Direct Tax Kalpesh

Prof.
Kalpesh Sanghavi PART A WEALTH TAX CA final
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WEALTH TAX Online lectures for CA studies Net Wealth Allowable Debts Total Assets Wealth Tax is charged for every Assessment Year on the Net Wealth of an individual , HUF, Company and certain association of persons, as on a particular date known as valu ation date . Assessment year (A.Y.) Assessment year means a period of 12 months commencing from 1st day of April eve ry year. Valuation date Valuation date means the 31st March, immediately preceding the Asst. year. Where there is a change in the Net Wealth on the Valuation date , it is the Net wealth as at the last moment of the valuation date, which is taxable. Net wealth sec.2 (m) Net wealth means Total Assets minus specified Debt. Total assets includes Deemed assets u/s 4. However no wealth tax is payable on Exempt assets as per section 5. The value of all the taxable assets on the valuation date is clubbed together and is reduced by the amount of debt owed by the assessee. The net wealth so arrived at is charged to tax at the rates specified. The present rate of tax is 1% of the amount by which the ne t wealth exceeds Rs. 30,00,000. The rate is same for individuals, HUF's and companies. System of accounting. System of accounting has no relevance to the assessment under Wealth Tax Act [M. Ramanamma v. CWT (1986) 157ITR 555 (AP)]. For example, J, a wealth-tax assessee, follows cash system of accounting. He borrowed money to purchase a motor car. Accrued interest on such loan is deducted as a debt owed even though it does not appear in books of account. Tax base of wealth tax. Net wealth, as on the valuation date, is the tax-base for the levy of wealth tax . If there is any change
in the wealth of an assessee even on the valuation date by way of transfer, sale or gift, and any asset has changed hands or does not exist on valuation date, the same cannot be includ ed in the net wealth. Similarly, an asset received or purchased by an assessee even in the closing hou rs of valuation date, is inclusible in net wealth and liable to tax. Thus, net wealth on the last mome nt of the valuation date is the tax-base for the levy of wealth tax. CA final Direct Taxes Page 2
Prof. Kalpesh Sanghavi
SECTION 45, NO WEALTH-TAX IS CHARGEABLE FOR 1) Any company registered under section 25 of the Companies Act, 1956. 2) Any co-operative society; 3) Any social club; 4) Any political party; and 5) A Mutual Fund specified under section 10(23D) of the Income-tax Act. SECTION 3, CHARGE OF WEALTH-TAX Subject to the other provisions contained in this Act, there shall be charged fo r every financial year, a wealth tax in respect of the net wealth on the corresponding valuation date of every individual, Hindu undivided family and company at the rate or rates specified. Madras high court in case of Halai Menon Association [2000] 244 ITR 0357 has held that Association of persons are not liable to wealth-tax as individual. The reasons given by the court is that the expression individual cannot be stretched t o include entities which were deliberately omitted and left out of the charging section of the Weal th-tax Act. The supreme court in case of CWT v. Ellis Bridge Gymkhana it has been held that It i s only under the Wealth-tax Act that the charge is on "every individual, Hindu undivided family a nd company" and not on an association of persons or a body of individuals or a firm. If the lang uage of section 3 of the Wealth-tax Act is contrasted with the provisions of other cognate statutes it wi ll clearly appear that the intention of the Legislature was not to treat an association of persons or a body of individuals or a firm as an unit of assessment for the purpose of imposition of wealth-tax. Imp 21 AA DEEMED INDIVIDUAL 21AA of the wealth tax provides for assessment of associations of persons in certain special cases and not otherwise. Assessment as an association of persons can be made only when the individual shares of the members of the association in the income or assets or b oth of the association on the date of its formation or any time thereafter are indeterminate or unknown . It is only in such an eventuality that an assessment can be made on an association of persons, otherwi se not. An association of persons cannot be taxed at all under section 3 of the Wealth-tax Act. The Legislature deliberately excluded a firm or an association of persons from t he charge of wealthtax and the word "individual" in the charging section cannot be stretched to inc lude entities which had been deliberately left out of the charge.
Theory Question Theory Question CA final Direct Taxes Page 3
Onlline lectures for CA sstudies lline lectures for CA sstudies Asseessee AO Fi OP irm Sh. ( Sh. (21 Det. (4) . Not 1AA) 4 SSchemee of law WWealth tax i s chargeablee for every AAsst. Year inn respect of the Net Weealth as on thhe valuation n date, oof an individdual, HUF aand Companny, at the flaat rate of 1%% of the Neet Weal th iss excess of RRs.15 lakhs. For exxample if NNet Wealth i s 31 lakhs tthan 31-30 == 1 lakh * 11% = 10 00 Rs. Is wealtth tax liability. Scoope of WWealth TTax Basics Asset D. Asse E. Asse et et Basi char s of rge Vaaluation Rules
ASSETS DEFINED U/S 2(ea): Imp Building or land appurtenant Exclusion 1 Exclusion 2 Exclusion 3 Exclusion 4 Exclusion 5 Any building or land appurtenant thereto whether used for residential or commercial purposes or as guest-house or otherwise (including a farm houses situated within 25 kms. From the local limits of any municipality or a cantonment board). A house meant exclusively for residential purpose and which is allotted by a company to an employee or an officer or a director who is in whole-time employment, having a gross annual salary of less than Rs.5 [FIVE] Lakhs. Any house for residential or commercial purpose which forms part of stock intrade
Any house occupied by the assessee for the purpose of any business or profession carried on by him. Any residential property that has been let-out for a minimum period of three hundred days in the previous year Any property in the nature of commercial establishments or complexes Motor cars Exclusion 1 Motor cars used by the assessee in the business of running them on hire or Exclusion 2 As stock-in-trade: Jewellery Jewellery, or any other article made wholly or partly of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals: Meaning of jewellery Ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stones, and whether or not worked or sewn into
any wearing apparel Precious or semi-precious stones, whether or not set in any furniture, utensils or other article or worked or sewn in to any wearing apparel CA final Direct Taxes Page 5
Online lectures for CA studies Exclusion 1 Those used by the assessee as stock-in-trade. Exclusion 2 Gold Deposit Bonds issued under the Gold Deposit Scheme. Yachts boats and air crafts. Exclusion 1 Those used by the assessee for commercial purpose and held as stock in trade. Urban land Urban Land means Land situated in any area which is comprised within the jurisdiction of a municipality or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which th e relevant figures have been published before the valuation date OR In any area within such distance, not being more than 8 kms. From the local limits of any such municipality or cantonment board as may be notified. Exclusion 1 Land on which construction of a building is not permissible under an y law. Exclusion 2 Land occupied by any building which has been constructed with the ap proval of the appropriate authority Exclusion 3 Any unused land held by the assessee for industrial purposes for a p eriod of two years from the date of its acquisition by him. Exclusion 4 Any land held by the assessee as Stock-in-trade for a period of TEN years from the date of its acquisition by him. Cash in hand Cash in hand, in excess of Rs.50,000 of individuals and HUF s and in the case of other persons any amount not recorded in the books of accounts. CA final Direct Taxes Page 6
Prof. Kalpesh Sanghavi www.kalpeshclasses.com CA final Direct Taxes Page 7 Illegal asset. There is no difference between legal asset and illegal asset. The revenue is not concerned with the illegality of the transaction. Thus, cash-in-hand representing sale proceeds of smuggled items is chargeable to wealth tax, provided the statutory condition regarding chargeabili ty is satisfied. Thus, where the assessee is an individual, cash sale of smuggled goods on valuation da te amounting Rs 1,20,000 is taxable to the extent of Rs 70,000 (1,20,000 - 50,000). Legal ownership. An asset belongs to its legal owner. For example, an assessee has purchased the jewellery. The jewellery belongs to him as he is its legal owner. Where the assessee is the leg al owner of an asset, the lack of possession is no criterion to hold that the asset does not belong to the assessee. Take an example. J purchased a residential house in April. Conveyance deed was executed. However, the possession could not be taken over as the validity of the sale deed was disputed by K, brother of J. The suit is pending on 31 March being the valuation date. The value of the resid ential house is to be Motor Cars Assets Jewellery Yachts Boats and Air Crafts Urban Land Cash in Hand Building or Land Appurtenant
Online lectures for CA studies included in the net wealth of J as the house legally belongs to him [U.S. Nayak v. CWT (1968) 65 ITR ITI (Mys.)]. Articles seized by excise authorities but not confiscated are included in net we alth as they belong to the assessee. Mere seizure of an asset does not in any way impair the ownership of an assessee in the asset. unless it is confiscated lawfully, it belongs to the assessee and is incl usible in his net wealth [CWT v. Meghji Girdharilal (1989) 176 ITR 63 (MP)]. Thus, cash, jewellery, gold, silver, etc., seized in tax raids belong to the assessee. www.kalpeshclasses.com Exclusive place for CA final study online. 198 Raja Ram Mohan Roy Marg, Prarthana Samaj, Mumbai 400004 Tel. 022-23801121 / 23820676 +91-9969100000 +91-9969400000
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Building or land appurtenant scope of : Multi storayed house Residential house: A building used for human habitation is a residential house [ Shiv Narain Chaudharv (1997) 108 1TR 104 (All.)] In the present times when multi-storeyed fl ats are becoming the order of the day, a flat may also be considered as a residential unit or a r esidential house [Vidva Vakash Talwar (1981) 132 1TR 661 (Del.)]. Thus, a house or a flat used as a dwel ling place is residential house. It is an asset. Guest house: A house used for the purpose of maintaining a "guest house" is an asset, liable to wealth tax. Guest house refers to a place where the guests of the assessee are received gratuitous ly or at a concessional rate [Sliri Durga Enterprises v. I.T.O. (1976) 102 ITR 745 (Ker.)]. Where an acc ommodation is maintained either in the principal place of business or in a place of business o r in place where the factory is located for directors and other employees, the accommodation cannot b e described a "guest house". It is a "residential accommodation". The term "guest house" refers to a place for the reception of strangers. Employees cannot be treated as strangers. Hence, unless the guest house is intended for use by a complete stranger, it cannot be called a guest house [CIT v. Aruna Sugars Ltd. (1980) 123 ITR 6l9(Mad.)j. Farm house: A farm house is an asset, provided it is situated within 25 km from the local li mits of any municipality or cantonment board. For example, Mr J owns a farm house on Delhi-M athura Road. It is located at 30 km from Delhi but 15 km from Faridabad. It is an asset because it is situated within 25 km from the municipality of Faridabad. The municipality may be known by any n ame, that is, municipal corporation, notified area committee, town area committee, town commit tee or by any other name. A "farm house" would mean a house for dwelling on a farm (that is, a tract of la nd, held for the purpose of cultivation). Thus, a house on an agriculture land may constitute a f arm house, provided it is situated within 25 km from the local limits of any municipality or cantonment board. If there is no municipality within a radius of 25 km around a farm house, it is not an asset.
