Tax Planning and Management

Unit –IV

Wealth tax- Part-1 (Basics of Wealth Tax)

CONTENTS

• What is Wealth Tax• Legal Framework• Charging of Wealth Tax• What is Net Wealth• Who is Assessee• Valuation Date• Deemed Assets• Debts Owed by the

Assessee.• Exempt Assets • Summary

What is wealth Tax?• Wealth Tax is a tax on the value of wealth owned

by a person, levied under the Wealth Tax Act,1957.

• It is one of the direct taxes.• It is annual tax.It is charged for every assessment

year commencing from 1st April, 1957• The tax is levied @ 1 per cent on the amount of

net wealth as on 31st March of every year, if the amount of net wealth exceeds Rs.15,00,000*.

*For the previous year 2009-10 this limit has been increased to Rs. 3,00,000

Legal Framework

• Wealth tax is charged under the provisions of WEALTH TAX ACT,1957 read with WEALTH TAX RULES, 1957

Contd.

WEALTH TAX ACT, 1957

• THIS Act came in to force with effect from 1st April, 1957.

• This Act extends to the whole of india.• This Act is divided into 8 chapters and

contains 119 (in numbers) sections and 3 Schdules.

• This Act has detailed provisions regarding levy and collection of wealth tax.

Charging Of Wealth Tax• Section 3 of wealth Tax Act, 1957 provides that Every• Individual, • HUF or • Company, who is an assessee shall be charged wealth tax @1% on

the amount by which his net wealth, determined on the basis of nationality and residential status, on the relevant valuation date, exceeds Rs. 15,00,000.

But following are not subject to wealth tax u/s 45:

Who are not subject to wealth Tax?

Section 45 of Wealth Tax Act provides that no wealth tax shall be levied in respect of the net wealth of the following persons:– Section 25 company– Any co-operative society*– Any social club– Any political party– A mutual fund specified u/s10 (23D) of the

Income tax Act.Imp

What is Net Wealth [sec. 2(m)]• Section 2(m) of Wealth Tax Act, 1957 defines what

is ‘Net Wealth’. In simple words, Net Wealth means:

Value of Assets owned by the assessee as on the Valuation date

------

Add: Deemed assets u/s 4

Less: Exempt assets u/s 5

Total

Less: Debts incurred in relation to assets included above.

Net WealthContd.

Contd.Basis of computing net wealth [Sec. 6]

Net wealth is to be computed :

In case of Individual In case of HUF and Company

On the basis of his Nationality and Residential status in the previous year ending on the valuation date. (for valuation date 31.03.07 previous year is 06-07)

On the basis of its Residential status in the previous year ending on the valuation date.

Who is an assessee[Sec.2(c) ]

• Assessee means a person by whom wealth tax or any other sum of money (I.e. penalty, interest) is payable under this Act, and includes:

WHAT IS AN ASSET?[sec. 2(ea)]

• The term Assets has been defined under section 2(ea) of wealth Tax Act, 1957.

• This definition covers only 6 types of assets ,basically these are unproductive in nature.

• It is to be noted that for the purpose of charging wealth tax “ there must be an asset with in the meaning of sec.[2(ea)]

1. Building 1. Any building or land

appurtenant thereto whether used for Residential purpose or Commercial purpose or for the purpose of maintaining a guest house or otherwise, including a Farm House situated within 25 kms from the local limits of the municipality BUT subject to the following exceptions

Exceptions to the definition of house

The following shall not be included in the definition of house:

1. Any house allotted by a company for residential purpose to an employee or an officer or a director who is in full time employment having a gross annual salary of less than Rs.5 lakh.

2. Any house for residential or commercial purpose, which forms part of stock in trade of the assessee.

Contd.

Contd.

3. House used by the assessee for the purpose of his business or profession.

4. Any residential property that has been let out for a minimum period of 300 days in the previous year,

5. Any property in the nature of commercial establishment or complexes

2.Motor car(whether Indian or foreign)

• But following will not be considered as asset

1. A car used for running on hire

2. A car held as stock in trade.

3. Jewellery, Bullion, Furniture, utensils, or any other article made (wholly or partly) of gold, silver or any precious metals

But Jewellery held as stock in trade is not an asset.

4. Yachts, boats and aircrafts

• But yachts, boats and aircrafts used for commercial purpose are not assets.

• Meaning of commercial purpose (e.g. using for earning income or held as stock in trade.

5. Urban Land• Urban land means land situated in any area which is with in the

jurisdiction of a municipality and which has a population of not less than 10,000 according to the preceding published census.

