocable transfers -
The asset is transferred by an individual to a person or an association
of person after March 31, 1956, under a revocable transfer is ‘deemed
asset’ of transferor [Section 4(1)(a)(iv)]
Assets
transferred to son’s wife [Section
4(1)(a)(v)] - The asset transferred by an individual after May 31, 1973,
to son’s wife, directly or indirectly, without
adequate consideration will be ‘deemed asset’ of transferor
[Section 4(1)(a)(iv)]
Assets
transferred for the benefit of son’s wife -
If the asset is transferred by an individual after May 31, 1973, to a
person or an association of the immediate or deferred benefit of son’s
wife, whether directly or indirectly, without adequate consideration, it
will be treated as ‘deemed asset’ of the transferor [Section 4(1)(a)(vi)].
Interest
of partner- Where
the assessee (may or may not be an individual) is a partner in a firm or
a member of an association of persons, the value of his interest in the
assets of the firm or an association shall
be included in the net wealth of the partner/member. For this purpose,
interest of partner/member in the firm or association of persons should
be determined in the
manner laid down in Schedule III to the Wealth-tax Act
[Section 4(1)(b)].
Admission
of minor to benefits of the partnership firm - If a minor is admitted to
the benefits of partnership in a firm, the value of his interest in the
firm shall be included in the net wealth of parent of minor in
accordance with the provisions of section 4(1)(a)(ii) [see
para 546.2]. It will be determined in the manner specified in Schedule
III.
Conversion
by an individual of his self-acquired property into joint family
property - If an
individual is a member of a Hindu undivided family and he converts his
separate property into property belonging to his Hindu undivided family,
or if he transfers his separate property to his Hindu undivided family,
directly or indirectly, without adequate consideration, the converted or
transferred property shall be deemed to be the property of the
individual and the value of such property is includible in his net
wealth [Section 4(1A)]
If
there was such transfer and if the converted or transferred property
becomes the subject-matter of a total or a partial partition among the
members of the family, the converted or transferred property or any part
thereof, which is received by the spouse of the transferor, is deemed to
be the asset of the transferor and is includible in his net wealth.
Gifts
by book entries - 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 a body of individuals with whom he has
business connection, the value of such gift will be included in the net
wealth of the person making the gifts, unless he proves to the
satisfaction of the Wealth-tax Officer that the money had actually been
delivered to the other person at the time the entries were made [Section
4(5A)]
Impartible
estate -
For the purpose of the Wealth-tax Act, the holder of an impartible
estate shall be deemed to be the owner of all the properties comprised
in the estate [Section 4(6)]
Property
held by a member of a housing society - Where the assessee is a member of a co-operative housing society and a
building or part thereof is allotted or leased to him, the assessee is
deemed to be the owner of such building and the value of such building
is includible in computing his net wealth. In determining the value of
such building, any outstanding instalments, payable by the assessee to
the society towards the costs of such house, are deductible as debt owed
by the assessee. The above
rules are also applicable
if the assessee is a member of a company or an association of persons
[Section 4(7)]
Property
held by a person in part performance of a contract [Section 4(8)] - 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. Similarly, a person can
acquire 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 transaction as is referred to in
section 269UA(f) of the
Income-tax Act.
In above cases, the
assets are taxable in the hands of beneficial owners, in the same manner
in which they are taxed under the Income-tax Act :
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Assets which are exempt from tax
The
following assets are exempt from wealth-tax, as per section 5.
Property
held under a trust -
Any property held by an assessee under a trust or other legal obligation
for any public purpose of charitable or religious nature in India is
totally exempt from tax. [Section 5(i)].
Business
assets held in trust, which are exempt - The following business assets held by as assessee under a trust for
any public charitable/religious trust are exempt from tax - (a) where
the business is carried on by a trust wholly for public religious
purposes and the business consists of printing and publication of books
or publication of books or the business is of a kind notified by the
Central Government in this behalf in the Official Gazette (b) the
business is carried on by an institution wholly for charitable purposes
and the work in connection with the business is mainly carried on by the
beneficiaries of the institution (c) the business is carried on by an
institution, fund or trust specified in sections 10(23B) or 20(23C) of
the Income-tax Act.
Any
other business assets of a public charitable/religious trust is not
exempt.
Coparcenary
interest in a Hindu undivided family - If the assessee is a
member of a Hindu undivided family, his interest in the family property
is totally exempt from tax [Section 5(ii)].
Residential
building of a former ruler -
The value of any one building used for the residence by a former ruler
of a princely State is totally exempt from tax [Section 5(iii)]
Former
ruler’s jewellery -
Jewellery in possession of a former ruler of a princely State, not being
his personal property which has been recognised as a heirloom is totally
exempt from tax [Section 5(iv)]
The
jewellery shall be permanently kept in India and shall not be removed
outside India except for a purpose and period approved by the Board.