House maintained otherwise A house which is not used either for residential or commercial purpose or which is not maintained as a guest, or farm house, within the radius of 25 km for the local limits of any m unicipality or cantonment board, but used for any other purpose, would also be an asset. Thus, where a building is used to promote art, charity, religion or any object of general public utility, neither, it is a residential or commercial use of the building nor it is being used as a guest house or farm house, such building would be an asset as it is being used "otherwise". Similarly, a building used as a social club or welfare centre or health centre would also be an asset. Thus, a building used fo r any purpose is an "asset". However it can be subject to exclusions. Land appurtenant to the house: CA final Direct Taxes Page 9
Online lectures for CA studies "land appurtenant to the house" is also being treated as asset roversy in the matter. The expression "land appurtenant thereto" has not been defined st, therefore, be understood in its popular and non-technical sense of "relating yed or occupied with a house. The words "land appurtenant to" in the context of house e lands belonging to house property or the lands necessary or connected with the house [ITO v. Goverdhan Dass and Sons (1987) 20 ITD 681 (Amr.)]. to avoid any cont in the Act. It mu to", usually enjo property means th enjoyment of the
Thus, the appurtenant land in respect of a residential building may be in the fo rm of a compound and playground, courtyard and backyard, kitchen-garden, cattle-shed, motor-garage, e tc., forming part of the building. In respect of a non-residential building, the appurtenant lands may be in the fo rm of car-parking space, connecting roads between different departments of the factory area, dryin g grounds and playgrounds, forming part of the building. Where the land, contiguous to the building, can be used for purpose other than e njoyment of the building, the whole of the land may not be treated as land "appurtenant thereto" . For example, where a building has got 10 acres of adjoining land, the entire adjoining land may not be treated as "lands appurtenant to the building". The tax authorities have got jurisdiction to deter mine the extent of land appurtenant to the building taking into account a variety of circumstances that may be relevant to determine whether the land contiguous to the building should be treated as "land appurtenant thereto". Some of the relevant tests have been cited in [CIT v. Ziabunisa Begum (1985) 151ITR 321 (AP)] as follows: (i) If the building together with the land is treated as an indivisible unit and enjoyed as such by the persons enjoying the building, it is an indication that the entire land is appur tenant to the building. (ii) I If the building has extensive lands appurtenant thereto, and even if the building and the land have been treated as one single unit and enjoyed as such by the occupiers, an en quiry could be made to find out whether any part of the land contiguous to the building can be put t o independent use without causing any determent to the effective and proper enjoyment of the build ing as such. Such an enquiry should be conducted not based on any artificial considerations b ut from the point of view of the persons occupying the building, that is, the number of persons of di fferent branches of families, residing in the building, the requirement of the persons occupying the
building consistent with their social standing, etc. If any surplus is arrived at on such enquiry, t he extent of such surplus land may not qualify to be treated as land appurtenant to the building. (iii) If there is any evidence to indicate that any portion of the land contiguo us to the building was put to use other than the enjoyment of the building, such land does not qualify to be treated as land appurtenant to the building. For instance, the land used by the occupants for co mmercial, agricultural and horticultural purpose, although forming part of the land adjacent to buildin g, does not qualify to be treated as land appurtenant to the building. (iv) If the owner or occupant is deriving any income from the land which is not liable to be assessed as income from the house property under Sec. 22 of the Income-tax Act, then the extent of such land does not qualify to be treated as lands appurtenant to the building. (v) Any material pointing to the attempted use of the building for purpose other than the effective and proper enjoyment of the house would also afford a safe guide to determine th e extent of surplus land not qualifying to be treated as land appurtenant to the building. Direct Taxes Page 10 CA final
The above tests are only illustrative and not exhaustive. Thus, whether or not, the land contiguous to the building, is land appurtenant thereto, is a question of facts. Building under construction Section 2(ea) refers to any building or land appurtenant thereto whether used fo r residential or commercial purposes or for the purpose of maintaining a guesthous e otherwise including a farm house situated within 25 kms from local limits of any municipality with some exceptions provided therein. No where in the definition of the word assets , an incomplete building has been referred to. The charging section of the Act has to be strictly construed and, accordingly, the value of the incomplete building cannot be added in the net wealth of the assess ee. In the absence of any provision in the Act for inclusion for value of incomplete building, the bui lding in question is not includible in the computation of the net wealth of the assessee on the relevant valuation date. However land can be subjected to wealth tax on its own merit. Imp Houses excluded from the purview of chargeability: (1) Residential house allotted by a company to a whole-time employee, drawing a gross annual salary of less than Rs 5,00,000: The exclusion applies only to a company assessee, provided the following conditi ons are satisfied: (i) The house is allotted by the company to its employee/officer/director who is in the whole-time employment. Thus, no exclusion applies where the employee is a part-time employe e or where the alloottee is not an employee. The whole-time employee may be a permanent employee or temporary employee. For e xample, Mr J is appointed by a company in leave vacancy for 3 years as a whole-time employee. The condition is satisfied even though he is not a permanent employee, (ii) The annual gross salary of the employee/ officer/ director should be less t han Rs 5,00,000. Thus, if the annual gross salary is Rs 5,00,000 or more, the exclusion is gone. The term "gross salary" has not been defined in the Act. It may be construed as per its d ictionary meaning. "Salary" refers to a fixed compensation paid to a person for regular work or ser vice. Accordingly, salary would include all cash allowances but not perquisites. The limit of Rs 5 lakh is applicable from the assessment year 1999-2000. (iii) The house is allotted exclusively for residential use. Thus, where the hou se is allotted partly for residential purposes and partly as a showroom to display company's products or a s a godown to store
company's products, the exclusion does not apply. (2) Any house for residential or commercial purposes, held as stock-in-trade: Any house for residential or commercial purposes which forms part of stock-in-tr ade is excluded from the purview of "assets". Thus, construction companies/concerns/real estate dealers, holding residential houses as stock-in-trade are not liable to wealth tax. Similarly, wh ere shops, godowns, warehouses, office premises, factory premises, etc., are held as stock-in-trade, all of them are excluded from the purview of the assets. Like-wise, constructing guest houses and selling them at profit will take them out from the ambit of wealth-tax laws. If guest house is used.for entertaining customers, it is an asset. CA final Direct Taxes Page 11
Online lectures for CA studies (3) Any house occupied by the assessee for any business or profession carried on by him: From the assessment year 1997-1998 and subsequent years, any house which is occu pied by the assessee for the purposes of any business or profession carried on by him, has b een excluded from the purview of "assets". Accordingly, commercial building or any other building, occupied by the assessee for the purposes of business or profession, carried on by him, is not an asset. Thus, a nursing home building owned and occupied by the owner for treating the patients, is not an asset. Similarly, the studio owned and occupied by a photographer is excluded from the purview of assets. Office building owned and occupied by a chartered accountant for his practice is not li able to wealth tax. Factory building, office premises, showroom, godown and shop, etc., owned and oc cupied by the company assessee for its business would not be an asset. Where a welfare buildin g, like guest house, club house, school building and temple, etc., is owned by the assessee and used for the purposes of business, its exclusion from wealth tax would be doubtful. The narrow view may b e that "occupancy" would mean personal and physical occupation by the owner himself for the purposes of business. Hence, exclusion would not apply. The broader view may be that "occupa ncy" by the agents is 'occupancy' by the principal. Accordingly, the occupancy of the welfar e building by the employees/agents, etc., would be regarded as occupancy by the owner. Hence, the exclusion would apply-Where an assessee is engaged in the business of constructing building and let them on hire for business purposes, he is not entitleci to claim the exclusion in respect of such buildings under this clause as he has not occupied them for his own business. Where the assessee has occupied only a part of the premises for his business or profession, the exclusion would apply to that part only. The balance part of the premises which is not occupied for the purposes of business or profession would be an asset and liable to wealth ta x. For example, Dr D owns a house. One-third portion is used as a "clinic" for practice and two-third s portion is used as residence. Clinic portion of the house is not an asset. Similarly, where a businessman uses the ground floor of the building for his bus iness purposes and the first floor is occupied for residential purposes, the ground floor of the bu ilding is not an asset. The residential portion is an asset. Where a building, owned by a partner, is occupied by the firm for the purposes o f its business, the partner would be entitled to claim the exclusion of such building. Partnership b
usiness is nothing but the business carried on by every partner, acting for all the partners. The build ing used by the firm would he treated as used by the partner for the business carried on by him. Majo rity of the High Court opinions support this view [Addl. CIT v. N. Vaidayanathan (1989) 180 ITR19 8 (Mad.). Also see: CIT v. P.M. Thomas (1990) 181ITO 247 (Ker.); CIT v. Syed Anwar Hussien (199 0) 180 ITR 749 (Pat.); CIT v. Rasiklal Balabhai (1979) 119 ITR 303 (Guj.)]' However, the Ka rnataka High Court has dissented from this view [CIT r. K.N. Guruswami, (1984) 148 ITR34(Kar.)]. Used for the purpose of business and profession The assessee-company, which carried on various businesses, owned several buildin gs, most of which were let to its employees. The rental of the premises was fixed, it did not chan ge with the change of the occupant, and it was deducted from the wages of the employee or employees oc cupying the premises. Held that, That the income of the assessee from the buildings or lands appurtenant thereto rented out to its employees was income from business and not as "Income from pro perty". [1966] 059 ITR 0152- Commissioner of Income-tax vs. Delhi Cloth and General Mills Co. L td. (Punjab High Court) CA final Direct Taxes Page 12
A bungalow owned by the assessee-company was in the occupation of G and K as emp loyees and directors free of charge. The assessee-company effected repairs to the bungalow and also provided modern amenities including air-conditioners. The questions were whether the inco me from the bungalow was to be computed as income from business and whether the assessee was entitled to claim allowance for actual repairs and depreciation. Held that 1) In view of the finding of fact by the Tribunal, occupation of the property by G and K for the purpose of effective discharge of their duties vis-a-vis the business of the ass essee-company amounted to occupation by the assessee for the purpose of its business and the i ncome therefore had to be assessed as income from business; 2) That the assessee was entitled to deduction of actual repairs and depreciation. 3) When a house property is occupied as residence by employees or directors, etc., of the assesseecompany, if concerned with the promotion of the business of the assessee-company, whether on payment of rent or otherwise, to enable them to discharge their functions effici ently and the letting out of the property is subservient and incidental to the main business o f the assessee, such an occupation amounts to occupation and user of the property by the assessee its elf for the purpose of its business, even though no business is actually run in such premise s. [1994] 210 ITR 0001-CIT vs. Modi Industries Ltd. (Delhi High Court) (4) Residential property let out for 300 days or more during the previous year: Where, a residential property is let out for a minimum period of 300 days during the previous year, it is excluded from the purview of "assets". It is operative from the assessment ye ar 1999-2000 and subsequent years. Where a residential property is let out for mixed purposes, that is, residential and commercial, the portion let out for residential purposes would not be treated an asset. Where a residential building consists of several units, some of them remain let out for 300 or more days and some are laying vacant or let out for less than 300 days, it appears that exclusion would apply for units which remained let out for 300 or more days. Where a commercial property is let out for residential purposes for 300 or more
days during the previous year, it appears that exclusion would not apply as it is not a resident ial property. Similarly, where a residential property is let out for 300 or more days for comm ercial purposes, exclusion would not apply. (5) Commercial complexes/establishment: Any property in the nature of commercial establishment or complexes is excluded from the purview of "assets". The exclusion is applicable from the assessment year 1999-2000 and subsequent years. The terms "commercial establishment" and "commercial complexes" have not been defined. 'Commercial establishment' would refer to a place where products are sold/exchanged or a profit-making establishment. Thus, where a place is let out to a trader, the place is used for a commercial establishment, that is, to carry on any trade or busine ss. Thus, it should be excluded. Imp CA final Page 13 Direct Taxes
Online lectures for CA studies "Commercial complex" is a large building or group of buildings with common facil ities like banks, post office, telecommunication, security, parking spaces, storage, etc. Such com plexes are built by the builders to let them on hire under lease or tenancy. Thus, exclusion would a pply when such complexes are in use as such. Exclusion would not apply to commercial complexes remaining vacant. Thus, commercial establishment complex held as investment would be chargeable to wealth tax. The shops, offices, factory buildings situated in commercial complex/commer cial establishment are excluded from the purview of assets, provided they are let out. www.kalpeshclasses.com Exclusive place for CA final study online. 198 Raja Ram Mohan Roy Marg, Prarthana Samaj, Mumbai 400004 Tel. 022-23801121 / 23820676 +91-9969100000 +91-9969400000
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Prof. Kalpesh Sanghavi Motor cars :
Motor cars are "assets". "Motor car" means any motor vehicle other than a transp ort vehicle, omnibus, road roller, tractor, motor cycle or invalid carriage [Sec. 2(26) of th e Motor Vehicle Act, 1988]. "Transport vehicle" means a public service vehicle, private service vehic le, bus of an educational institution or a goods carriage [Sec. 2(47) of the Motor Vehicle Act , 1988]. Transport vehicle is not a motor car. "Invalid carriage" means a motor vehicle specially d esigned and constructed, and not merely adapted for the use of a person suffering from some physical defect or disability and used solely by or for such a person [Sec. 2(18) of the Motor Vehi cle Act, 1S'88]. "Invalid carriage" is not a motor car. Motor car held as stock-in-trade or used in a hiring business excluded from char geability: Two exclusions have been provided in respect of motor cars. (1) Motor cars held as stock-in-trade: Where the assessee holds motor cars as stock-in-trade, the motor cars are excluded from the purview of "assets". Thus, automobile dealers/manufacturers are not assessable on the value of motor cars, held as sto ck-in-trade. No timelimit is provided to hold them as stock-in-trade. (2) Motor cars held as taxies: Where the assessee holds the motor cars to be use d in a business of running them on hire, such motor cars are not "assets". Unregistered motorcars Motor car purchased by an assessee but not registered under Motor Vehicle Act legally belongs to the assessee as the ownership of moveable property passes und er the Sale of Goods Act and not under Motor Vehicle Act. Where a motor car of an assessee is stolen before valuation date but theft is not certified by the polic e authorities till valuation date, the stolen motor car still belongs to the asses see. It is to be included in his net wealth. Imp CA final Direct Taxes Page 15
Online lectures for CA studies Aircrafts used for business purposes : The wordings in section 2(ea) make it clear that there is difference between the term commercial purposes and the term used by the assessee in the business of running them on hire . Wherever the Legislature wanted that a particular asset should be used for hire for claiming exemption, they have specifically mentioned this fact. In other cases, the term commercial purposes has been used to indicate that the asset should be used for the purpose of business and there is no condit ion that it should be let out on hire. The term commercial purposes has to be distingu ished from personal purposes . In other words, if the aircraft, i.e., helicopter, is used for personal purposes, it would be liable to wealth-tax. If it is used for commercial purposes , i.e., for bu siness purposes, it would not be chargeable to wealth tax. In the case of Amalgamated Electricity Co. Ltd., it was held that if the asset i s used for doing a business, the object of which is to make a profit, then the asset is used for co mmercial purposes. It is nowhere laid down that in order to satisfy the requirement of commercial purpose s, aircraft should be used as air taxi. One can use it for his own business also to meet the exigencie s of the business. Admittedly, it was treated as business asset. The depreciation was allowed on th e same. As such, it can be said that the helicopter was used for commercial purposes. It is therefor e beyond the ken of wealth-tax. Imp www.kalpeshclasses.com Exclusive place for CA final study online. 198 Raja Ram Mohan Roy Marg, Prarthana Samaj, Mumbai 400004 Tel. 022-23801121 / 23820676 +91-9969100000 +91-9969400000 CA final Direct Taxes Page 16
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Online lectures for CA studies Membership Type 1 2 3 Membership Name Free DT IDT Description Wealth Tax (excluding valuation rules and questions / answers.) Direct Taxes for CA final (Includes membership type 3) (also included 130 + Class work problems and solution) Indirect taxes of CA final. (included +100 Class work problems and solution) Hours of video access Granted 5 Hrs 100 Hrs 75 Hrs Membership commence (May 2011 Exam) 16th May 16th May 16th May Fair Usage of Hours for attending all lectures for given subject once. (approximately in this many hours once all lectures can be attended, some extra time is given considering revision of any chapters that may be required. Particularly for DT if students attend basic topics of IPCC lectures also when we post from time to time then students will have to buy more hours at additional cost.) 5 Hrs 100 Hrs 65 Hrs Time of Access / Viewing(You can access the lectures any time with user name and password. Subject to your membership expiry date and hours of usage.) 24/7 24/7 24/7 Download of video files (Video files are copy right protected, It is not allowed to be downloaded. User must not copy or distribute it any manner what so ever, audio or video or both.) Yes (Selected Files Only) No No Viewing online(You must be connected to internet with at least broadband connection. You can also access these lectures with help of smart mobile phone if it supports Java and gives you speed of 384 kbps minimum.)