Or In any area with in such

distance, not being more than 8 km. From the local limits of any municipality or cantonment board , notified by the central government.

But subject to the following exceptions:

The following urban land shall not be treated as asset:

• Land on which construction of building is not permissible under any law.

• The land occupied by any building which has been constructed with the approval of appropriate authority.

• Any unused land held by the assessee for industrial purpose for a period of two years from the date of its acquisition.

• Any land held by the assessee as stock in trade for a period of ten (10) years from the date of its acquisition.

6. Cash in Hand • In case of Individual and HUF:

cash in hand in excess of Rs. 50,000, whether recorded in books of account or not.

• In case of Company: any cash not recorded in the books of account

What is valuation date

• A very important date in the wealth tax.

• All the assets held by the assessee on that day are counted for the purpose of wealth tax.

• 31 March preceding the relevant assessment year is the valuation date.

Problem:

• Determine whether following are assets or not under Sec.2(ea):

Deemed Assets [sec. 4]

• Deemed assets means those assets which do not belong to assessee but they are included in computing the net wealth of the assessee.

Deemed assets which are included in computing net wealth of an individual assessee only.

Types of deemed assets

Deemed assets which are included in computing net wealth of any assessee (individual, HUF, Company).

A B

Conditions for inclusion of Deemed AssetsThe individual (transferor) must be the

owner of the asset transferred on the date of transfer.

These assets must be transferred without adequate consideration.

These assets must be held by the transferee on the valuation date.

‘Type A’ Deemed Assets

• Following deemed assets will be included in the net wealth of individual assessee only:

1. Asset transferred to spouse [Sec.4(1)(a)(I)

• If any asset has been transferred by an individual to his/her spouse, directly or indirectly without adequate consideration, then such asset shall be included in the net wealth of the transferor.

EXCEPTION:• If such asset has been

transferred in connection with an agreement to live apart then such asset shall not be included in the net wealth of the transferor.

Contd. • The relationship of husband and wife must

exist on both the dates, I.e, date of transfer and valuation date.

• ‘Love and affection’ is a good consideration but not an ‘adequate consideration’.

2. Assets held by a minor child [sec. 4(1)(a)(ii)]

• Assets held by a minor child are included in the net wreath of the parent.

• However, the following assets shall not be included in the net wealth of parent and would be taxable in the hands of the minor only.

Contd.

Contd.• Assets held by a minor child suffering from any

disability of the nature specified u/s 80U of Income Tax Act,

• Assets held by a minor married daughter.• Assets acquired by a minor child out of the

following income referred to in proviso to Section 64 (1A) of the Income Tax Act:– Income from manual work done by him,– Income from activity involving application of his/her

skill, talent or specialised knowledge or experience.

Contd.

• It should be noted that the child must be minor on the valuation date , otherwise, clubbing provision shall not apply.

• Question: in which parent’s income the net wealth of

the minor child will be clubbed?

contd.• If marriage subsist:

– In the net wealth of that parent whose net wealth (excluding the assets of minor child) is greater.

• If marriage does not subsist:– In the net wealth of that parent who maintains the minor child in

the previous year,

and where any such assets are once included in the net wealth of either parent, they will not be included in the net wealth of other parent unless permitted by the assessing officer.

3. Assets transferred to a person or association of persons [sec.4(1)(a)(iii)]

• If any asset [within the meaning of Sec2(ea) ] has been transferred by an individual to a person or association of person, directly or indirectly, without adequate consideration for the immediate benefit of the :– Individual himself or herself– His/her spouse,

then such asset will be included in the net wealth of the transferor.

Again the relationship of husband and wife must exist on the valuation date.

4. Asset transferred under Revocable Transfer [sec.4(1)(a)(iv)]

• If any asset [within the meaning of Sec2(ea) ] has been transferred by an individual to a person or association of person, directly or indirectly, otherwise than under an IrrevocableTransfer,

then such asset will be included in the net wealth of the transferor.

Contd.

Contd.Meaning of revocable transfer• Following transactions are treated as revocable:

1. Transfer revocable within a period of six years or during the transferee’s lifetime; or

2. If the transferor derives any benefit, directly or indirectly, from the assets transferred; or

3. If the transferor has a right to re-transfer, directly or indirectly, whole or any part of the assets or income from the assets transferred.

4. If the transferor has a right to re-assume power, directly or indirectly, over the whole or any part of the assets or income from the assets so transferred.

5. An Asset transferred to son’s wife [sec.4(1)(a)(v)]

• If any asset [within the meaning of Sec2(ea)] has been transferred by an individual to his/her son's wife directly or indirectly, without adequate consideration , then such asset shall be included in the net wealth of transferor.

