Amit Kumar

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Wealth Tax
Charge of Wealth tax [Sec.-3(2)] Subject to other provisions contained in the Wealth-tax Act, every individual, HUF or company, who is an assessee, shall be charged wealth-tax @ 1% on the amount by which his net wealth, determined on the basis of nationality and residential status, on the corresponding valuation date relevant to the assessment year 1993-94 and onwards, exceeds Rs.15,00,000. For assessment year 2008-09, the valuation date is 31.3.2008 According to the above, wealth-tax is chargeable only on three categories of persons i.e. individual, HUF and company. Individual The expression individual in section 3 includes the following: (i) The trustee of a private trust. (ii) Hindu deities. (iii) Holder of an impartible estate. (iv) Heirs of an individual, who died intestate leaving behind his self acquired property will be assessed in their individual capacity and not as HUF. (v) AOP, where the shares of the members are indeterminate or unknown.

Wealth tax Act not to apply in certain cases [Sec.-45] No wealth-tax shall be levied under the Act in respect of net wealth of (a) any company registered under section 25 of the Companies Act, 1956. (b) (c) (d) (e) any co-operative society. Any social club. Any political party. Any mutual fund specified in section 10(23D) of the Income-tax Act.

Computation of Net Wealth Net wealth shall be computed as under: (a) Aggregate value of all assets wherever located belonging to the assessee on the valuation date computed as per schedule III of the Wealth-tax Act. (b) Aggregate value of all assets required to be included in the net wealth of the assessee on the valuation date under section 4 of the Wealth-tax Act computed as per Schedule III of the Wealth-tax Act. (c) Exemption under section 5 of the Wealth-tax Act.

Amit Kumar

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(d) Debts owned by the assessee on the valuation date, which have been incurred in relation to the assets included in his net wealth. (e) Net Wealth = (a) + (b) (c) (d) ------Less: Assets exempt under section 5 Less: Debts incurred in relation to assets included in the net wealth Net Wealth Example: Case I Case II Case III ---------

In other words, net wealth means: Value of assets belonging to the assessee as on the valuation date Add: Deemed wealth under section 4

Gold of the assessee was confiscated by the Customs Department on: 29.3.2008 31.3.2008 02.04.2008

Whether this gold shall be included in the net wealth of the assessee as on valuation date 31.3.2008? Solution: Case I: Gold confiscated by the Customs Department shall not be included in the net wealth of the assessee as on 31.3.2008 since it does not belong to the assessee on 31.3.2008. Case II: The asset must belong to the assessee on the last moment of the valuation date so as to be included in the net wealth of the assessee. Therefore, in the present case the gold which has been confiscated by the Customs Department, ceases to be the property of the assessee on the last moment of 31.3.2008 and hence, is not to be included in the net wealth of the assessee as on 31.3.2008. Case III: As on 31.3.2008, Gold belongs to the assessee and thus, is to be included in the net wealth of the assessee. Note: In case the gold is seized but not confiscated then, in all three cases above, it shall be included in the net wealth of the assessee as on 31.3.2008 since the gold the gold belongs to the assessee as on 31.3.2008. Definition of Asset [Sec.-2(ea)] Asset means: 1. Any building or land appurtenant thereto (hereinafter referred to as house), whether used for residential purposes or commercial purposes or for the purpose of maintaining a guest house or otherwise.

Amit Kumar Note:

9891463160, 9891026051 House shall include a farm house situated within 25 km from the local limits of any municipality (whether known as municipality, municipal corporation or by any other name) or a cantonment board.

But it does not include: (i) A house meant exclusively for residential purposes and which is allowed by a company to an employee or an officer or director who is in whole time employment, having a gross annual salary of less than five lakh rupees. (ii) Any house for residential or commercial purposes which forms part of stock in trade. (iii) Any house which the assessee may occupy for the purposes of any business or profession carried on by him. (iv) Any residential property that has been let out for a minimum period of 300 days in the previous year. (v) 2. Any property in the nature of commercial establishments or complexes.

Motor cars All motor cars whether Indian or foreign. But does not include: (i) Motor cars used by the assessee in the business or running them on hire. (ii) Motor cars held as stock in trade.