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Online lectures for CA studies INCIDENCE OF TAXATION SEC.6 Incidence of Tax depends on the residential and citizenship status of the assess ee and location of assets. The following table summaries this: Category 1 Category 2 STATUS TAXABLE ASSETS DEDUCTIBLE DEBTS INDIVIDUAL, if he is both ordinarily citizen in India AND citizen of India HUF, if it is ordinarily resident in India. COMPANY, if it is Resident in India. ALL ASSETS Wherever located I.E. In India + Abroad ALL DEBTS Wherever located ALL OTHER ASSESSEES ASSETS IN INDIA Debts in India Location of the assets The location of assets and debts is of prime importance for computation of taxab le net wealth and incidence of tax. The location of assets or debts is essentially a question of f act and should be decided in the light of evidence. The following instruction have been issued by the Department in this connection for general guidance: Property Located in india 1) 2) 3) 4) 5) Tangible immovable property Rights or interest in or over Immovable property (otherwise than by way of security) or benefits arising out or immovable property. Rights or interest in or over Movable property (otherwise than by way of security). Debts Ships or Aircraft s. If the property LIES in India If the said immovable property lies in India. If the said movable property is LOCATED in India. If they are contracted to be repaid in India. If REGISTERED in India. CA final Direct Taxes Page 20
DEEMED ASSETS - SEC 4 CLUBBING In computing the net wealth of an Individual, there shall be included as belongi ng 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 th e individual, directly or indirectly, otherwise than for adequate consideration or in connection with agreement to live apart, or (ii) By a MINOR CHILD, not being a married daughter of such individual, or A minor ch ild suffering from any disability of the nature specified in the sec 80U of the I.T. Act. Clubbing provision shall not apply in respect of such assets as have been acquir ed by the minor child out of his income referred to in the proviso 64(1A) of the Income-ta x Act and which are held by him on the valuation date: Where the assets held by a minor child are to be included in computing the net w ealth of an individual, such assets shall be included, (a) where the marriage of his pare nts subsists, in the net wealth of that parent whose net wealth (excluding the assets of the m inor child so includible) is greater; or (b) where the marriage of his parents does not sub sist, in the net wealth of that parent who maintains the minor child in the previous year. 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 succee ding year unless the Assessing Officer is satisfied, after giving that parent an opportuni ty of being heard, that it is necessary so to do. (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 or the individual, his or her spouse, or both. (iv) By a person or association of persons to whom such assets have been transferred by the individual otherwise than under an IRREVOCABLE TRANSFER. (v) By the SON S WIFE of such individual to whom such assets have been transferred by the individual, directly or indirectly, otherwise than for adequate consideration. (vi) By a person or association or 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 son s wife, of such individual. CA final Direct Taxes Page 21
Online lectures for CA studies CA final Direct Taxes Page 22 Relation ship of husband and wife The word "spouse" means lawfully-wedded husband and wife and not the relationship of concubine. The word "wife" or "spouse" does not include a female with whom the assessee has an illicit connection for however long a period. The "spouse" does not include a prospective wife or prospective husband: For example, M was engaged to K. He settled jewellery/motor car/cash, etc., on a trust with a direction that the said assets would be given to K at the time of her marriage with him. However, the trustees delivered the said assets to K, 20 days prior to her marriage with M. The Assessing Officer included the said assets in the net wealth of M on the ground that the trustees were not empowered to deliver the said assets to K prior lo her marriag e with M. Hence, the HUF Clubbing Son s Wife Irrevocable Transfer Person or AOP for benefit of spouse / sw Minor Child Spouse
transfer should be deemed to have taken place at the time of her marriage with M when the relation of the spouse was there. The action of the Assessing Officer is not justified. I t is not relevant to consider that there was violation of the terms of the trust deed. Even if the de livery of the said assets is against the terms of the trust deeds, it is not possible to ignore the factum of delivery before her marriage with M. The value of the assets transferred is not assessable in the ne t wealth of the transferor. It is taxable as the wealth of the transferee-spouse [CWT v. M. K. A nanthkumar (1986) 157ITR 598 (Mad.)], In order to attract the application of clubbing provisions of spouse the relatio nship of husband and wife must subsist not only at the time of the accrual of income from the assets but also when the transfer of assets is made. The words "wife" and "husband" must be taken in thei r primary sense which is clearly indicative of a marital relationship. [1963] 049 ITR (S.C.) 009 7- Philip John Plasket Thomas vs. CIT (Supreme Court of India) If H has gifted to W jewellery worth Rs.100,000/- on 1.12.1996 and subsequently H marries w on say 1.1.1997 then the value of jewellery will never be clubbed with the Net weal th of H at any time: even after their marriage. This is because the relationship of husband and wife did not exist on the date of transfer. E.g. (b) if H & W are husband and wife and H gifts jewellery w orth Rs.100,000/- to W on 15.12.1997 but dies on 31.12.1997 then (although on 31.3.1997 clubbing did take place) on the valuation date 31st march, 1998 no clubbing will take place since on the valuati on date 31.3.98 the relationship of husband and wife does not exist. A widow or widower is not a spo use. What value to be clubbed It may be noted that the value to be clubbed will be the value (of the transferr ed asset) as on the valuation date irrespective of what its value was when transferred. Property was sold by assessee to wife for inadequate consideration. There shall be inclusion of income from property sold, in husband's income to the extent of inadequacy of co nsideration. [1970] 076 ITR 0279 Patwardhan (H.N.) vs. CIT (Bombay High Court) Where there is Transfer of house property to spouse otherwise than for adequate consideration assessee is deemed to be owner of house property. In this case entirety of incom e arising to spouse from house property includible in assessee's total income. Principle of proporti onality determined by
inadequacy of consideration not postulated by section 64. [1988] 173 ITR 0003- C IT vs. Junus Haji Ummer Sait (Kerala High Court) Payement of meher
Any transfer of an asset in discharge of legal obligation is for adequate consid eration. Thus, payment of "Meher" to the wife by the husband during the life-time is not a transfer wit hout "adequate consideration" [Ghiasuddin Babu Khan v. CIT (1985) 153 ITR 707 (AP)(F.B.)]. Ther efore, the property purchased out of such meher cannot be included in the hands of the husb and under Sec. 4(l)(a)(i) [CWT v. Nawab Fazalyar Jung (1993) 66 Taxman 168 (AP)]. Asset transferred in connection with divorce Transfer by one spouse to another under an agreement to live apart (DIVORCE) not covered by clubbing provisions: Any transfer effected either by the husband to the wife or vice-versa under an agreement to live apart does not fall within the purview of the deeming provisio n. Accordingly, the transferred asset is to be excluded from the net wealth of the transferor. CA final Direct Taxes Page 23
Online lectures for CA studies When asset change its form Further the clubbing provisions will apply irrespective of whether the assets ar e held by the transferee in the original form (i.e. in the same form as he received them) or i n any other form on the valuation date. Where the asset transferred by the assessee us disposed of by th e transferee & the transferee acquires (with the consideration received) another asset, the value o f that new acquired asset as on the valuation date will be clubbed. CWT Vs Kishan Lal Bubna 204 ITR 600 (SC). Reading section 4(1)(a) of the Wealth-tax Act, 1957, there is no doubt that the provision contemplates that where the assets which have been transferred have been convert ed to some other assets, it is the value of the converted assets on the valuation date that has t o be taken into account in computing the net wealth of the transferor assessee. [1993] 204 ITR 0600- CWT vs . Kishan Lal Bubna (Supreme Court of India) Where there is transfer of assets to spouse or minor child there shall be inclus ion of transferred assets in net wealth of assessee if such assets are assets as per section 2(ea) on the valuation date. Such properties transferred need not have been "assets" on the date of transfer. [197 8] 115 ITR 0160A Kollankulam (M.G.) vs. CIT (Kerala High Court) Indirect transfer / cross transfer For the purpose of clubbing provision it was not necessary that the same assets belonging to the husband should have reached the wife. The assets might, in the course of being t ransferred, be changed deliberately into assets of a like value of another person, as happened in this case. A chain of transfers such as those in this case was comprehended by the word "indirectly ". That if two transfers were inter-connected and were parts of the same transaction in such a way that they could be said to have been adopted as a device to avoid the implications of clubbing p rovision then the case would fall within the section even though one was not in the consideration for t he other in the technical sense. Commissioner of Income-tax Vs. Kothari (C.M.) 49 ITR 109. Minors income out of specified source The clubbing provision of sec. 4(1)(a)(ii) will not apply in respect of assets, acquired by the minor child out of income earned by him, form any manual work done by him or from acti vity involving application of his skill, talent. Specialised knowledge & experience. If on the valuation date the child already has become a major the value of asset
s cannot be included in the Net Wealth of the transferor (CIT Vs. Ashokabhai Chimanbhai 56 ITR 42 (SC ). In other words the child should be minor on the valuation date. Accreation to value of asset Where shares are transferred by an assessee to his spouse and subsequently bonus shares are allotted to her, the bonus shares are an accretion to the assets transferred by the asses see but they cannot be regarded as "assets transferred" by the assessee and the dividend income from th ose bonus shares cannot be regarded as arising even indirectly from the assets transferred by the assessee and cannot be included in the total income of the assessee. Held that the dividend income o n the bonus shares held by the assessee's wife was not taxable in the assessee's hands under sectio n 64 as the bonus shares could not be regarded as "assets transferred" by the assessee. [1983] 142 ITR 0377- CIT vs. Birla (M.P.) (Bombay High Court) CA final Direct Taxes Page 24
Sec.4 (1)(b): share in firms or aop s: Where the assessee is partner in a firm or is a member of an association of pers ons the value of his interest in the assets of the firm or the association is to be included in his N et Wealth u/s 4(1)(b). If a person is a partner in a firm on behalf of the HUF then value of his intere st in the firm is ineludible in the Net wealth of HUF. The value of interest of a minor in a firm (in which he is admitted to the benef its of partnership) it to be included in the net Wealth of that parent whose Net wealth (exclusive of this value) is greater. So ordinarily a minor s share in a firm will be clubbed in the hands of the parents w hose Net wealth is higher. However if the marriage of his parents does not subsist then the same wi ll be included in the New Wealth of that parent who maintains the minor child. Sec 4(1A): HUF clubbing provisions: When an individual converts his separate property into joint family property of HUF or transfers the property to the HUF (of which he is a member) otherwise than for adequate co nsideration then: 1) The entire value of the property so converted or gifted will be included in t he Net Wealth of the individual and 2) Subsequently if the converted or gifted property becomes the subject matter o f total or partial partition then the share allotted to the SPOUSE out of the converted or gifted p roperty will be included in the Net Wealth of that individual. This Sec. Will apply only to conversions or gifts made after 31.12.1969. Minor converting property If a minor child of the converting member or donor member also gets a share in t he partition of converted property or gifted property the share of the property received by the minor child is not to be included in the net wealth of the converting member/donor member such propert y held by the minor is to be clubbed with the net wealth of that parent whose wealth is greate r provided the marriage of the parents subsists on the valuation date if the marriage of the pa rents does not subsist such asset is to be included in the net wealth of that parent who maintains the child. CA final Direct Taxes Page 25
Online lectures for CA studies Sec.4 (5) irrevokable transfer The value of any assets transferred under an irrevocable transfer shall be liabl e to be included in computing the net wealth of the transferor as and when the power to revoke arise s to him. Further in order to constitute an irrevocable transfer the following conditions must be satisfied. 1) The instrument of transfer must not contain any provisions for the RETRANSFER di rectly or indirectly over the whole of any part of the assets or income. 2) The instrument of transfer must not give the transferor rights to REASSUME power directly or indirectly over the whole or any part of the assets or income. However, it is stated that an irrevocable transfer includes a transfer, which is not revocable for a period exceeding 6 years or during the lifetime of the transferee. We have seen above that a transfer not revocable for a period exceeding 6 years is treated as an irrevocable transfer Hence the value of the transferred assets will not be clubb ed with the Net wealth of the transferor. However sec.4 (5) states that as soon as the power to revoke arises (say after 7 Years), clubbing will start and the value of the assets will have to be included in the Net wealth of the transferor. Where R transfers a motor car to S for 6 years, the transfer is revocable f the car is wholly used for the benefit of S. The motor car so held by S is to be included in the alth of R. If the transfer is for a period exceeding 6 years or for the life-time of the transferee, ansfer may still be revocable if the transferor derives any benefit or exercises control over come or the asset. Computation of the period of irrevocability: The minimum period or irrevocability, that is, 6 years and one day would be coun ted from, the date of the execution of the deed. If the deed is irrevocable originally for a period of 6 years or less and is made irrevocable for a period of 6 years and one day by executing another extens ion deed, such transfer cannot be treated an "irrevocable" eventhough the extension deed is exe cuted before the expiry of the original deed. CA final Page 26 Direct Taxes even i net we the tr the in
Sec.4 (5A) gifts by book entries Where a person makes a gift of money by means of entries in the books of account s (maintained by him or any other individual, HUF, firm, AOP or BOI with whom he has a business o r other connection) the value of such gifts will be includible in his Net Wealth unless he proves to the satisfaction of the AO (Assessing Office) that the money has actually been DELIV ERED AT THE TIME ENTRIES WERE MADE. Sec.4 (7) property held as member of co-operative housing society etc Where the assessee is a member of a co-operative housing society company or asso ciation of persons and building or part thereof is allotted or leased to him he shall be deemed to be owner of such building or part and its value shall be includible in his Net Wealth. In determi ning its value however any outstanding installments payable by the assessee to the society, company, or association of persons towards cost of the house is deductible as debt owned. Sec.4 (8) 53A of the transfer of property act A Person: a) Who is allowed to take/retain possession of any building or part thereof in part performance of a contract of the nature referred to in sec.53A of the Transfer of Property Act. b) Who acquires any rights in any building or part thereof by virtue of a transaction of the type referred to in Sec. 269 UA (f) of the I.T. Act. Is deeme d to be the owner of that building or part and the value thereof would be includible in his Net We alth. Sec 33. Liability of transferees of properties in certain cases Where by reason of the provisions contained in section 4, the value of any asset s transferred to any of the persons mentioned in that section have to be included in the net wealth of an individual, the person in whose name such assets stand shal l, notwithstanding anything contained in any law to the contrary, be liable, on the service of a notice of demand by the Assessing Officer in this behalf, to pay th at portion of the tax assessed on the assessee as is attributable to the value of t he asset standing in his name as aforesaid. Provided that where any such asset is held jointly by more than one person, they shall be jointly and severally liable
to pay the tax as is attributable to the value of the asset so jointly held. Imp Where any such person as is referred defaults in making payment of any tax deman ded from him, he shall be deemed to be an assessee in default in respect of such sum, and all the provisions of this Act relating to recovery shall apply accordingly. Imp CA final Page 27 Direct Taxes
Online lectures for CA studies EXEMPT ASSETS: SEC.5 Sec.5 (i): public charitable trusts Any property held by the assessee under trust or other legal obligation for any public purpose of a charitable or religious nature in India, is exempt However business assets (subject to some exceptions) will not be exempt. Charitable or religious purpose: The expression "charitable purpose" has not been defined in the Act. It is said to mean relief of the poor, educational and medical relief or the advancement of any other object of g eneral public utility. The relief to poor does not necessarily mean giving them free doles or alms, it may take some other shape, e.g. seeking better reward for labour. Raising of moral, intellectual, ec onomic, social and political conditions of people in general is an object of general public utility . 'Public religious purpose' means any purpose related to the advancement, support or propagation of religion. Property dedicated to an idol to which public have free access is a public religious trus t and is entitled to exemption. The charitable or religious purpose should be confined to India. If the charitab le or religious purpose for which the property is held lies outside India, the right to exemption is los t. Thus, if a Muslim in India settles certain property on trust and directs the trustees to spend the in come for the benefit of Mecca and Medina, no exemption can be claimed in respect of such properties. The exemption is to be denied completely even if some objects of the charitable trust confine outsid e India [CWT v. Trustees of the Nizam's Religious Endowment Trust (1977) 108 ITR 229 (AP)]. CA final Direct Taxes Page 28
Sec.5 (ii): coparcenercy interest in huf Interest of the assessee in coparcenercy property of an HUF is exempt. The exemption avoids double taxation of the same property once in the hands of t he coparcener and then in the hands of Hindu undivided family. Sec.5 (iii): residential building of a ruler Any one building used by a Ruler as his official residence immediately before th e commencement of the Constitution (26th Amendment) Act. 1971 is exempt. One Official Residence of Ex-Indian Ruler [(Sec. 5(iii)] Any one building which is in the occupation of ex-Indian ruler and which has bee n declared by the Central Government as his official residence, is exempt from wealth tax. If the ruler ceases to occupy the building, notified by the Central Government as his official residence, the Ruler is not entitled to exemption in respect of such building. If a ruler has more than one official residence, the exemption is available only in respect of one such residence, as is declared to be his official residence by the Central Government . The choice of such official residence to be exempted from wealth tax left to ruler. The exemption applies only to building or part of the building which has been de clared by the Central Government as official residence of the ex-ruler and which is in his occupation, therefore, the building let put to tenants is not entitled to the exemption as it is not in the occupation of ex-rulers [Mohammedan Khan and others v. CIT (1997) 224 ITR 672 (SC)]. The expression 'ruler' means the Prince, Chief or other person who, at any time before the commencement of the Constitution (Twenty-sixth Amendment) Act 1971) was recognis ed by the President as the ruler of Indian State, or any person who at any time before suc h commencement was recognised by the President as successor of such ruler. CA final Direct Taxes Page 29
Online lectures for CA studies Sec.5 (iv): ruler s jewellery Jewellery in possession of Ruler, which is not his personal property, is fully exempt if it is recognised by the Central Government before 1.4.1957 or the Board after that date. Where such recognition does not exist, the Central Board of Direct Taxes is empowered to accord such recognition but it should be obtained by the ex-ruler at the time of his first assessment under thi s Act. If the Board recognises the jewellery in the possession of an ex-ruler at the ti me of his assessment as his "heirloom jewellery", it will be exempt from wealth tax. Imp Heirloom jewellery of ex-rular 5(iv) The exemption is available if the following conditions are also satisfied by an ex-ruler: (i) The jewellery is permanently kept in India and is not removed outside India except for a purpose and period approved by the Board. (ii) The reasonable steps are taken for keeping the jewellery substantially in i ts original shape, (iii) The reasonable facilities are allowed to any office of the government auth orised by the Board in this behalf to examine jewellery as and when necessary. If any of the conditions is not satisfied, the Board is empowered to withdraw th e recognition retrospectively from 9 September 1972. The Board has to record the reasons for such withdrawal. If the Board withdraws the recognition retrospectively, wealth tax becomes payable by t he ex-ruler for all the assessment years for which the jewellery was exempted on account of the reco gnition. In such a case, the back assessment years have to be rectified. For this purpose, the fair market value of the jewellery on the date of the withdrawal of the recognition is deemed to be the m arket value on each valuation date relevant to back assessment years. But the aggregate amount of we alth tax in respect of jewellery for all the back assessment years cannot exceed 50% of its fair mar ket value on the valuation date relevant for the assessment year in which the recognition is with drawn. CA final Direct Taxes Page 30
Sec.5 (v): for person of indian origin or a citizen of india If any person of Indian origin or a citizen of India who was ordinarily residing in a foreign country, leaves such country and returns to India with an intention of permanently residing in India then he will enjoy exemption on the following assets for the next 7 successive Asst. Years after his return. Imp Money brought in to India Provided they are brought into India within oneyear prior to return to India or thereafter. Value of assets brought in to India Value of assets acquired out of moneys brought in to India A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grandparents, was born in undivided India; Moneys standing to the credit of such person in a Non-resident (External) Accoun t in any bank in India on the date of his return to India, shall be deemed to be moneys brought by him into India on that date. CA final Direct Taxes Page 31
Online lectures for CA studies Sec.5 (vi) one house or part of a house or a plot of land One house or part of a house or a plot of land belonging to an individual or a Hindu undivided family Provided that wealthtax shall not be payable by an assessee in respect of an asset being a plot of land comprising an area of five hundred square meters or less. (1 sq meter = 10.794 feets) Several self-contained units which are contiguous and situate in the same compound and with common boundaries and having unity of structure could be regarded as one building. The exemption would be available in respect of the val ue of the entire building, [1992] 197 ITR 0258- CWT vs. Najima Nizar (Mrs.) (Kerala High Court). The Act has not defined "house". The word "house" would include any building irrespective of its use, that is to say, it may be used for business purpose or as a residence or as a school and it should not be restricted to a dwelling house. Th us, where the assessee lets out a part of the house as a godown for business purpose s and remaining part for residence, he is entitled to the exemption for the entire house, comprising residential unit and godown which constituted one building [CWT v. Mahal Chand Pandia (1996) 219 ITR 733 (Guw.)]. Imp www.kalpeshclasses.com Exclusive place for CA final study online. 198 Raja Ram Mohan Roy Marg, Prarthana Samaj, Mumbai 400004 Tel. 022-23801121 / 23820676 +91-9969100000 +91-9969400000 CA final Direct Taxes Page 32
Prof. Kalpesh Sanghavi www.kalpeshclasses.com CA final Direct Taxes Page 33 One House or Part of a House or a plot of land Exempt For person of Indian Origin or a Citizen of India Ruler s Jewellery Residential Building of a Ruler Coparcenercy Interest in HUF Public Charitable Trusts
DEBT OWED DEBT OWED Online lectures for CA studies Net wealth = total assets Format of computation Particulars Asset Value Debt Net 1 Jew 12 10 2 2 3 4 Total XX XX XX Deduction of Debts Owed by the Assessee on Valuation Date and which have been In curred in relation to Chargeable Assets: The next step in computing the net wealth is to deduct the value of all debts owed by the assessee on valuation date and which have been incurred in rel ation to the chargeable assets The deduction of such debts is allowed from the aggregate value of the chargeabl e assets, wherever located, belonging or deemed belonging to the assessee on the valuation date. A contingent liability is not a debt owed, and cannot be deducted. A question has arisen regarding the admissibility of deduction of the wealth-tax liability for the purpose of computing the taxable net wealth. The Board has been advised that the liability under the Wealth-tax Act is not a debt owed by the assessee incurred in relation to the as sets taxable under the Wealth-tax Act. The liability to wealth-tax is a personal liability of the asses see. Moreover, this liability not a debt incurred by the assessee but is created by the statute. The refore, no deduction is to be allowed for the wealth-tax liability in the computation of the taxable net we alth of the assessee. [1993] 203 ITR (Stat) 0134- Circular Number: 663 The assessee borrowed a sum of Rs. 40,000, from the LIC on the security of his h ouse in which he was residing. Out of this Rs. 30,000 was invested in a fixed deposit in a bank f or one year. On the security of the fixed deposit the assessee borrowed monies which he utilised for various purposes. The amount of the loan borrowed was adjusted against the fixed deposits on matur ity. In his return for wealth-tax, the assessee claimed deduction of the amount outstanding on the valuation date out of the amount borrowed from LIC. The debt in question was one acquired by the mortg age of the residential house which was not chargeable to wealth-tax thus the debt could not be allowed as a deduction. [1980] 123 ITR 0464- Srinivasan (T.V.) vs. CWT (Madras High Court) Section 80L can be availed of only by an assessee and as the total income of a h allowable debts
usband as defined in s. 2(45) would include the income arising to the wife in respect of which s. 64( 1)(iii) would operate, the provisions of SEC. 80L cannot be applied to the income arising to the wife w hich has to be included in the hands of the husband under s. 64(1)(iii), because, in respect of that income, the wife CA final Direct Taxes Page 34
cannot be considered as the assessee Consequently, the relief under s. 80L would be available to the husband after the wife's income has been clubbed with his income. [1984] 146 ITR 0627- CIT vs. Ramaswamy (P.N.) (Madras High Court) The first step to be taken in arriving at the net wealth of the assessee is to t ake the aggregate value of all his assets which are required to be included in his net wealth in accordance with the provisions of the Act. The assets which are specified in section 5(1) of the Wealth-tax Act, 1 957, have to be excluded in arriving at the aggregate value of all his assets for the purpose of section 2(m) of the Act. The aggregate value of all the debts thereafter will be deducted from the aggreg ate value of all the assets so arrived at. I.E. debts in relation to exempt assets shall not be allow ed as deduction. [1996] 217 ITR 0159-CWT vs. Chockalingam (P.R.) (Madras High Court) The assessee, one of the co-owners of a house having a one third share therein, had received advance rent. That amount remained unadjusted out of the advance received by the assesse e was a "debt owed ". [1991] 192 ITR 0163- SHAKTI SIKAND (Delhi High Court) www.kalpeshclasses.com Exclusive place for CA final study online. 198 Raja Ram Mohan Roy Marg, Prarthana Samaj, Mumbai 400004 Tel. 022-23801121 / 23820676 +91-9969100000 +91-9969400000 CA final Direct Taxes Page 35
Online lectures for CA studies Family settlement On the death of B, the Maharaja of Gondal, disputes arose between his two sons, viz., V and his younger brother, S. Their mother, the assessee, intervened and gave a letter to S, to the effect that if V did not give in full Rs. 50 lakhs wh ich was the amount B had desired to give S, then S will get the balance of the amoun t from her. V paid only Rs. 20 lakhs and S claimed the balance from the assessee. Imp Pursuant to her commitment, the assessee transferred war stock valued at Rs. 11 lakhs to S and also agreed to hand over certain ornaments in full settlement of his claim. The ornaments were not given and disputes arose between S and the assessee which wer e also eventually settled in writing and by virtue of that settlement the assessee paid a sum of R s. 10 lakhs to S. The question was whether for the purpose of computing the assessee's net wealth on t he valuation dates the liability to pay the balance of Rs. 19 lakhs could constitute a debt owed by the assessee within the meaning of section 2(m) of the Wealth-tax Act, 1957, and was deductible. [1979] 117 ITR 0784CWT vs. Vijayaba (H.H.), Dowager Maharani Saheb of Bhavnagar Palace (Supreme Court o f India) Held that 1) On the facts, that this was a case of a family settlement or family arrangement binding on the parties; the assessee agreed to purchase peace for the family and to pay her son , S, the amount which fell short of Rs. 50 lakhs if her elder son, V, did not pay him and such a consideration was good consideration which brought about an enforceable agreement between the part ies; 2) The liability of the assessee became enforceable by law, 3) The liability of the assessee was created by the family arrangement arrived at b etween the parties, and even if it was a contingent liability, the contingency did happen and the as sessee became liable to pay the sum of Rs. 19 lakhs as a debt. 4) The sum of Rs. 19 lakhs was a subsisting debt on the valuation dates and was ded uctible in computing the assessee's net wealth. [1979] 117 ITR 0784- CWT vs. Vijayaba (H.H. ), Dowager Maharani Saheb of Bhavnagar Palace (Supreme Court of India) CA final Direct Taxes
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GENERAL PRINCIPAL OF DEBT OWED It should be a debt. The expression "debt" signifies a sum of money which is now payable or will beco me payable in future by reason of present obligation (Keshoram Industries & Cotton Mills Ltd v . CWT (1996) 59 ITR 67 (SC). For example, a loan is taken on 15 June 2008, repayable after 3 yea rs. On valuation date 31 March 2009, it is debt because an obligation to pay has been incurred on or before valuation date though the debt is payable after the valuation date. Debt to be owed by the assessee. It should be debt owed by the assessee, that is, it should be enforceable agains t the assessee. If the debt is not enforceable against the assessee, no deduction can be allowed in res pect of such debts. Take an example. Mr J owns a residential house. Mrs J borrows Rs 50,000 from her relatives to renovate/repair the house. Mr J cannot claim the deduction of Rs 50,000 because the debts is not enforceable against him. Similarly, where Mrs J purchases a motor car out of bor rowed money in the name of her husband, J cannot claim the deducti. 'ii of such debt in computing h is net wealth. Debt to be outstanding on valuation date. The debt, owed by the assessee, should be outstanding on valuation date. If it h as been paid on or before valuation date, no deduction is allowed for such debts. Purpose ot the debt. The debt, owed by the assessee and outstanding on valuation date, should be incu i red in relation to the chargeable assets which have been included in the net wealth of the assessee . Thus, each and every kind of debt, not relating to chargeable assets, is not deductible. For ex ample, a loan taken to purchase shares or loan taken to acquire plant or machinery is not to be deducte d, as the shares and plant and machinery are not "assets" under Sec. 2(ea). Similarly where a loan is taken to acquire an exempted asset under Sec. 5, it is not deductible. For example, loan is taken on the security of jewellery. The loan is applied to acquire residential house which is exempt unde r Sec. 5(vi). Such loan is not to be deducted in computing net wealth because it is applied to acqu ire an exempted asset. It cannot be deducted on the ground that it has been taken on the security of je wellery which is an asset under Sec. 2(ea). Where a loan is taken to purchase a motor car or jewelle ry or a residential house, such debt is deductible as the said properties are "assets". Where a loan is taken on the
security of the residential house to meet the marriage expenses or to meet the m edical expenses of the assessee, such debt cannot be deducted because the purpose of the borrowing is not to acquire any chargeable asset. If a loan is taken on the security of jewellery to purchase a motor car for pers onal use, such loan is to be deducted as it is incurred in relation to chargeable assets. Deduction of debt vs. Value of assets. Where a debt is incurred in relation to the chargeable asset and the debt is out standing on the valuation date, such debt is deductible in computing the net wealth. There is no nexus between the value of the assets and the amount of the debt to be deducted. The value of the asset is to be determined under Schedule III which at times may be less than the amount of debt incurred in CA final Direct Taxes Page 37
Online lectures for CA studies relation to be said chargeable asset. Such debt has to be deducted in full. Take an example: Mr J borrows Rs 2,00,000 to purchase a motor car. The motor car is valued under Rule 20/21 at the market value on the valuation date. The market value is Rs 1,50,000. In computin g net wealth the deduction of outstanding debt together with accrued interest, on valuation date is deducted. Thus, if the amount of outstanding debt plus accrued interest is Rs 2,50,000 deduction is allowed for such debt though the value of asset to be included in net wealth is Rs 1,50,000. Location of debt. Debt is to be deducted if it is owed by the assessee on valuation date and it is incurred to acquire chargeable asset. For example, loan is taken outside India to acquire taxable as set in India; such loan is deductible in computing net wealth in India. Time-barred debt. A time-barred debt is not enforceable against the debtor, Therefore, the debtor cannot claim it as a deduction even if the debt has been incurred in relation to the chargeable asset . However, if the debtor does not take shelter under the law of limitation and agrees to pay a tim e-barred debt, he can claim deduction in respect of such debt. The rule of "no consideration, no contr act" under Sec. 25 for the Indian Contract Act, does not apply to such a case. Debt payable by instalments. Where a debt relating to chargeable asset, is payable by instalments, the discou nted net value of the outstanding instalments, falling due after valuation date, is to be deducted. Th us, the deduction is not to be allowed for gross amount of future instalments but present values of futur e instalment. Accrued interest. Where a debt is incurred relating to chargeable assets, the outstanding interest on the debt till valuation date is also to be deducted even if the assessee follows cash system o f accounting. Current year wealth-tax liability. Current year wealth-tax liability is a debt relating to chargeable asset. It is also owed by the assessee on valuation date but it is not a debt "incurred" by him. The word 'incurred' me ans voluntarily incurred. Wealth tax is a tax imposed on the assessee by the statute. Hence, cur rent year wealth-tax liability is not to be deducted in computing net wealth (Circular No. 663 Dt. 28
.09.1993). Transferee's debt [Sec. 4(3)(a)]. Any debt incurred by the transferee relating to deemed assets under Sec. 4 neith er can be allowed to the transferor nor to the transferee. The transferor cannot be allowed the deduc tion because the debt is not owed by him. The debt is owed by the transferee but no deduction can be a llowed to him because the deemed asset is not taxable in the hands of transferee. Deemed asset is included in the net wealth of the transferor. Advance for sale of property is a debt. Where an assessee agrees to sell a property, receives part consideration and giv es possession of the property, the property is still owned by the assessee, since he continues to hav e title over the same and has to be included in the wealth of the assessee notwithstanding the deeming provision of CA final Direct Taxes Page 38
presuming sale for purposes of computation of income from property and capital g ains. The question that arose in CWT v. Bajoria Properties Pvt. Ltd. [2002] 258 ITR 29 (Cal) was wh ether the amount received as part consideration for the agreement of sale could be treated as deb t in relation to property, so as to require deduction of the same as a liability incurred in rela tion to the included wealth in computation of taxable wealth. The High Court pointed out that the pay ment received would be a charge on the property within the meaning of section 55 of the Transf er of Property Act, so that it has necessarily to be treated as debt incurred in relation to that as set and allowed as a deduction. www.kalpeshclasses.com Exclusive place for CA final study online. 198 Raja Ram Mohan Roy Marg, Prarthana Samaj, Mumbai 400004 Tel. 022-23801121 / 23820676 +91-9969100000 +91-9969400000
CA final
Online lectures for CA studies SOME ILLUSTRATIVE CASES OF ASSET Particulars of assets Whether asset on valuation date 1. Farm house situated within 25 km from Delhi Cantonment Board. Yes 2. Farm house situated within 25.01 km from Delhi Municipal Yes Corporation but within 1 km from Gurgaon Municipality. 3. Farm house under construction on land situated within 8.01 km from Farm house not an Kolkata Municipal Corporation. asset as it is under construction. Land is not an asset as it is not urban land. 4. A residential house allotted by a foreign company in India to its No resident manager, whose annual gross salary is Rs 4,99,999. 5. A residential house allotted by a firm in India to its accountant whose Yes annual gross salary is Rs 4,99,999. However, firm is not an assessee. 6. A residential house allotted by a private company in India to its part-Yes time permanent accountant whose annual gross salary is Rs 2,00,000. 7. A residential house allotted by a public company in India to its No whole-time director, whose net annual salary after deducting contributions to provident fund (Rs 75,000) is Rs 4,24,999. 8. Motor car used for transporting employees. Yes 9. Motor truck owned by an Indian company, used for transporting its No raw material and finished products. 10. A residential house under construction on a land purchased in Surat Urban land is an on 15 July 2006 but completed on 25 August 2007. asset but incomplete house is not an asset. 11. Guest house held as stock-in-trade for the last 5 years. No 12. Factory building/godown and office building occupied by the No assessee for his business purpose. 13. Godown building let out on rent. No 14. Residential house held as stock-in-trade. No 15. Urban land held as stock-in-trade since 31 March 1997. Yes 16. Commercial complex let out on rent. No 17. Residential house let out on rent for 299 days. Yes 18. Aircraft used by the company for its senior executive. No 19. 10 kg of gold, held bv an individual. Yes CA final Direct Taxes Page 40
20. 10 kg of gold held bv Krishna Jewellers. 21. Gold/silver utensil, held by an HUF. 22 Gold, silver utensil held by a jeweller. 23. Urban land on which building is constructed without the approval of the competent authority. 24. Agriculture land in Delhi on which construction is not permissible. 25. Urban land purchased on 1 March 2005 for constructing factory, lying vacant on 31 March 2007. 26. Building site purchased in 1996 within the jurisdiction of a municipality having a population of 9,999. Construction on land is permissible. However, it is lying vacant. 27. Opening cash book balance of J on 31 March 2007 is Rs 5,25,000. However, he has deposited Rs 4,75,000 into bank before close of banking hours. 28. Closing cash book balance of J Ltd. on 31 March 2007 is Rs 15,00,000. A customer has paid Rs 35,000 cash on 31 March 2007 after the closing balance and it is recorded in cash book on 1 April 2007. No Yes No Yes No Yes No No Cash balance not exceeding Rs 50,000 Unrecorded cash of Rs 35,000 is an asset. CA final Page 41 Direct Taxes
Online lectures for CA studies VALUATION OF ASSETS (Part B schedule III) Valuation of immovable property being Building or LA Actual Rent Received (6 months, say) X Actual Rent Receivable (12 months) X Add: Where taxes levied in respect of the property are borne wholly or partly by the tenant-by the amount of the taxes so borne by tenant; X Add: Where expenditure on repairs is borne by the tenant by one-ninth of the actu al rent X Add: Where the owner has accepted any amount as deposit (not being advance rent for three months or less)- by 15 percent of the deposit minus the interest actually paid: (if deposit was outstanding for only part of the previous year 15% p.a. must be calculated for the number of complete months for which deposit was outstanding) X Add: Where the owner has received any amount by way of premium-by the amount obtained by dividing the premium by the number of years of the lease X Add: Where the owner derives any benefit or perquisite as consideration for leas ing of the property or any modification of the terms of the lease, by the value of such benefit or perquisite X Actual annual rent (a) X Municipal valuation (b) X Where the property is let actual annual rent or annual ratable value assessed by local authority whichever is higher. Where the property is not let : Annual ratable value assessed by local authority or if there is no such assessment the amount which the owner can reasonably be expected to receive as annual rent had such property been let. Gross maintainable rent X Less Municipal Taxes levies X Less 15% of GMR X Net Maintainable Rent X CA final Direct Taxes Page 42
CAPITALISE NMR (NMR * 12.5/10/8) (See note no. 1) X If the property is acquired or constructed on or before 31.3.1974 than the Capitalised NMR If the property is acquired or constructed after 31.3.1974 value thereof will be higher of Capitalised NMR or Actual Cost (i.e. actual cost of acquisition/construction (plus cost of improvement, if any) However even for a property acquired/constructed after 31.3.74 the value may be taken as Capitalised NMR (Instead of higher of Capitalised NMR & Actual Cost) if the property satisfies BOTH the following requirements (i) The property is a residential house exclusively used by the assesses for his one residential purpose throughout the period of 12 months ending on the valuation date. (ii) Actual cost thereof does not exceed Rs.25 lacs. (Rs.50 lacs for Bombay, Calcutta, Delhi & Madras) It may be noted however that this benefit is available for only ONE such residential house. Thus an assessee having more than one such house may choose any one for this purpose. Add: PREMIUM FOR EXCESS UNBUILT AREA (Note No. 2,4) X Less: REDUCTION FOR UNEARNED INCREASE IN VALUE OF LAND (Note No. 3) X Sec.7 (2) valuation of self occupied house: The value of S.O. House may be taken at the Option of the assessee as the value determined in the manner laid down in Schedule III as on the valuation date next following the date on which he become owner of the house or the valuation date relevant to the A.Y. 1971-72 whichever is later. Thus the assessee is given an option to take the old value if he so chooses. However he gets this option only if the house is self occupied (S.O.) in the sense that is it exclusively used by hi m for residential purposes throughout the period of 12 months immediately preceding the valuation date. Imp Value of the property for the purpose of the wealth tax X CA final Direct Taxes Page 43
Online lectures for CA studies Capitalised NMR (note no 1) The value of the property is to be taken as Capitalised NMR i.e. NMR * Multiplie r factor. The Capitalised NMR is calculated as NMR multiplied by 12.5 or 10 or 8 depending on whether the building is constructed on freehold land and the UN-expired period of lease as o n the valuation date. The following table summaries this: Bldg. Constructed. On Freehold Land Leasehold Land Unexpired period of lease of such land on V.D. > Or = 50 yrs. > 15 < 50 yrs. < Or = 15 yrs. Multiplier = 12.5 10 8 Part B of Schedule III Not Applicable. (Note 4) Add premium (for excess unbuilt area): (rule 6) (note no. 2) If the un-built area exceeds the specified area the Rule 3 value will be increas ed by the following Premium percentages. % Of Excess Area To Aggregate Area PREMIUM TO BE ADDED > 05% but < or = 10% of Aggregate Area 20% >10% but < or = 15% of Aggregate Area 30% >15% but < or = 20% of Aggregate Area 40% >20% of Aggregate Area Part B not Applicable FMV TO CONSIDER CA final Direct Taxes Page 44
Prof. Kalpesh Sanghavi Prof. Kalpesh Sanghavi
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a) For Bombay, Calcutta, Delhi & Madras 60% of Aggregate Area b) For Agra, Ahmedabad, Amristar, Allahabad, Bangalore, Bhopal, Cochin, Hyderabad, Indore, Jabalpur, Jamshedpur, Kanpur, Lacknow, Ludhiana, Madurai, Nagpur, Patna, Pune Sale, Sholapur, Srinagar, Surat Tiruchirapalli, Trivandrum, Baroda & Varanasi Middle level towns 65% of Aggregate Area c) Any other place 70% of Aggregate Area Reduction for unearned increase in value of land (note no. 3) Where the property is constructed on land obtained on lease from the Government, a local authority or any authority referred to in clause (20A) of section 10 of the Income-tax Act , and the Government or any such authority is, under the terms of the lease, entitled to claim and re cover a specified part of the unearned increase in the value of the land at the time of the transfer of th e property, the value of such property as determined shall be reduced by the amount so liable to be claim ed and recovered or by an amount equal to fifty per cent. of the value of the property as so determi ned, whichever is less, as if the property had been transferred on the valuation date. In other words wh ere 1) The property is constructed on land obtained on lease from the Government or a Local/Housing Authority 2) The Government /authority is entitled to recover a specified part of the unearne d increase in value of the land, at the time of transfer of the property. Then the Rule 3 value will be reduced by the lower of the following 2 amounts: i) Amount liable to be recovered by the Government/ authority as aforesaid; or ii) 50% of the Rule 3 value. Rule 8. -- Rule 3 not to apply in certain cases (NOTE 4) (a) where, having regard to the facts and circumstances of the case, the Assessing Officer, with the previous approval of the Deputy Commissioner, is of opinion that it is not practicable to apply the provisions of the said rule to such a case ; or (b) where the difference between the unbuilt area and the specified area exceeds twenty per cent. of the aggregate area ; or
Theory Question CA final Direct Taxes Page 45
Online lectures for CA studies (c) where the property is constructed on leasehold land and the lease expires wi thin a period not exceeding fifteen years from the relevant valuation date and the deed of lease d oes not give an option to the lessee for the renewal of the lease and in any case referred to in clause (a) or clause (b) or clause (c), the value of the property shall be determined in the manner laid down in rule 20 i.e. FMV is to be adopted. www.kalpeshclasses.com Exclusive place for CA final study online. 198 Raja Ram Mohan Roy Marg, Prarthana Samaj, Mumbai 400004 Tel. 022-23801121 / 23820676 +91-9969100000 +91-9969400000
CA final
Prof. Kalpesh Sanghavi (Part D schedule III)
Prof. Kalpesh Sanghavi www.kalpeshclasses.com (Part D schedule III) ASSETS OF BUSINESS (RULE 14) If the assessee is carrying on a business for which accounts are maintained by h im 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 su ch assets. For this purpose one has to make the following adjustment: Imp Assets Value to be taken Depreciable assets Written down value Non-depreciable assets (other than stock-in-trade) Book value Closing stock Value adopted for the purpose of income tax. If the value of any asset (referred above) determined according to the provision s of Schedule III exceeds the value given in the table supra by more than 20 percent of the value given in the table (supra), then higher value shall be taken as value of the asset. The value of an asset not disclosed in the balance sheet, shall be taken to be t he value determined in accordance with the provisions of schedule III as applicable to that asset. CA final Direct Taxes Page 47
Online lectures for CA studies (Part E schedule III) Online lectures for CA studies (Part E schedule III) INTEREST IN FIRM OR AOP (RULE 15, 16) The net wealth of the firm or association of persons on the valuation date shall first be determined as if it were the assessee and, thereafter, Imp Rs. A) That portion of the net wealth of the firm or association as is equal to the amount of its capital shall be allocated among the partners or members in the proportio n in which capital has been contributed by them X B) The residue of the net wealth of the firm or association shall be allocated a mongst the partners or members in accordance with the agreement of partnership or association for the distribution of assets in the event of dissolution of the fi rm or association or, in the absence of such agreement, in the proportion in which the partners or members are entitled to share the profits X TOTAL (A + B) X Provided that in determining the net wealth of the firm or association for the p urposes of this rule, no account shall be taken of the exemptions in section 5. CA final Direct Taxes Page 48
(Part F schedule III) VALUATION OF LIFE INTEREST (RULE 17) The value of the life interest of an assessee shall be arrived at by multiplying the average annual income that accrued to the assessee from the life interest by the fraction. average annual income [for last three years only] means the average of the gross income derived by the assessee from the life interest durin g each year of the period ending on the valuation date, reduced by the average of the expenses incurred [the amount of the reduction for such expenses shall, in no case, exceed five pe r cent. of the average of the annual gross income] on the collection of such income in each of those ye ars. Imp APPENDIX (See rule 17) 1 / (P+ D)- 1 Age nearer birthday Premium for unit sum assured Value of life interest of rupee 1 per annum at 6 % rate of interest (1) (2) (3) 0 0.02906 10.100 1 0.01590 11.999 2 0.01295 12.517 3 0.01162 12.765 4 0.01095 12.893 5 0.01065 12.951 6 0.01058 12.965 7 0.01063 12.955 8 0.01076 12.930 9 0.01095 12.893 10 0.01117 12.850 11 0.01142 12.803 12 0.01169 12.751 13 0.01197 12.699 14 0.01226 12.644 15 0.01257 12.587 16 0.01286 12.534 17 0.01319 12.473 18 0.01350 12.417 19 0.01387 12.351 20 0.01431 12.273 21 0.01469 12.207 22 0.01512 12.132 23 0.01556 12.057 24 0.01606 11.972 25 0.01656 11.888 CA final Direct Taxes Page 49
Online lectures for CA studies 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 0.01706 0.01762 0.01825 0.01894 0.01962 0.02037 0.02112 0.02194 0.02281 0.02369 0.02462 0.02562 0.02669 0.02787 0.02912 0.03044 0.03181 0.03325 0.03475 0.03637 0.03806 0.03987 0.04181 0.04387 0.04612 0.04850 0.05100 0.05362 0.05637 0.05931 0.06244 0.06575 0.06925 0.07294 0.07681 0.08167 0.08589 0.09025 0.09475 0.09938 0.10415 0.10907 0.11414 0.11938 11.806 11.715 11.614 11.505 11.399 11.285 11.173 11.053 10.927 10.804 10.675 10.541 10.400 10.249 10.093 9.932 9.771 9.607 9.441 9.267 9.092 8.911 8.724 8.533 8.333 8.130 7.926 7.722 7.518 7.310 7.099 6.888 6.676 6.464 6.255 6.008 5.806 5.610 5.419 5.234 5.054 4.879 4.709 4.543 Direct Taxes Page 50
CA final
Prof. Kalpesh Sanghavi 70 71 72 73 74 75 76 77 78 79 80 0.12483 0.13054 0.13652 0.14278 0.14936 0.15627 0.16356 0.17125 0.17937 0.18796 0.19706 4.380 4.220 4.062 3.907 3.753 3.602 3.453 3.305 3.160 3.016 2.875
CA final
Online lectures for CA studies (Part G schedule III) VALUATION OF JEWELLERY (RULE 18, 19)
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). The following points should also be kept in view Theory Question Statement to be submitted with return Reference to valuation Whether the value A statement The Assessing officer may refer the valuation to a of jewellery does in Form no. valuation officer, if he is of the opinion that th e fair not exceed Rs. O-8A market value of the jewellery exceeds the value of 5,00,000/-jewellery as declared in the return by more than 33 1/3 per cent of the returned value or Rs.50000/-. In such case the value of jewellery shall be in fair market value as estimated by the valuation officer. Whether the value of the jewellery exceeds Rs.5,00,000/A report of a registered valuer in Form No.O-8 The Assessing Officer may refer the valuation to a valuation Officer if he is of the opinion that the value of jewellery declared in the return is less than its fair market value (although it is in accordance with the estimate made by a registered valuer). In such case the value of jewellery shall be the fair market value as estimated by the valuation officer. RULE 19 ADJUSTMENT FOR SUBSEQUENT 4 A.Y. The value of jewellery determined by the valuation officer for any assessment year (hereinafter referred as the first assessment year) shall be taken to be the value of such jewellery for the subsequent four assessment years subject to the following adjustment: a) Where the jewellery includes gold or silver or any alloy containing gold or silv er, the market value of such gold or silver or such alloy on the valuation date relevant to the concerned subsequent assessment year will be substituted for the market value of such gold or silver or alloy on the valuation date relevant to the first assessment year:
b) Where any jewellery or part of jewellery is sold or otherwise disposed of by the assessee or any jewellery or part of jewellery is acquired by him, on or before the valuation da te relevant to the concerned subsequent year; the value of the jewellery determined for the first a ssessment year shall be reduced or increased, as the case may be, and the value as so reduced o r increased shall be the value of the jewellery for such subsequent assessment year. Theory Question CA final Direct Taxes Page 52
34AB. REGISTRATION OF VALUERS The Chief Commissioner or Director-General shall maintain a register to be calle d the Register of Valuers in which shall be entered the names and addresses of persons registered as valuers. Any person who possesses the qualifications prescribed in this behalf may apply to t he Chief Commissioner or Director-General in the prescribed form for being registered as a valuer under this section and different qualifications may be prescribed for valuers of different classes of assets. Theory Question Every application shall be verified in the prescribed manner, shall be accompani ed by such fees as may be prescribed and shall contain a declaration to the effect that the applica nt will make an impartial and true valuation of any asset which he may be required to value, fur nish a report of such valuation in the prescribed form, charge fees at a rate not exceeding the rate o r rates prescribed in this behalf, not undertake valuation of any asset in which he has a direct or in direct interest. The report of valuation of any asset by a registered valuer shall be in the prescrib ed form and be verified in the prescribed manner. 16A. REFERENCE TO VALUATION OFFICER (DVO PROCEDURE) For the purpose of making an assessment under this Act, the market value of any asset is to be taken into account in such assessment, the Assessing Officer may refer the valuation o f any asset to a Valuation Officer (a) in a case where the value of the asset as returned is in a ccordance with the estimate made by a registered valuer, if the Assessing Officer is of opinion tha t the value so returned is less than its fair market value (b) in any other case, if the Assessing Officer is of opinion (i) that the fair market value of the asset exceeds the value of the asset as returned by more than such percentage of the value of the assets as returned or by more than such amount as may be prescribed in this behalf ; or (ii) that having regar d to the nature of the asset and other relevant circumstances, it is necessary so to do. Theory Question For the purpose of estimating the value of any asset in pursuance of a reference , the Valuation Officer may serve on the assessee a notice requiring him to produce or cause to be produced on a date specified in the notice such accounts, records or other documents as the Va luation Officer may require. Where the Valuation Officer is of opinion that the value of the asset has been c orrectly declared in
the return made by the assessee he shall pass an order in writing to that effect and send a copy of his order to the Assessing Officer and to the assessee. Where the Valuation Officer is of opinion that the value of the asset is higher than the value declared in the return made by the assessee, or where the asset is not disclosed or the v alue of the asset is not declared in such return or where no such return has been made, the Valuation Off icer shall serve a notice on the assessee intimating the value which he proposes to estimate and gi ving the assessee an opportunity to state, on a date to be specified in the notice, his objections ei ther in person or in writing before the Valuation Officer and to produce or cause to be produced on t hat date such evidence as the assessee may rely in support of his objections. On the date spec ified in the notice or as soon thereafter as may be, after hearing such evidence as the assessee may pr oduce and after CA final Direct Taxes Page 53
Online lectures for CA studies considering such evidence as the Valuation Officer may require on any specified points and after taking into account all relevant material which he has gathered, the Valuation O fficer shall, by order in writing, estimate the value of the asset and send a copy of his order to the Assessing Officer and to the assessee. On receipt of the order from the Valuation Officer, the Assessing Officer shall, so far as the valuation of the asset in question is concerned, proceed to complete the assessm ent in conformity with the estimate of the Valuation Officer. www.kalpeshclasses.com Exclusive place for CA final study online. 198 Raja Ram Mohan Roy Marg, Prarthana Samaj, Mumbai 400004 Tel. 022-23801121 / 23820676 +91-9969100000 +91-9969400000
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Prof. Kalpesh Sanghavi (Part H schedule III)
Prof. Kalpesh Sanghavi www.kalpeshclasses.com (Part H schedule III) RESIDUARY RULES (RULE 20 AND 21) It provides that the value of any asset which is not governed by above shall be the price which in the opinion of the A.O. it would fetch if sold in the Open Market on the valuation date. For the removal of doubts, it is hereby declared that the price or other consideration for which any property may be acquired by or transferred to any person under the terms of a deed of trust or through or under any restrictive covenant in any instrument of transfer shall be ignored for the purposes of determining under any provision of this Schedule, the price such property would fetch if sold in the open market on the valuation date. Imp Concept of price and open market: The expression "the price it would fetch" means the gross price as paid by the p urchaser and not the amount which the seller would ultimately receive after deduction of incidental e xpenses in effecting the sale, for example, advertising, commission, legal fees, etc. The expression "open market" means a market to which everybody has free access t o come in and make an offer. A black market is not an 'open market' and the prices prevalent i n such market cannot be taken into account. Price controlled by law: Where prices are controlled under any law in respect of some properties, the pri ces fixed by the legislature should be taken into account. Both the purchaser and the seller are equally bound by the law of the land. Procedure to be followed: Valuation is an art and not an exact science. Mathematical certainty is not dema nded, nor indeed, is it possible. While estimating the price which an asset would fetch if sold in the o pen market on the valuation date, the Assessing Officer is required to estimate the price that a w illing buyer would pay. The power conferred on the Assessing Officer is a judicial power and has to be e xercised judiciously and not in arbitrary manner according to whims and surmises. He should not overvalue an asset and must take into account all the relevant factors while estimating the price. He i s bound to consider the value declared by the assessee and if he rejects it, he has to give reasons and background for his conclusions. The opinion of the Assessing Officer is neither sacred nor binding.
It is open to review in appeal by the Commissioner (Appeals) (under Sec. 23) and thereafter by the Tr ibunal (under Sec. 24). CA final Direct Taxes Page 55
Online lectures for CA studies PART - B BUSINESS INCOME CA final Direct Taxes Page 56
BUSINESS OR PROFESSION Profits and gains of business or profession are required to be computed in accor dance with the method of accounting regularly followed by the assessee [Sec. 145], However, som e outlays are allowed to be deducted on actual payment basis even if the assessee follows merc antile system of accounting [Sec. 43B]. In certain cases, scheme of presumptive computation has b een devised to dispense with the requirements of compulsory audit and maintenance of accounts Thus, if t he assessee follows cash system of accounting, profits be computed on receipts basis, while in mercantile system, it should be computed on accrual basis. Revenue computation normally does not allow capital outlays. However, some speci al provisions have been enacted to amortise capital outlays to arrive at taxable profits [Sec. 35ABB, 35D, etc.]. Scheme of depreciation also helps to amortise capital cost of the assets used fo r the purpose of business profession [Sec. 32]. Certain deeming provisions and some deemed incomes also play, their defined role to swell the gamut of taxable profits [Sec. 41 and Sec. 68 to 69D]. Special provisions have been enacted to regulate certain deductions in the compu tation of taxable profits [Sec. 30 to 35, Sec. 36, Sec. 40 and Sec. 40A]. It is impossible to legi slate for each and every item of business expenditure. Hence, an assessee is allowed to claim residuary d eductions under the umbrella of commercial expediency under Sec. 37(1). The scheme of computation of taxable profits and gains of business or profession is proposed to be discussed in this chapter. Profits of each business need not be computed separately. If one and the same business is carried on at a number of places, there is only one business. Net profits of the business have to be ascertained by aggregating the profits earned in all the branches and deducting them from all the allowable expenses. If more than one business is carried on by the assessee, profits of each business must be computed separately [South India v. C IT 3 ITR 11]. CA final Direct Taxes Page 57
Online lectures for CA studies SECTION 2 DEFINES IN ITS SUB SECTION 2(13) "BUSINESS" includes any trade, commerce or manufacture or any adventure or conce rn in the nature of trade, commerce or manufacture. 2(36) "PROFESSION" includes vocation. Systematic and Organised Activity. The word "business" is one of wide import and it means an activity carried on co ntinuously and systematically by a person by the application of his labour and skill with a vie w to earning an income [Barandra Prashad Ray v. ITD (1981) 129 ITR 295 (SC)]. The expression "business" though extensively used, is a word of indefinite impor t. In taxing statues it is used in the sense of an occupation or profession, which occupies time, attent ion and labour of a person, normally with the object of making a profit [State of Andhra Pradesh v. H. Abdul Bakshi and Bros. (1964) 15 STC 644(SC)]. To regard an activity as business, there must be a course of dealings, either actually continued or contemplated to be continued with a profit motive, and not for sport as a pleasure [CVT V.K. Vijay Kumar (2000) 243 ITR 271 (Mad.)]. Meaning of business, trade, adventure in nature of trade. The word business is one of wide import and in fiscal statutes, it must be constru ed in a broad rather than a restricted sense. The word business is not defined exhaustively in t he Income-tax Act, but it denotes an activity with the object of earning profit. To say that a busi ness is being carried on, means no more than that profit is to be earned by a process or production. Busin ess, as understood in the income-tax law, connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose. This does not, however, mean that under no circumsta nces a single transaction can amount to a business transaction. The expression business does not necessarily mean trade or manufacture only; it is being used as including within its scope p rofessions, vocations and callings for a fairly long time. The word business is one of wide import and i t means an activity carried on continuously and systematically by a person by the application of his labour and skill with a view to earning an income. Trade in its primary meaning is the exchanging of goods for goods or goods for mon ey; in its secondary meaning it is repeated activity in the nature of business carried on w ith a profit motive, the
activity being manual or mercantile, as distinguished from the literal arts or l earned professions or agriculture. When section 2(13) refers to an adventure in the nature of trade, it clearly sug gests that the transaction cannot properly be regarded as trade or business. It is allied to tr ansactions that constitute trade or business but may not be trade or business itself. It is characterised b y some of the essential features that make up trade or business but not by all of them; and so, even an isolated transaction can satisfy the description of an adventure in the nature of trade It vests even a single act with character of business. A classic case on this co ncept is that of the Supreme Court in G. Venkataswami Naidu & Co. where it was held that a single tra nsaction may amount to a plunge into the waters of trade when it is undertaken with profit mo tive. It is the intention, at the time of acquiring the asset, that would be relevant. While a s ingle transaction with intent to trade would be an adventure, a repetition makes it business. CA final Page 58 Direct Taxes
1) Where the transactions were not diversified; nor were they gradual, according to opportunities offered by fluctuating market conditions but were in bulk and almost at a time, which ordinarily were not the characteristics of a business dealing 2) That the name the assessee gave to the account, viz., "Account of Rs. 48 lakhs f loating in the share market", could not render the dealings in that account into trading transa ctions if otherwise they were not. 3) Since the expression "adventure in the nature of trade", implied the existence o f certain elements in the transactions which in law would invest them with the character of trade o r business and the question on that account becomes a mixed question of law and fact, the court can review the Tribunal's finding if it had misdirected itself in law. It is fairly clear that where a person in selling his investment realises an enhanced price, the excess over his purchase price is not profit assessable to tax. But it would be so, if what is done is not a mere realisation of the investment but an act done of making profits. The distinction between the two types of tran sactions is not always easy to make. Whether the transaction is of one kind or the other depends on the question whether the excess was an enhancement of the value by realising a security or a gain in an operation of profit-making. If the transaction is in the ordinary line of the as sessee's business there would hardly be any difficulty in concluding that it was a trading transac tion, but where it is not, the facts must be properly assessed to discover whether it was in the natur e of trade. 4) The surplus realised on the sale of shares, for instance, would be capital if th e assessee is an ordinary investor realising his holding; but it would be revenue if he deals wit h them as an adventure in the nature of trade. The fact that the original purchase was made w ith the intention to resell if an enhanced price could be obtained is by itself not enough but in conjunction with the conduct of the assessee and other circumstances it may point to the trading char acter of the transaction. 5) For instance, an assessee may invest his capital in shares with the intention to resell them if in future their sale may bring in a higher price. Such an investment, though motiva
ted by a possibility of enhanced value, does not render the investment of a transaction i n the nature of trade. The test often applied is, has the assessee made his shares and securitie s the stock-in-trade of a business. [1970] 077 ITR 0253- Raja Bahadur Kamakhya Narain Singh vs. CIT ( Supreme Court of India) Profits Motive not Essential. Though the element of profit is generally present in "business" but the motive o f making profit or actual earning or profit is not an essential ingredient of business. For instanc e, mutual concerns and societies carry on business though not with a profit motive. Business includes T rade, Commerce. Trade implies buying goods and selling them to make profit. If such transactions are done on a large scale, it is called commerce. Nobody can define the volume of business, which wo uld convert a trade into commerce. But everybody understands the distinction between the two with su fficient vagueness [Sri Gajalakshmi Ginning Factory Ltd. v. CIT (1952) 22 ITR 502 (Mad.)]. "Business" is not merely confined to purchase and sale of articles or goods. It may consist of rendering services to others, i.e. communication service (i.e. telephone, telegraph, etc.) or transport (i.e. railways, bus, and aeroplane, etc.). There is no anti-thesis between service and business. Business includes Manufacture. Manufacture involves the bringing into existence of a new product, which may have a different physical or chemical composition and is understood differen tly in common and CA final Page 59 Direct Taxes
Online lectures for CA studies commercial parlance [CIT v. Best Chem and Limestone Industries Pvt. Ltd. (1994) 210 ITR 883 (Raj)]. "Manufacture" implies a change but every change is not "manufacture". It is only when the change, or a series of changes take the commodity to the poi nt where commercially it can no longer be regarded as the original commodity but instead it is recogni sed as a new and distinct article, having its own name, identity character and end use [CIT v . Oceanic products Exporting Co. (1996) 219 ITR 293 (Ker.); Assistant CIT v. Soni Photo Films P. Lt d. (2000) 245 ITR (AT) II (Del.) (AT)]. The principles are clear, but difficulties arise in their application in individ ual cases. There might be borderline cases where either conclusion with equal justification may be reached [CIT v. Kanam latex Industries (P) Ltd. (1993) 203 ITR 542 (Ker.)]. Intention to resell When the purchase is made solely with an intention to resell at a chaser has no intention of holding the property for himself, the transaction is n the nature of trade. Where the purchase of any article is made without an intention to it, a resale under changed circumstances is only a realisation of capital investment tamp the transaction with a business character. Transaction relating to business If a transaction is related to the business which is normally carried on by an a ssessee, though not directly part of it, it may be inferred that the transaction is an adventure in the nature of trade. For example, Mr X is a cotton merchant. During a crisis in the cotton market, he is appointed under the power of attorney to wind up the affairs of a cotton firm and to dispose of the cotton bales and distribute the sale proceeds. The commission that he receives is taxable as busi ness profits, The quantity of the commodity purchased Where the transaction is unrelated to business, which is normally carried on by an assessee, the quantity purchased and sold may throw some light on the nature of the transactio n. If the quantity purchased is quite large which cannot be consumed by an assessee and his family in a reasonable time, and it does not give him any pride or possession, such transaction may be inferred as an adventure in the nature of trade. Where the purchased property undergoes alteration and then sold profit and pur an adventure i sell at a prof and does not s
Where a commodity is purchased, altered, repaired or converted into a different property and then sold, it may be readily inferred that the transaction is an adventure in the nat ure of trade. number of operations If the operations are repeated, the transaction may be regarded as an adventure in the nature of trade. For instance, Mr S, a partner in the firm of ship brokers, entered into contract s for the purchase of ships in his own name and thereafter turned over those contracts to the client o f his firm; profits from such contracts are assessable as income from business. Other considerations CA final Direct Taxes Page 60
The nature of the commodity, the subsequent dealings of the assessee, the nature of the organisation employed by the assessee and the manner of disposal may be such that the transac tion mav be stamped with the character of a trading venture. Concern in the nature of a trade A concern in the nature of trade, commerce, or manufacture also falls within the definition of "business". A concern in the nature of trade implies that it has an adequate deg ree of business organisation for the purpose of carrying on an undertaking. The size of organisa tion must necessarily depend upon the character of the concern itself. Land ventures Developing land and selling it in bits: where a person acquires land with a view to selling it later after developing it, he is carrying on an activity to be described as a business venture. Where the person goes further and develops the land into plots, develops the area, and dea ls with the land as stock-in-trade, he is carrying on business and making profits [Raja J. Rameshwar Rao v. CIT (1961) 42 ITR179 (SC)]. If a person invests money in land intending to hold it, enjoys its income for so metime, and then sells it at a profit, it would be a clear case of capital accretion and not profit der ived from an adventure in the nature of trade [G. Venkataswami Naidu & Co. v. CIT (1959) 35 ITR 594 (SC)]. Where the assessee company purchased large areas of land and buildings from the government with borrowed funds, interest on which was much higher than the income from the said propertie s, and sold part of the said properties within a short time of their purchase, it was held that the purchase and sale of properties was an adventure in the nature of trade and was in the course of a pr ofit-making scheme [Khan Bahadur, Ahmed Alladin & sons v. CIT 60 ITR 573 (SC)]. Thus, where initial intention is to make profit by resale, transaction is a business venture. Shares dealings The surplus realised on sale of shares would be capital if the assessee is an or dinary investor realising his holdings but it would be revenue, if he deals with them as an adve nture in the nature of trade [Raja Bahadur Kamakhya Narian Singh v. CIT (1970) 77 ITR 253 (SC)]. Bullion dealings Where the assessee purchased silver bar at the beginning of the war and not with an intention to
make investments but in expectation of rise in the price of silver and sold them when the war had come to an end, the profit from the sale of gold and silver was held to be a rev enue receipt [Tribhuvandas Vallabhodas v. CIT (1960) 61ITR 518 (Bom.)]. Decrees/claims acquired in money lending business Purchase of money-decrees and realisation of monev therefrom by a money-lender, is an adventure in the nature of trade, since money decree is not an asset which one would acqui re for keeping it for his employment [Rukmam Co. (P) Ltd. v. CIT (1964) 92 ITR 599 (Mad.)]. Purchase of a claim, pending arbitration Where the assessee took over claims from the party against a company in respect of which arbitration suit was pending, and on settlement of the claim made a profit, the profit was h eld assessable as CA final Direct Taxes Page 61
Online lectures for CA studies income accruing from an adventure in the nature of trade [CIT v. Himalayan Files & Marbles (P) Ltd. (1991) 188 ITR 293 (Bom.)]. Leasehold dealings Dealings in real property, activity of taking a property on lease, setting up a market thereon and letting out the shops and stalls in the market as a part of trading operations w ould fit within the meaning "business" [S. G. Mercantile Co. (P) Ltd. v. CIT 83 ITR 700 (SC)]. Forest leasing Leasing out of forest to contractors and recovering royalty from them can be in the nature of business activity under Sec. 28 [CIT v. Khairagarh Timber Traders (1982) 137 ITR 346 (MP)]. Stock broker A stock-broker is not engaged in the practice of profession. The real job of the stock-broker is to make arrangement for sale of the share or securities to others. Such activity cl early fills within the expression "business" and not " profession" [CIT v. Lallubhai Nagardes & Sons. ( 1993) 204 ITR 93 (Bom.)]. Scope of : profit motive Profit motive is essential for business. "Business" without profit is not busine ss, "any more than a pickle is candy", as pointed out in State of Andhra Pradesh v. H. Abdul Bakshi & Bros. But it was held that there need be no motive for making profits nor any actual earning of p rofit in P. Krishna Menon v. CIT. However profit motive can-not decide whether it is business income or capital gains because in capital investment there is also profit motive as capital appreciatio n. The assessee who was a successful lawyer and an active politician, and who was a lso for some time the Governor-General of India, Union Minister and Chief Minister of a State, had all along been an author of books and writer of articles to journals. He received Rs. 5,125 from f our journals to which he had contributed articles, and Rs. 480 from the All-India Radio, but claimed t hat these amounts were casual and non-recurring receipts not arising from any business or vocation . Though the amounts in question were not received in pursuance of any contract of employment between the assessee and the journals or the All-India Radio, the writing of books and contr ibuting articles to periodicals and magazines constituted a vocation and as the amounts arose from a
vocation. In a case like this even if the assessee did not expect any remuneration for his services, if the amount was really paid on account of the services, though voluntarily, the amount received would be taxable as income. [1963] 050 ITR 0196- Rajagopalachariar (C.) vs. Commissioner of Income-t ax (Madras High Court) Capital Receipts not Chargeable. Capital receipts are outside the purview of this clause unless specifically requ ired to be included by the statutes. Take an example. The supplier of bottles received compensation fro m an American company for destroying empty bottles of Coca-cola and Fanta as the Government re fused permission for bottling agreement. The A.O. did not tax the amount of compensation. The CIT revised the Order under Sec. 263 and taxed it. Held, the empty bottle being a capital asset, the c ompensation received for their distruction was a capital receipt [CIT v. Soft Beverages P.Ltd. (2001) 249 ITR 552 (Mad.)]. CA final Direct Taxes Page 62
Chargeability of Revenue Receipts. In order to be chargeable, the receipts must be of revenue nature either by way of sales or consultancy fees or in some other form. Receipts should be a part of considerati on for goods or services. It should not be a capital receipt or a returnable deposit. Thus, wher e a manufacturer of soft drinks receives deposits from customers for safe return of empty bottles, such d eposits cannot give rise to business income because such deposits are returnable after the bottles h ave been returned. Such deposits are not part of sales consideration [CIT v. Madurai Soft Drinks (P ) Ltd. (2000) 241 ITR (Mad.)]. www.kalpeshclasses.com Exclusive place for CA final study online. 198 Raja Ram Mohan Roy Marg, Prarthana Samaj, Mumbai 400004 Tel. 022-23801121 / 23820676 +91-9969100000 +91-9969400000
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Online lectures for CA studies PROFESSION AND VOCATION Meaning of profession A vocation, as normally understood, is a calling in which a person passes his li fe. It may even be stated to a way of living or a sphere of activity for which one has a special fi tness, though it is not necessary that the activity should be indulged in for the purposes of livelihood [K. Ramaswami Gounder v. CIT (1987) 163 ITR 94 (Mad.)]. Social work and preaching religion may amount to vocation. Teaching is a vocation if not a profession, a teaching of vendents eve n as a matter of religion amounts to carrying on a vocation [P. Krishna Mohan v. CIT (1959) 35 IT R 48 (SC)]. Profession vs. Occupation. Profession has to be distinguished from occupation, w hich tantamount to "business", viz., an occupation which substantially is the arrangement for sale of goods. All professions are businesses but all businesses are not professions. There sho uld be some special qualification of a person apart from skill and ability, which is required in car rying on any activity which could be considered as profession. This could be by having education in a particular system either in a college or university or it may be even by experience. In the case o f a broker, the activities are carried on either under a written agreement or even verbal agreement in resp ect of different constituents and the activities, therefore, would amount to business. Meaning of vocation Preaching of sermons in church by representative or employee of church is an int egral part of church. Activities of church amount to a vocation. Its income falls under head "profits and gains of business or profession" because profession includes vocation. Church entailed to deprecia tion on church building. [1984] 145 ITR 0786- All Saints Church vs. CIT (Karnataka High Court) Clause.2 (36) defined " profession as including " vocation ". Even the dictionar y meaning of the word " vocation " is " person's trade or profession". The teaching of Vedanta ha d been held by the Supreme Court to be a vocation. The preaching of sermons in the church by the re presentative of the church could not be different from the teaching of Vedanta or any other teaching . The teaching or preaching may be done by a representative or any employee of the church. It did not matter who did it, so long as it was considered to be an integral part of the church. The disci ples went to the church and not to the person who taught or preached. The activities of the assessee-chu rch, therefore, amounted to a vocation. The assessee-church was, therefore, entitled to deprecia
tion in respect of the church building. [1984] 145 ITR 0786- All Saints Church vs. CIT (Karnataka High Court) A vocation is only a way of living or a sphere

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