Reasonable steps shall be taken for keeping that jewellery substantially
in its original shape. Reasonable facilities shall be allowed to any
officer of the Government, or authorised by the Board, to examine the
jewellery as and when necessary.
Assets
belonging to the Indian repatriates - Assets (as given below)
belonging to assessee who is a person of Indian origin or a citizen of
India, who was ordinarily residing in a foreign country and who has
returned to India with intention to permanently reside in India, is
exempt. A person shall be deemed to be of Indian origin if he, or either
of his parents or any of his grand-parents, was born in undivided India.
After
his return to India, following shall not be chargeable to tax for seven
successive assessment years -
(a) moneys brought by him into India (b) value of asset brought by him
into India (c) moneys
standing to the credit of such person in a Non-resident (External)
Account in any bank in India on the date of his return to India
and (d) value of assets acquired by him out of money referred to
in (a) and (c) above within one year prior to the date of
his return and at any time thereafter [Section 5(v)]
One
house or part of a house -
In the case of an individual or a Hindu undivided family,
a house or a part of house, or a plot of land not exceeding 500
sq. meters in area is exempt. A house is qualified for exemption,
regardless of the fact whether the house is self-occupied or let out. In
case a house is owned by more than one person, exemption is available to
each co-owner of the house [Section 5(vi)]
2 Valuation of assets
The
value of an asset, other than cash, shall be its value as on the
valuation date determined in the manner laid down in Schedule III.
Valuation
of a building -
Value of any building or land appurtenant thereto, or part thereof, is to
be made in accordance with Part B of Schedule III to the Wealth-tax Act
The first step is to
find out gross maintainable rent. Gross maintainable rent is (a) annual
rent received/receivable by the owner or annual value of the property as
assessed by local authority, whichever is higher (if the property is let
out) or (b) annual rent assessed by the local authority or if the
property is situated outside the jurisdiction of a local authority, the
amount which the owner can reasonably be expected to receive as annual
rent had such property been let (if the property is not let).
In the following
cases “actual rent” shall be increased in the manner specified below :
(a) Taxes borne by tenant (b) If property is rented, one-ninth of actual
rent will be added, if expenditure on repairs in respect of the property
is borne by the tenant (c)
Interest @ 15% on deposit given by tenant or difference (d) Premium
received as consideration for leasing of the property or any
modification of the terms of the lease will be divided over the number
of years of the period of the lease and will be added to ‘actual
rent’ (d) If the derives any benefit or perquisite as consideration
for leasing of the property or any modification of the terms of the
lease), the value of such benefit or perquisite shall be added to actual
rent.
Net
maintainable rent is determined by deducting from the gross maintainable
rent (a) the amount of
taxes levied by any local authority in respect of property (deduction is
available even if these are to be borne by the tenant) ; and (b) A
sum equal to 15% of gross maintainable rent.
The
net maintainable rent is finally capitalized to arrive as value of net
asset.. This can be done by multiplying the net maintainable rent by
12.5. If the property is constructed on leasehold land, net maintainable
rent is to be multiplied by 10 when the unexpired period of lease of
such land is 50 years or more and multiplied by 8 where the unexpired
period of lease of such land is less than 50 years).
If a property is
acquired/constructed after March 31, 1974, then the value of the house
property is determined as above. Original cost of
construction/acquisition plus cost of improvement of the house
property is calculated. The
higher of the above is taken as capitalised value of net maintainable
rent. This exception is applicable in respect one house property. The
cost of acquisition/construction (plus cost of improvement) does
not exceed Rs. 50 lakh, if the house is situated at Bombay, Calcutta,
Delhi and Madras (Rs. 25 lakh at any other place).
If
unbuilt area of the plot of land on which the property is built exceeds
the specified area, premium is to be added to the capitalised value
determined above.
Valuation of self-occupied
property - If
assessee owns a house (or a part of the house), being an independent
residential unit and is used by the assessee exclusively for his
residential purposes throughout 12 months ending on the valuation date,
valuation will be as per provisions of section 7(2).
Assessee can either take value of
the house as determined above on the valuation date relevant for the
current assessment year or he take value of the house, as determined
above, on the first valuation date next following the date on which he
became the owner or the valuation relevant for the assessment year
1971-72, whichever is later. The choice is of the assessee.
Where the house has been
constructed by the assessee, he shall be deemed to have become the owner
thereof on the date on which the construction of such house was
completed.
Valuation
of assets of business - If
the assessee is carrying on a business for which accounts are maintained
by him regularly, the net value of the assets of the business as a
whole, having regard to the balance sheet of such business on the
valuation date, is taken as value of such assets [Part D, Schedule III].
(A)
The assets are valued as follows - Depreciable assets -
Written down value, plus 20%, Non-depreciable assets (other than
stock-in- trade) - Book value, plus 20%, Closing stock -
Value adopted for the purpose of income-tax, plus 20%.