Jewellery, bullion, furniture, utensils, or any other article made wholly or partly of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals. But does not include: Jewellery etc. held as stock in trade. Note: Jewellery includes (i) 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. (ii) Precious or semi-precious stones, whether or not set in any furniture, utensils, or other article or worked or sewn into any wearing apparel. Yachts, boats and aircrafts But does not include: Those used by the assessee for commercial purposes.

Amit Kumar Urban land

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But does not include: (i) Land on which construction of a building is not permissible under any law for the time being in force in the area in which such land is situated. (ii) Land occupied by any building which has been constructed with the approval of the appropriate authority. (iii) Any unused land held by the assessee for industrial purposes for a period of two years from the date of its acquisition by him. (iv) Land held as stock in trade by the assessee for a period of ten years from the date of its acquisition by him. Example 1: Plot of land is purchased by the assessee for industrial purposes on 1.1.2005 Construction of factory is started on 30.6.2005 and is completed on 31.12.2008 Solution: Valuation date 31.3.2005 Land is not an asset 31.3.2006 Land is not an asset* 31.3.2007 Land is an asset* 31.3.2008 Land is an asset* 31.3.2009 Land and building are not assets since they are used for the purposes of business of the assessee. It is presumed that assessee has started the business in the previous year ended 31.3.2009. *Incomplete structure is not a building and is therefore not an asset. Example 2: Mr. X purchased a residential plot an 1.1.2005. Construction of residential house is started on 30.6.2005 and is completed on 31.12.2008. Solution: Valuation date 31.3.2005 31.3.2006 31.3.2007 31.3.2008 . 31.3.2009

Land is an asset presuming that Asset falls in the definition of Urban land. Building and the land appurtenant thereto is an asset.

6. Cash in hand, in excess of Rs.50,000 in case of individuals and HUF and in the case of other persons any amount not recorded in books of account.

Amit Kumar Exclusion of assets and debts outside India [Sec.-6] Whether to be included Assets located in India 1A In case of an Indian national:Resident but ordinarily resident in India Resident but not ordinarily resident in India Non-resident Yes Assets located out-side India Yes

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Whether to be deducted Debts located in India Yes Debts located outside India Yes

Yes

No

Yes

No
Unless incurred in relation to asset located in India

Yes

No

Yes

No
Unless incurred in relation to asset located in India

1B

In case of an individual who is a foreign national (Residential status in this case shall not have any effect) In case of HUF Resident and ordinarily resident Non-resident or resident but not ordinarily resident in India In case of company Resident Non-resident

Yes

No

Yes

No
Unless incurred in relation to asset located in India

2.

Yes Yes

Yes No

Yes Yes

Yes No
Unless incurred in relation to asset located in India Yes

3.

Yes Yes

Yes No

Yes Yes

No
Unless incurred in relation to asset located in India

Amit Kumar Deemed Assets under section 4 of Wealth-tax Act. 1. Assets transferred to spouse 2. Assets held by Minor child

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3. Assets transferred to a person or Association of Persons for the benefit of the individual, his/her spouse. 4. 5. 6. 7. Assets transferred to a person or AOP under revocable transfer Assets transferred to sons wife Assets transferred to person or AOP for the benefit of sons wife Converted property

8. Interest of partner of a firm or Member of AOP [Sec.-4(1)(b)] Where the assessee is a partner of a firm or a member of any AOP other than a cooperative society, the value of the interest of the assessee in the assets of the firm or AOP determined as per Schedule III shall be included in his net wealth. Note: Where a minor is admitted to the benefits of partnership in a firm, the value of the interest of such minor in the assets of the firm determined as per Schedule III will be included in the net wealth of the parent. 9. Gift made by book entries [Sec.-4(5A)] Where a gift of money from one person to another is made by means of entries in the books of account maintained by the person making the gift, or by an individual or a HUF or a firm or an AOP with whom or with which he has business or other relationship, the value of such gift shall be liable to be included in the net wealth of the person making the gift. Unless proved to the satisfaction of the Assessing Officer that the money has been actually delivery to the person at the time the entries were made. 10. 11. Membership under a house building scheme [Sec.-4(7)] Building /right in building acquired in special cases [Sec.-4(8)]

Exemption in respect of certain items [Sec.-5] 1. Property held under a trust [Sec.-5(I)] Any property held by the assessee under trust or legal obligation for any public purpose of charitable or religious nature in India is exempt from tax. However this exemption is subject to the provision of section 21A.