• Imp. It is be noted that relationship between individual

(transferor) and daughter-in law must exist on both the date- date of transfer and valuation date.

Problem on previous slide

• Mr. X have transferred his building (with in the meaning of Sec.2(ea) ) to MS. Y who later on married Mr. Z (son of Mr. X).

• Problem: In whose net wealth this asset will be included?

6. Asset transferred to person or association of person [sec.4(1)(a)(vi)] • If any asset [within the meaning of Sec2(ea) ] has been

transferred by an individual to a person or association of person, directly or indirectly, without adequate consideration for the immediate, or deferred benefit of the son’s wife then such asset will be included in the net wealth of the transferor.

• It is be noted that relationship between individual (transferor) and daughter-in law must exist on both the date- date of transfer and valuation date

Some important facts or points

• Asset transferred must be an asset with in the meaning of Sec. 2 (ea) on the ‘valuation date’ and not on the date of transfer.

• Example:

7. Converted Property [Sec.4(1A)]

• Where an individual, who is a member of a Hindu Undivided Family, converts his individual property in to the property of 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• By way of gift,

then such property is know as ‘converted property’.• And the value of such converted property on the

valuation date shall be included in the net wealth of the individual.

8. Holder of an impartible estate

• The holder of an impartible estate shall be deemed to be the owner of all the properties comprised in the estate.

Type “B” Deemed Assets

• The following assets will be included in the net wealth of any of assessee (i.e. individual, HUF, or Company)

1. Interest in a firm or Association of Persons [Sec. 4 (1) (b)]• In case of an assessee who is a partner in a firm

or a member of an association of persons, then the value of his/her interest in the assets of the firm or association, determined in a manner laid down in Schedule III.

• If a minor is admitted to the benefits of the partnership in a firm, the value of the interest of such minor in the firm shall be included in the net wealth of the parent of the minor.

2. Gift made by means of book entries [Sec.4 (5A)]• Where a gift of money from one person to

another person is made by means entries in the books maintained by anyone or more of the following:– Donor– An individual or HUF or firm or an AOP or

body of individual with which the donor has business or other relationship,

Then the value of such gift shall be included in the net wealth of the donor.

3.Building or part allotted under a House Building Scheme[Sec.4

• 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 other association, as the case may be,

the assessee shall be deemed to be the owner of such building or part thereof.

Some important facts or points

• Asset transferred must be an asset with in the meaning of Sec. 2 (ea) on the ‘valuation date’ and not on the date of transfer.

• The asset transferred need not be in the same form in which it was transferred by the transferor.

• Any accretions to the asset transferred do not come with in the scope of Section 4. [CWT v. Saraswathi Achi (1980)]

Case-1

• ‘X’ gifts units of UTI to his wife on 21.10.05. The units were sold by Mrs.X on 04.01.07 and she purchased gold ornaments on 05.02.07 out of the sale proceeds of the units.

Solve the case with justification.

Case-2

• ‘X’ gifts gold ornaments to his wife on 21.10.05. These gold ornaments were sold by Mrs.X on 04.01.07 and she purchased shares of RIL on 05.02.07 out of the sale proceeds of the gold ornaments.

Solve the case

Case-3

• ‘X’ gifts gold ornaments to his wife on 21.10.05. Mrs.X further makes a gift of gold ornaments to her sister on 4.01.07.

• If these gold ornaments are destroyed by fire on 4.01.07, then what will be the situation?

• If these gold ornaments were gifted by Mrs. X to her daughter in law, then what will be the situation?

Solve the case.

Debt owed by the assessee• For calculating net wealth of an assessee debts owed by

the assessee shall be deductible subject to the following condition:

1. Debs should have been incurred in relation to taxable assets.

2. Such debt should be still outstanding on the valuation date.3. Debts located in India or outside India shall be deductible

on the basis of nationality and residential status, as the case may be.

Liability under wealth tax Act is not a debt.

State whether following debts are deductible in the calculation of Net Wealth

1.Loan taken for the marriage of the daughter.

2.Loan taken to buy jewellery.3.Loan taken to buy shares of a company.

Summary For charging Wealth Tax the following points should

be kept in mind: Wealth tax is chargeable only in case of three categories of persons,

namely, individual, HUF, Company. Wealth tax is charged @ 1% on the net wealth exceeding Rs. 15,00,000. Net wealth of the assessee is to be computed as on the valuation date. For computing net wealth residential status and nationality of the

assessee will be considered. Asset must be an asset within the meaning of Sec.2 (ea). Such asset must belong to the assessee, however, deemed asset under

sec. 4 will also be considered. Such asset must be held by the assessee or the transferee under section 4

on the valuation date. For calculating net wealth exempt assets will not be considered. For calculating net wealth debts owed by the assessee on the valuation

date will be considered.

Problem : Explain the taxability of the following in the net wealth computation of Mr. A

a) Gifts of jewellery made to wife Rs 60,000, Market value on valuation date is Rs 2, 00,000.b) He gifted cash Rs. 2, 00,000 to his son’s wife without consideration, which she deposited in bank.c) Urban land transferred by him to his minor handicapped child.d) A minor son of Mr. A receives income by acting in films. Out of this income, he purchased a Car and a residential house; value of these on valuation date is Rs 50 Lacs.e) He transferred a house valued at Rs 20 Lacs to his married daughter but he has reserved the right to live in that house for whole life.

Exempt Assets [Sec.5]

• Section 5 of Wealth Tax Act provides that wealth tax shall not be payable by an assessee in respect of the following assets, although these assets are covered under sec. 2(ea) and belong to assessee or are deemed to be his/her/its assets u/s 4.

Property held under Trust [Sec.5 (i)]• Any assets held by the assessee under trust

or other legal obligation for any public purpose of charitable or religious nature in India is exempt from tax.

• The above exemption shall not be apply to any property forming part of any business carried on by the above trust.

Interest in Coparcenary property of the HUF [Sec.5 (ii)]• If the assessee is a member of H.U.F., he is

not liable to pay tax on his share in thejoint property, so long as the property remains joint and he continues as themember of that family.

• This is because HUF is itself a unit of taxation under the Wealth Tax Act, 1957.

ONE official Residence of a Ruler [Sec.5 (iii) ]• This exemption will be available only to an erstwhile

Ruler of an Indian State.• This exemption will be available only in respect of any

one building in his occupation, being a building which has been declared by the Central Government as his Official Residence.

• Where ex-Ruler has opted for one house for exemption under sec, 5(iii), he will not be entitled to exemption of another house under sec. 5(vi).

• However the exemption available only to the Ruler during his life time and not to his/her legal representative after his death.

Jewellery in possession of Former Ruler [Sec. 5(iv) ]• Jewellery in possession of a former Ruler not

being his personal property which has been recognized by the Central Govt. as his heirloom, before commencement of Wealth Tax Act or by the board after that shall be exempt.

• However this exemption is subject to fulfillment of following conditions:

Contd.

Contd.• The jewellery should be permanently kept in

India and should not be taken outside India without permission of the Board.

• Reasonable steps should be taken for keeping the jewellery substantially in original shape.

• Reasonable facilities should be allowed to any officer of Government authorized by the Board to examine the jewellery as and when necessary.

If these conditions are not fulfilled, the CBDT is empowered to withdraw such recognition.

Contd.Consequences if the recognition is withdrawn

• Where the recognition is withdrawn by the CBDT, the wealth tax becomes payable by the Ruler for all the assessment years after 9.09.1972 for which jewellery was exempt on account of such recognition.

Assets of Indian repatriate [Sec 5(v)]• Indian repatriate means a person of Indian origin

or a citizen of India who wasresiding in a foreign country and on leaving such country assessee has returned toIndia with the intention of permanently residing therein. In this case his followingassets shall be exempt for 7 successive assessment years, commencing with theassessment year following the date of his return to India.

Contd.

Contd.(i) Money brought by him in India(ii) Assets brought by him in India.(iii) Any balance in Non-Resident External

Accounts in India on the date of his return(iv) Assets acquired by him out of money in his

Non-resident External Account or by sending money from foreign country within 1 year immediately preceding the date of his return to India.

(v) Any assets acquired by him out of money brought in by him in India or out of the balance in NRE account after his arrival in India.

One house [Sec.5 (vi)]

• This exemption is allowed only to individual or HUF and in respect of the following:– One house– A part of the house,– A plot of land not exceeding 500sq. Mts.

in any area, belonging to such individual orHUF.

State True or False:i) Motor car held as stock-in-trade is a

taxable asset. ------ii) Investment into shares of a company is

non-taxable asset. -----iii) Assets transferred to a minor child are

taxable in the hands of the parents. ---iv) Property transferred to a trust for the

benefit of the spouse is exempt. -----

Contd.

v. All residential buildings of a former ruler are exempt. ------

vi. The only house owned by the assessee built on the area of 600sq. meters is exempt. ---

Thanks