(B) Then
value of house property, life interest, jewellery and other assets is
calculated as per other provisions of Wealth Tax Act.
Higher of A or B is taken as
value of assets.
Value of interest in firm
or association of persons - The net wealth of the
firm on the valuation date is ascertained.. For determining the net
wealth of the firm (or association), no account shall be taken of the
exemptions given by section 5. The portion of the net wealth as is equal
to the amount of the capital of the firm or association is allocated
amongst the partners or the members in the proportion in which capital
has been contributed by them.
The residue of the net wealth is
allocated amongst the partners or the members in accordance with the
agreement of the partnership or association of persons for the
distribution of assets in the event of dissolution of the firm or
association or in the absence of such agreement, in the proportion in
which the partners (or members) are entitled to share profits [Part E,
Schedule III]
Value of life interest -
The value of life interest of an
assessee shall be determined as per Part F, Schedule III. Average net
annual income of the assessee derived from the life interest during 3
years ending on the valuation date is calculated. While computing net
annual income, expenses incurred on the collection of such income
(maximum of 5% of the average of annual gross income) shall be deducted.
This is multiplied as per formula prescribed to arrive at value of
asset.
Valuation of jewellery
- The value of jewellery shall be
estimated to be the price which it would fetch if sold in the open
market on the valuation date (i.e., fair market value). Where
the value of jewellery does not exceed Rs. 5,00,000, a
statement in Form No. O-8A is to be submitted. Where
the value
of the jewellery
exceeds Rs. 5,00,000,
a report of a registered valuer in Form No.
O-8 should be submitted. The report is not binding on assessing officer
(Valuation Officer) and he can determine fair market value of jewellery.
The
value of jewellery determined by the Valuation Officer for any
assessment year shall be taken to be the value of such jewellery for the
subsequent four assessment years subject to the prescribed adjustments.
Valuation
of any other asset - The
value of any asset, other than cash (being an asset which is not covered
in above paras) shall be estimated either by the Assessing Officer
himself or by the Valuation Officer if reference is made to him under
section 16A. In both these cases, the value shall be estimated to be the
price which it would fetch if sold in the open market, on the valuation
date. If the asset is not saleable in the open market, the value shall
be determined in accordance with guidelines or principles specified by
the Board from time to time by general or special order.
3 Other issues relating to wealth tax
Charitable
or religious trusts - A
trust can forfeit exemption
for any of the following reasons - (a) any part of the trust’s
property or any income of the trust, including income by way of
voluntary contributions, is used for the benefit of the settlor, the
trustee, their relatives etc.; or
(b) any part of the income of the trust, created on or after April 1,
1962, including income by way of voluntary contributions, enures
directly or indirectly, for the benefit of any of the persons referred
to in section 13(3) of the Income-tax Act ;
or (c) any funds of the trust are invested or deposited or any
shares in a company are held by the trust in contravention of the
investment pattern for trust funds laid down in section 11(5) of the
Income-tax Act.
In
such case, tax shall be leviable upon and recoverable from the trustee
or manager in respect of the property held by him under trust at the
rate of tax applicable to a resident in India.
These provisions are not
applicable in the case of a scientific research association [Section 10(21)
of the Income-tax Act] and in the case of any institution, fund or trust
referred to in section 10(22), (22A), (22B) or (23C)
of the Income-tax Act in specified situations [Section 21A]
Association of persons
where shares of members are indeterminate/unknown -
If assets chargeable to wealth-tax
are held by an association of persons and the individual shares of the
members in the income or assets of the association are indeterminate or
unknown, wealth-tax is levied to the same extent as it would be leviable
upon and recoverable from an individual who is citizen of India and
resident in India [Section 21AA]
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Return of wealth and assessment
Every person is required to file
with the Wealth-tax Officer a return of net wealth in Form BA, if his
net wealth or net wealth of any other person in respect of which he is
assessable under the Act on the valuation date is of such an amount as
to render him liable to wealth-tax. Return can be filed on or before the
“due date” specified under section 139 of the Income-tax Act.
Return
in response to a notice - In
the case of any person who, in the opinion of Wealth-tax Officer, is
assessable to tax, the Wealth-tax Officer may, before the end of the
relevant assessment year, issue a notice requiring him to furnish,
within 30 days from the date of service of such notice, a return of net
wealth in the prescribed form.
Assessment
- The assessee is required to pay
the tax before filing of the return and such return is to be accompanied
by the proof of such payment. Provisions of regular assessment, as
applicable under Income Tax, will apply to wealth tax also.
Interest
or penalty and prosecution -
Interest @ 1% per month is payable for failure to pay wealth tax on due
date. Penalty and prosecution provisions also apply.
Mr. A has the following assets on
31-3-2008:
