mf0012 taxation management set1

MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks)

Taxation Management– 4 Credits Book ID-B1210 30th September 2010

Sikkim Manipal University of 31 Directorate of Distance Learning Naseer Khan Pathan - 531010763

Name Naseer Khan Pathan Roll. Number / Registration Number 531010763 Program MBA Semester-3 / Spring 2010 Subject Taxation Management Code MB0012 Learning Center Global Institute , Kingdom of Bahrain Center code 02519




Q.1 Tax evasion is a menace to the people, economy and the country. In the wake of

recent Swiss Bank Account scandal give your views on the following:

a. How does it affect Indian economy and the growth prospects?

b. Does black money cause inflation? [10 Marks]

Solution:

In view of the facts set out so far, it becomes necessary to look at the extent of compliance of

tax laws in India. Though many estimates of black money have been coming forth, an attempt was

made to determine the extent of tax evasion in the Mumbai Income Tax charge, which collected about

35% of the Income Tax collections of the country and 43% of the corporate tax collections. The study

was made on the basis of results of the survey and search cases for all the years covered by such

cases. It came to light that none of the taxpayers concerned declared for taxation purposes anything

more than 25% of their true incomes after 1999. The figure arrived at was given to the press

specifying the basis on which it was so calculated. Not a single protest was received from any of the

taxpayer, including companies. The said figure was thereafter cited for some more time, and even

thereafter no protest was received. There was, therefore, every reason to believe this estimate.

However, there appear to be higher tax evasion in the case of companies. Some of the companies

have shown their entire capital as having come from the countries regarded as Tax Havens.

Considering the extent of Indian monies stacked in Swiss Bank Accounts, and bank accounts of the

developed countries, and comparing the same with the annual income tax collections of the Central

Government, it appears that the real income admitted for taxation purposes is less than 25% . The

extent of evasion appears to be very much higher in the case of companies as the companies have

resorted to evolution of tax evasion devices in the accounts and such methods have not yet

been properly investigated by the Income Tax Department. There are companies which have

camouflaged their capital investments and shown it in the books as if it is explained capital for

income tax purposes.

The Indian Scenario - Peculiar problems of tax evasion:

It will be appropriate at this stage to highlight some of the key problems from the view point of

computerisation in India:




(a) Investments in Real Estate: The one field where black monies have been invested on the largest

scale is that of real estate properties. Lands were sold for only 20% of their real values and the

balance 80% given in cash out of the tax evaded monies, ever since 1947. But later on when the tax

rates were lowered to 30% for individuals and 35% for companies, the black portion got reduced to

40%. It may be a difficult task to trace such black transactions through the computer system,

suggested for adoption on the U.S. pattern for India. But it is common knowledge that the black

monies invested in land have been reinvested in bank accounts, shares and in other properties, apart

from real estate property. It is now confirmed knowledge that in regard to buildings constructed,

only 40% of the cost is shown to income tax. It is possible to detect such investment by analysis of the

data obtained from the trade and industry governing commodities used for construction of buildings.

Further, as all the transactions relating to sale of real estate properties are now recorded in

computers maintained by the Registration Offices all over the country, and if the same data is

brought on the computers of the Income Tax Department, it should be possible to know many

owners of property who have not filed their tax returns at all so far. In India, there are only 3 corers

of tax assesses at present, and thus a large number of people with taxable income have evidently

chosen not to file income tax returns.

(b) Gold and Jewellery Holdings: India is having the largest private holdings of gold and diamond

jewellery among all the countries of the world. In the searches conducted by the Income Tax

Department, huge unaccounted cash balances and gold and diamond jewellery have been found

in the bank lockers maintained by tax payers in bogus names and in their own names. At current

market rates, purchases of gold, silver and diamonds may now reach about Rs. 80,000 crores a year.

Gold and diamond traders are mostly keeping their transactions outside bank accounts. They are also

giving vouchers to the effect that raw gold has been given by the customers, though; in fact, it would

have come from the traders themselves. Therefore, it is necessary to introduce a law requiring them

to transact only through bank cheques and issue computerized bills, to facilitate proper flow of

information to the computer system of the tax department.

(c) Shares, Mutual Funds, etc: There are vast investments in shares and debentures, travelers’

cheques, mutual funds and the primary bonds issued by the Reserve Bank of India. The data

regarding company shares and other investments mentioned can be easily transferred to the

computer system of the Income Tax Department. The Mumbai Stock Exchange is having a separate




computer system with complete data on daily transactions and the Income Tax Department has so

far not made use of such data. There is also the data generated in the computers of the organizations

in charge of demat of shares. Like-wise, the data on post office savings and other accounts is easy to

be brought on the computers of the tax department for verification with the individual returns,

which are available with the Government itself.

d) Undisclosed Stock in-trade held by companies and traders : Many firms and individuals have

also a tendency to keep undisclosed business assets like cars and private assets, unaccounted cash

holdings etc., They have ability to give extensive bribes to protect business and other interests. All

such practices would varnish once fear is caused among the tax payers about the use of computerized

data for taxation purposes.

(e) Benami Investments: Benami investments are typical of the Indian economy. Even big

companies have indulged in such practices to impart total secrecy to their undisclosed

accounts. It may be difficult to determine whether the investment found in the computers of the

income tax department is benami or not, and benami shares will have to be traced sometimes by

extensive studies to be conducted by teams of revenue officers. This problem requires

comprehensive study because it is peculiar to the Indian Taxation System.

(f) Swiss Bank and other undisclosed bank accounts held abroad: Swiss Bank Accounts are

shrouded in secrecy and hence no information will be available to the computer system of the

Income Tax Department. The amounts in Swiss Bank Accounts, which are held in foreign currency,

have been utilized by big companies and other taxpayers in India to import huge machineries at

vastly under invoiced prices. Such practices enable payment of secret trade commissions in

foreign currency and unaccounted funds in Indian currency to those contesting general

elections. Several major companies have converted Swiss Account holdings into benami shares and

debentures. The large amounts of Swiss Bank deposits have, thus, been utilized and every year, there

are additions to the Swiss Bank Account holdings.

b. Does black money cause Inflation?




Illegally earned money is called black money. It is the result of hoarding, smuggling, tax evasion and

dealing in immovable property for which the consideration is paid in black. It has been beyond the

control of the Government. The black money has already created a serious problem in our country.

The Indian economy stands badly shattered because of the huge amount of this tainted wealth lying

in the coffers of the rich. It has given rise to parallel economy operating in the country. As a result,

the prices continue to rise in spite of all government efforts to control them. The poor go on

becoming poorer while the rich go on becoming richer. The gap between the haves and the have not’s

is widening every day.

Black money is used by the rich in various evil activities. They use this money for corrupting and

demoralizing social and political life. They display it in ostentatious living and wasteful luxuries.

They bribe Government officers and lead them to corruption and dishonesty. They purchase political

bosses and control the strings of the Government. Thus the entire social structure comes to be badly

polluted.

It is difficult to form an exact idea of the amount of black money in circulation in the country.

Searches and raids by Income Tax authorities are conducted from time to time. Such raids yield

crores of rupees. But the people are, at times, cleverer than the Government. They seek the aid of the

best legal brains and get the law twisted in their favour. Most of the offenders use all their money

and influence and go scot free whenever they are caught. The Government has, at various times,

announced some voluntary disclosure schemes for unearthing the black money. These schemes have

proved successful to a very limited extent. What has come to the surface is believed only to be the tip

of the huge iceberg lying hidden underneath. The 1997 Voluntary Disclosure Scheme announced by

the Government of India unearthed a big amount of black money as the tax rate in this scheme had

been reduced to thirty per cent.

The black money, according to some reliable estimates has gone up to Rs. 10,000 crores in our

country. It is to a great extent responsible for a great rise in prices because the purchasing power of

the people has increased. People having black money are leading a life of luxury whereas the poor

people are leading a miserable life. Some leading economists of the country have suggested stringent

measures to the government to unearth black money but successive governments have been




rejecting those measures. The vested interests always stand in the way of effective measures and get

them diluted.

The government of the day appears to be doing its best to unearth black money. A number of steps

have been taken. Taxation structure and system have been made easier. At different times, the

government has brought forward several schemes and asked the people to declare their wealth.

There has been some success. A lot soil remains to be done.

It must be clear to all that the nation cannot shut her eyes to this state of affairs. Smugglers and

black-marketers can no longer be tolerated. They are striking at the very roots of our democratic

structure. All steps to weed the black money out of circulation must be taken as early as possible. The

government must come down with a heavy hand on smugglers, tax evaders, black-marketers and

hoarders. Black money is a curse. It must be rooted out from public life.




Q.2 Detail death cum retirement gratuity under section 17 (1) iii of IT act. Is

commutation of pension a viable option in terms of tax planning? [10 Marks]

Solution:

Death-cum-retirement gratuity or any other gratuity which is exempt to the extent specified from

inclusion in computing the total income under clause (10) of Section 10. Any death-cum-retirement

gratuity received under the revised Pension Rules of the Central Government or, as the case may be,

the Central Civil Services (Pension) Rules, 1972, or under any similar scheme applicable to the




members of the civil services of the Union or holders of posts connected with defence or of civil posts

under the Union (such members or holders being persons not governed by the said Rules) or to the

members of the all-India services or to the members of the civil services of a State or holders of civil

posts under a State or to the employees of a local authority or any payment of retiring gratuity

received under the Pension Code or Regulations applicable to the members of the defence

service. Gratuity received in cases other than above on retirement, termination etc is exempt

up to the limit as prescribed by the Board. Under the provisions of Section 10(10) of the IT Act,

any death-cum-retirement gratuity of a government servant is completely exempt from income tax.

However, in respect of private sector employees gratuity received on retirement or on becoming

incapacitated or on termination or any gratuity received by his widow, children or dependants on his

death is exempt subject to certain conditions. The maximum amount of exemption is Rs. 3,

50,000; Of course, this is further subject to certain other limits like the one half-month's salary for

each year of completed service, calculated on the basis of average salary for the 10 months

immediately preceding the year in which the gratuity is paid or 20 months' salary as calculated. Thus,

the least of these items is exempt from income tax under Section 10(10).

Any payment in commutation of pension received under the Civil Pension(Commutation) Rules

of the Central Government or under any similar scheme applicable to the members of the civil

services of the Union, or holders of civil posts/posts connected with defence, under the Union, or

civil posts under a State, or to the members of the All India Services/Defence Services, or, to the

employees of a local authority or a corporation established by a Central, State or Provincial Act, is




exempt under sub-clause (i) of clause (10A) of Section 10. As regards payments in commutation of

pension received under any scheme of any other employer, exemption will be governed by the

provisions of sub-clause (ii) of clause (10A) of section 10. Also, any payment in commutation of

pension received from a Regimental Fund or Non-Public Fund established by the Armed Forces of the

Union referred to in Section 10(23AAB) is exempt under sub-clause (iii) of clause (10A) of Section 10.

The entire amount of any payment in commutation of pension by a government servant or any

payment in commutation of pension from LIC [Get Quote] pension fund is exempt from income tax

under Section 10(10A) of IT Act.

However, in respect of private sector employees, only the following amount of commuted

pension is exempt, namely: (a) Where the employee received any gratuity, the commuted value of

one-third of the pension which he is normally entitled to receive; and (b) In any other case,

the commuted value of half of such pension. It may be noted here that the monthly pension

receivable by a pensioner is liable to full income tax like any other item of salary or income and no

standard deduction is now available in respect of pension received by a tax payer.

Q.3 Explain the essential conditions to be satisfied by a firm to be assessed as firm

under Section 184? [10 Marks]

Solution:

Position of Firm under the Income Tax Act

Legally, a partnership firm does not have a separate entity from that of the partners constituting the

firm as the partners are the owners of the firm. However, a firm is treated as a separate tax entity

under the Income Tax Act. Salient features of the assessment of a firm are as under:

1. A firm is treated as a separate tax entity.

2. While computing the income of the firm under the head “Profits and gains of

business or profession”, besides the deductions which are allowed u/ss 30 to 37, special

deduction is allowed to the firm on account of remuneration to working partners and

interest paid to the partners. However, it is subject to certain limits laid down u/s 40 (b).

3. Share of profit which a partner receives from the firm (after deduction of

remuneration and interest allowable) shall be fully exempt in the hands of the partner.




However, only that part of the interest and remuneration which was allowed as a deduction

to the firm shall be taxable in the hands of the partners in their individual assessment under

the head ‘profits and gains of business or profession.’

4. The firm will be taxed at a flat rate of 30% plus education cess @ 3% plus for the financial

year 2010-11.

5. The firm will be assessed as a firm provided conditions mentioned under Section 184 are

satisfied. In case these conditions are not satisfied in a particular assessment year, the firm

will be assessed as affirm, but no deduction by way of payment of interest, salary, bonus,

commission or remuneration, by whatever name called, made to the partner, shall be

allowed in computing the income chargeable under the head “profits and gains of business

or profession” and such interest, salary, bonus, commission or remuneration shall not be

chargeable to income tax in the hands of the partner.

Assessment of firm

From point (5) stated above, it can be concluded that for taxation purposes, a firm can be of two

types:

1. Firm assessed as firm (provided conditions mentioned u/s 184 are satisfied).and the firm

shall be eligible for deduction on account of interest, salary etc while computing its income

under the head business and profession). However, it will be subject to the maximum of the

limit specified under Section 40(b)

2. If the prescribed conditions are not satisfied, no deduction shall be allowed to the firm on

account of such interest, salary, bonus etc.

Essential conditions to be satisfied by a firm to be assessed as firm (Section 184)

1. In the first assessment year: The firm will be assessed as a firm, also known as ‘Firm Assessed as

Such’ (FAAS) if the following conditions are satisfied:

(a) Partnership is evidenced by an instrument i.e. there is a written document giving the terms

of partnership.

(b) The individual share of the partners is specified in that instrument.




(c) Certified copy of partnership deed must be filed: A certified copy of the said instrument of

partnership shall accompany the return of income in respect of the assessment year for

which the assessment as a firm is first sought.

Where certified copy is not filed with the return there is no provision for condonation of delay.

However where the return itself is filed late then there is no problem if the certified copy is filed

along with such return as the condition that it shall accompany the return of income is satisfied.

Further Delhi ITAT in the case of Ishar Dass Sahini & Sons v CIT held that where uncertified Photostat

copy of the instrument of partnership is submitted along with the return of income and the certified

copy is produced at the time of assessment, it will satisfy this condition.

2. In the subsequent assessment years: If the above three conditions are satisfied the firm will be

assessed as such (FAAS) in the first assessment year. Once the firm is assessed as firm for any

assessment year, it shall be assessed in the same capacity for every subsequent year if there is no

change in the constitution of the firm or the share of the partners.

Where any such change had taken place in the previous year, the firm shall furnish a certified copy of

the revised instrument of partnership along with the return of income for the assessment year

relevant to such previous year. Read the box for some important points to be considered in this

regard.

Circumstance where the firm will be assessed as a firm but shall not be eligible for deduction on

account of interest, salary, bonus, etc. [Section 184(5)]




The firm will be assessed as a firm but shall not be eligible for any deduction on account of interest,

salary and bonus etc if there is failure on the part of the firm as is mentioned in Section 144 (relating

to Best Judgment Assessment) and where the firm does not comply with the three conditions

mentioned under Section 184.

Q.4 List out the steps to compute total income? [10 Marks]

Solution:

Step 1 – Determination of residential status

The residential status of a person has to be determined to ascertain which income is to be included in

computing the total income. The residential statuses as per the Income- tax Act are shown below –

In the case of an individual, the duration for which he is present in India determines his residential

status. Based on the time spent by him, he may be (a) resident and ordinarily resident, (b) resident

but not ordinarily resident, or (c) non-resident. The residential status of a person determines the

taxability of the income. For e.g., income earned outside India will not be taxable in the hands of a

non-resident but will be taxable in case of a resident and ordinarily resident.

Step 2 – Classification of income under different heads

The Act prescribes five heads of income. These are shown below – HEADS OF INCOME SALARIES

INCOME FROM PROFITS AND GAINS CAPITAL INCOME

HOUSE PROPERTY OF BUSINESS OR GAINS FROM OTHER PROFESSION SOURCES

These heads of income exhaust all possible types of income that can accrue to or be received by the

tax payer. Salary, pension earned is taxable under the head “Salaries”. Rental income is taxable

under the head “Income from house property”. Income derived from carrying on any business or

profession is taxable under the head “Profits and gains from business or profession”. Profit from sale

of a capital asset (like land) is taxable under the head “Capital Gains”. The fifth head of income is the




residuary head under which income taxable under the Act, but not falling under the first four heads,

will be taxed. The tax payer has to classify the income earned under the relevant head of income.

Step 3 - Exclusion of income not chargeable to tax

There are certain incomes which are wholly exempt from income-tax e.g. agricultural income. These

income have to be excluded and will not form part of Gross Total Income. Also, some incomes

are partially exempt from income-tax e.g. House Rent Allowance, Education Allowance. These

incomes are excluded only to the extent of the limits specified in the Act. The balance income over

and above the prescribed exemption limits would enter computation of total income and have to be

classified under the relevant head of income.

Step 4 - Computation of income under each head

Income is to be computed in accordance with the provisions governing a particular head of income.

Under each head of income, there is a charging section which defines the scope of income chargeable

under that head. There are deductions and allowances prescribed under each head of income. For

example, while calculating income from house property, municipal taxes and interest on loan

are allowed as deduction. Similarly, deductions and allowances are prescribed under other

heads of income. These deductions etc. have to be considered before arriving at the net income

chargeable under each head

Step 5 – Clubbing of income of spouse, minor child etc.

In case of individuals, income-tax is levied on a slab system on the total income. The tax system is

progressive i.e. As the income increases, the applicable rate of tax increases. Some taxpayers in the

higher income bracket have a tendency to divert some portion of their income to their spouse, minor

child etc. to minimize their tax burden. In order to prevent such tax avoidance, clubbing provisions

have been incorporated in the Act, under which income arising to certain persons (like spouse, minor

child etc.) have to be included in the income of the person who has diverted his income for the

purpose of computing tax liability.




Step 6 – Set-off or carry forward and set-off of losses

An assessee may have different sources of income under the same head of income. He might have

profit from one source and loss from the other. For instance, an assessee may have profit from his

textile business and loss from his printing business. This loss can be set-off against the profits of

textile business to arrive at the net income chargeable under the head “Profits and gains of

business or profession”. Similarly, an assessee can have loss under one head of income, say, Income

from house property and profits under another head of income, say, Profits and gains of business or

profession. There are provisions in the Income-tax Act for allowing inter-head adjustment in

certain cases. Further, losses which cannot be set-off in the current year due to inadequacy of eligible

profits can be carried forward for set-off in the subsequent years as per the provisions contained in

the Act.

Step 7 – Computation of Gross Total Income.

The final figures of income or loss under each head of income, after allowing the deductions,

allowances and other adjustments, are then aggregated, after giving effect to the provisions for

clubbing of income and set-off and carry forward of losses, to arrive at the gross total income.

Step 8 – Deductions from Gross Total Income

There are deductions prescribed from Gross Total Income. These deductions are of three types.

Step 9 – Total income

The income arrived at, after claiming the above deductions from the Gross Total Income is

known as the Total Income. It is also called the Taxable Income. It should be rounded off to the

nearest Rs. 10.




Step 10 – Application of the rates of tax on the total income

The rates of tax for the different classes of assesses are prescribed by the Annual Finance Act.

Taxation For individuals, HUFs etc., there is a slab rate and basic exemption limit. At present, the

basic exemption limit is Rs. 1, 00,000 for individuals. This means that no tax is payable by individuals

with total income of up to Rs. 1, 00,000. Those individuals whose total income is more than Rs. 1,

00,000 but less than Rs. 1, 50,000 have to pay tax on their total income in excess of Rs. 1,00,000 @

10% and so on. The highest rate is 30%, which is attracted in respect of income in excess of Rs. 2,

50,000. For firms and companies, a flat rate of tax is prescribed. At present, the rate is 30% on the

whole of their total income. The tax rates have to be applied on the total income to arrive at the

income-tax liability.

Step 11 – Surcharge

Surcharge is an additional tax payable over and above the income-tax. Surcharge is levied as a

percentage of income-tax. At present, the rate of surcharge for firms and domestic companies is 10%

and for foreign companies is 2.5%. For individuals, surcharge would be levied @10% only if their

total income exceeds Rs. 10 lakhs.

Step 12 – Education cess

The income-tax, as increased by the surcharge, is to be further increased by an additional

surcharge called education cess@2%. The Education cess on income-tax is for the purpose of

providing universalized quality basic education. This is payable by all assesses who are liable to pay

income-tax irrespective of their level of total income.

Step 13 - Advance tax and tax deducted at source

Although the tax liability of an assessee is determined only at the end of the year, tax is required to be

paid in advance in certain installments on the basis of estimated income. In certain cases, tax is

required to be deducted at source from the income by the payer at the rates prescribed in the Act.




Such deduction should be made either at the time of accrual or at the time of payment, as prescribed

by the Act. For example, in the case of salary income, the obligation of the employer to deduct tax at

source arises only at the time of payment of salary to the employees. Such tax deducted at source has

to be remitted to the credit of the Central Government through any branch of the RBI, SBI or any

authorized bank. If any tax is still due on the basis of return of income, after adjusting advance tax

and tax deducted at source, the assessee has to pay such tax (called self-assessment tax) at the time

of filing of the return Taxation

Q.5 Detail the important provisions under wealth tax act? [10 Marks]

Solution:

Important Provisions under Wealth Tax Act

One should try to understand the following provisions related to wealth tax act without which would

not be able to get exact implications of wealth tax act.

Asset must belong to the Assessee

The above six assets will be included in the net wealth of the assessee only when they belong to him.

Mere possession or joint possession unaccompanied by the right to, or ownership of, property would

therefore, not bring the property within the definition of net wealth for it would not be an asset

belonging to the assessee.

Assets must be held by the Assessee on the Valuation Date

If the asset has been spent, lost, destroyed or transferred by the assessee before the valuation date, it

is not held by the assessee on the valuation date. Hence the value of such asset shall not be included

in the net wealth of the assessee.

Assets required being included, though these may belong to others [Section 4]

Individual

In computing the net wealth of an individual, there shall be included, as belonging to that individual,

the value of assets which on the valuation date are held:




i) 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

ii) 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,

or

iii) by a person or association of persons to whom such assets have been transferred by the

individual directly or indirectly, otherwise than for adequate consideration for the

immediate or deferred benefit of the individual, his or her spouse, or

iv) by a person or association of persons to whom such assets have been transferred by the

individual otherwise than under an irrevocable transfer, or

v) by the son's wife, of such individual, to whom such assets have been transferred by the

individual, directly or indirectly, on or after the 1st day of June, 1973, otherwise than for

adequate consideration, or

vi) by a person or association of persons to whom such assets have been transferred by the

individual, directly or indirectly, on or after the 1st day of June, 1973, otherwise than for

adequate consideration for the immediate or deferred benefit of the son's wife, of such

individual or both, whether the assets referred to in any of the sub-clauses aforesaid are

held in the form in which they were transferred or otherwise:

Provided that where the transfer of such assets or any part thereof is either chargeable to gift-tax

under the Gift-tax Act, 1958 (18 of 1958) or is not chargeable under Section 5of that Act, for any

assessment year commencing after the 31st day of March, 1964, but before the 1st day of April, 1972

the value of such assets or part thereof, as the case may be, shall not be included in computing the net

wealth of the individual.

A partner in a firm or a member of an association of persons

In the case of an assessee who is a partner in a firm or a member of an association of persons (not

being a co-operative housing society), there shall be included, as belonging to that assessee, the value

of his interest in the assets of the firm or association determined in the manner laid down in

Schedule III: Provided that where a minor is admitted to the benefits of partnership in a firm, the

value of the interest of such minor in the firm, determined in the manner specified above, shall be




included in the net wealth of the parent of the minor, so far as may be, in accordance with the

provisions of the third proviso to clause (a).

An Individual being a Member of a Hindu undivided family

Where, in the case of an individual being a member of a Hindu undivided family, any property having

been the separate property of the individual has, at any time after the31st day of December, 1969,

been converted by the individual into property belonging to the family through the act of impressing

such separate property with the character of property belonging to the family or throwing it into the

common stock of the family or been transferred by the individual, directly or indirectly, to the family

otherwise than for adequate consideration (the property so converted or transferred being

hereinafter referred to as the converted property), then, notwithstanding anything contained in any

other provision of this Act or in any other law for the time being in force, for the purpose of

computing the net wealth of the individual under this Act for any assessment year commencing on or

after the 1st day of April, 1972:

a) The individual shall be deemed to have transferred the converted property, through the family, to

the members of the family for being held by them jointly;

b) The converted property or any part thereof shall be deemed to be assets belonging to the

individual and not to the family;

c) where the converted property has been the subject-matter of a partition (whether partial or total)

amongst the members of the family, the converted property or any part thereof which is received by

the spouse of the individual on such partition shall be deemed to be assets transferred indirectly by

the individual to the spouse and the provisions of sub-section (1) shall, so far as may be, apply

accordingly: Provided that the property referred to in clause (b) or clause (c) shall, on being included

in the net wealth of the individual, be excluded from the net wealth of the family or, as the case may

be the spouse of the individual.

Membership under a house building scheme [Section 4(7)]

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, notwithstanding anything




contained in this Act or any other law for the time being in force, be deemed to be the owner of such

building or part and the value of such building or part, shall be included in computing the net wealth

of the assessee; and, in determining the value of such building or part, the value of any outstanding

installments of the amount payable under such scheme by the assessee to the society, company or

association towards the cost of such building or part and the land appurtenant thereto shall, whether

the amount so payable is described as such or in any other manner in such scheme, be deducted as a

debt owed by him in relation to such building or part.

Building/Right in building acquired in special cases [Section 4(8)]

A person:

a) 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 (4 of 1882);

b) 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 (43 of 1961),

shall be deemed to be the owner of that building or part thereof and the value of such building or

part shall be included in computing the net wealth of such person.

Assets held by a minor child [Provisos 2 and 3 to Section 4(1) (a)]

Provided further that nothing contained in sub-clause (ii) shall apply in respect of such assets as have

been acquired by the minor child out of his income referred to in the provision to sub-section (1A) of

Section 64 of the Income-tax Act and which are held by him on the valuation date:

Provided also that where the assets held by a minor child are to be included in computing the net

wealth of an individual, such assets shall be included, -

(a) where the marriage of his parents subsists, in the net wealth of that parent whose net wealth

(excluding the assets of the minor child so includible under this sub-section)is greater; or

(b) where the marriage of his parents does not subsist, in the net wealth of that parent who

maintains the minor child in the previous year as defined in Section 3 of the Income-tax Act,

and where any such assets are once included in the net wealth of either parent, any such




assets shall not be included in the net wealth of the other parent in any succeeding year

unless the Assessing Officer is satisfied, after giving that parent inopportunity of being heard,

that it is necessary so to do.

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 30 lakhs from AY 2010-11. (Till 31-3-2009, the limit was 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. 30, 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.).




1-1 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)]




1-2 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 installments, 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:




1-3 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 are 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 authorized 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)]

Q.6 What is meant by full value of consideration? How short term capital gains and

long term capital gains are computed using full value of consideration? [10 Marks]

Solution:

Full value of consideration means & includes the whole/complete sale price or exchange value

or compensation including enhanced compensation received in respect of capital asset in transfer.

The following points are important to note in relation to full value of consideration.

• The consideration may be in cash or kind.

• The consideration received in kind is valued at its fair market value.

• It may be received or receivable.

• The consideration must be actual irrespective of its adequacy.

Full value of consideration

The expression “full value” means the whole price without any deduction whatsoever and it cannot

refer to adequacy or inadequacy of price. The consideration for the transfer of capital asset is what




the transferor receives in lieu of the asset he parts with, namely money or money ‟s worth is m. It is

not necessarily always the market value of the asset on the date of transfer.

However, at many places, reference is made to Free Market Value (FMV).

Expenses incurred wholly and exclusively in connection with such transfer

It refer to expenses necessary for effecting transfer, e.g. brokerage, commission paid for securing a

purchaser, cost of stamp, traveling expenses, incurred in connection with transfer, litigation

expenditure for claiming enhancement of compensation, etc.

1. Short-term capital gain

The profits and gains arising from the transfer of a short-term capital asset are treated as short-term

capital gains and included in the total income of the taxpayer for taxation at the rates applicable to

him. Where a taxpayer incurs a loss from the transfer of a short-term capital asset (such loss is

termed as short-term capital loss.) the same is allowed to be set off only against gain from the

transfer of another short-term or long-term capital asset. In a case where the short-term capital loss

remains unabsorbed, the same is allowed to be carried forward for set off only against gain from the

transfer of another short-term and long-term capital asset in the subsequent year. However, such

carry forward is restricted for a period of eight years. In other words, a short-term capital loss cannot

be set off against income from salaries, house property, business or profession or income under the

head other sources.

2. Long-term capital gain

Similarly, the profits and gains arising from the transfer of a long-term capital asset are treated as

long-term capital gains. Since long-term capital gains represent accumulation of income over a

period of time, these could turn out to be illusory in real terms. Accordingly, the cost of the asset is

adjusted for inflation during the period of holding. The increased cost is set-off against the sale

consideration of the long-term capital asset to determine the long term capital gain. Such long-term

capital gain is subjected to a concessional rate of tax to eliminate the bunching effect.




COST OF ACQUISITION

Cost of Acquisition (COA) means any capital expense at the time of acquiring capital asset under

transfer, i.e., to include the purchase price, expenses incurred up to acquiring date in the form of

registration, storage etc. expenses incurred on completing transfer.

In other words, cost of acquisition of an asset is the value for which it was acquired by the assessee.

Expenses of capital nature for completing or acquiring the title are included in the cost of

acquisition.

Indexed Cost of Acquisition = COA X CII of Year of transfer

CII of Year of acquisition

The indices for the various previous years are given below:

S.No. Fin. Year Cost Inflation Index S.No. Fin. Year Cost Inflation Index

1 1981-82 100 15 1995-96 281 2 1982-83 109 16 1996-97 305 3 1983-84 116 17 1997-98 331 4 1984-85 125 18 1998-99 351 5 1985-86 133 19 1999-2000 389 6 1986-87 140 20 2000-01 406 7 1987-88 150 21 2001-02 426 8 1988-89 161 22 2002-03 447 9 1989-90 172 23 2003-04 463 10 1990-91 182 24 2004-05 480 11 1991-92 199 25 2005-06 497 12 1992-93 223 26 2006-07 519 13 1993-94 244 27 2007-08 551 14 1994-95 259




If capital assets were acquired before 1.4.81, the assessee has the option to have either actual cost of

acquisition or fair market value as on 1.4.81 as the cost of acquisition. If assesses chooses the value as

on 1.4.81 then the indexation will also be done as per the CII of 1981 and not as per the year of

acquisition.

COST OF IMPROVMENT

Cost of improvement is the capital expenditure incurred by an assessee for making any addition or

improvement in the capital asset. It also includes any expenditure incurred in protecting or curing

the title. In other words, cost of improvement includes all those expenditures, which are incurred to

increase the value of the capital asset.

Indexed Cost of improvement = COA X CII of Year of transfer

CII of Year of improvement

Any cost of improvement incurred before 1st April 1981 is not considered or it is ignored. The

reason behind it is that for carrying any improvement in asset before 1st April 1981, asset should

have been purchased before 1st April 1981. If asset is purchased before 1st April we consider the

fair market value. The fair market value of asset on 1st April 1981 will certainly include the

improvement made in the asset.

Provisions for computation of Capital Gain

Provisions under section 48

The income under the head “Capital Gains” shall be computed by deducting the following from

the full value of the consideration received or accrued as a result of the transfer of the capital asset :

• Expenditure incurred wholly and exclusively in connection with such transfer.

• The cost of acquisition of the asset and the cost of any improvement thereto.




Computation of Short Term Capital Gains

From full value of consideration, deduct

• Expenditure incurred wholly and in exclusively

• Cost of acquisition

• Cost of any improvement of asset

Computation of Long Term Capital Gains

From full value of consideration, deduct

• Expenditure incurred wholly and in exclusively connection with the transfer

• Indexed cost of acquisition of asset

• Indexed cost of any improvement of asset

mf0012 taxation management set1

Documents