Amit Kumar

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Note: Exemption is not available in respect of the business assets of the trust. However, in the following cases, the business assets will be exempt. 2. Interest in the coparcenary property of the HUF [Sec.-5(ii)] HUF is itself unit of taxation under Wealth-tax Act, The interest of the assessee in the coparcenary property of any HUF of which he is a member shall be exempt. Shall be exempt. 3. 4. One official residence of a Ruler [Sec.-5(iii)] Heirloom jewellery of an erstwhile Ruler [Sec.-5(iv)] Jewellery in the possession of any Ruler, not being his personal property, which has been recognised as his heirloom by the Central Government. The recognition of the Central govt. is subject to the following conditions: (a) The jewellery shall be permanently kept in India and shall not be removed outside India except for a purpose and period approved by CBDT. (b) Reasonable steps shall be taken for keeping the jewellery substantially in its original shape. (c) Reasonable facilities shall be allowed to any officer of Government authorised by CBDT in this behalf to examine the jewellery as and when necessary. Note: If any of the conditions are not satisfied then the CBDT may withdraw the exemption retrospectively. In such a case the fair market value of the jewellery on the date of withdrawal of recognition shall be taken as the fair market value of the jewellery for all the assessment years for which recognition is withdrawn. However, the wealth tax payable for all the assessment years in respect of such jewellery shall not exceed 50% of the fair market value on the valuation date relevant for the assessment year in which recognition is withdrawn. 5. [Sec.-5(v)] Money and the assets brought into India by a citizen of India or Person of Indian Origin In case of an individual being a citizen of India or a person of Indian origin. who was ordinarily residing in a foreign country, i.e. Non-Resident

and who has returned to India with the intention of permanently residing in India then the moneys and assets brought by him into India

Amit Kumar

9891463160, 9891026051 and the value of assets acquired by him out of moneys sent from abroad and from NRE account within one year immediately preceding the date of his return to India

and the value of assets acquired at any time on or after the date of his return to India out of moneys brought from abroad or out of the balance in NRE Account standing on the date of his return to India. Shall be exempt for a period of seven successive Assessment years.

Commencing with the assessment year next following the date on which he returned to India. Note: If the assets brought into India are sold or the assets purchased from foreign currency are sold and from the sale proceeds a new asset is purchased then, the new asset so procured shall not be exempt under section 5(v). 6. One house or part of a house [Sec.-5(vi)] One house or a part of a house or a plot of land belonging to an individual or a Hindu Undivided Family. Provided that wealth tax shall not be payable by an assessee in respect of an asset being a plot of land comprising an area of 500 square meters or less.

Amit Kumar

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Valuation of Assets [Sec.-7] As per section 7(1), the value of the assets, other than cash as on the valuation date, shall be determined in the manner laid down in Schedule III of the Wealth-tax Act. Compute the NET MAINTABLE RENT of the immovable property: Gross maintainable rent Less: 15% of GMR Less: Municipal taxes Net maintainable rant Determination of GROSS MAINTAINABLE RENT Gross Maintainable Rent is XXX XXX XXX XXX XXX

Where property is not Let Out

Where property is Let Out

If the property falls In the jurisdiction of Any Local authority, The annual value as assessed by the Local authority.

If the property does not fall in the jurisdiction of any Local authority, the Fair Market Rent

Annual Rent

Annual Value as assessed by the Local Authority

Determination of Annual Rent Annual Rent

Where property is let out for the Entire year

Where property is let out for the part of the year Actual Rent X 12 Number of months for Which property was let out.

Actual Rent

Amit Kumar Determination of Actual Rent Actual rent shall be calculated as under: Actual rent received or receivable

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Add: (a) Taxes in respect of the property agreed to be borne by the tenant. (b) 1/9th of actual rent received or receivable where the repairs are to be borne by the tenant. (c) 15% interest on the deposit received from the tenant reduced by interest actually paid by the assessee to the tenant in respect of the deposit. (d) Lease premium or Non-refundable deposit received for leasing out the property Number of years of lease (e) Value of any perquisite or benefit received by the assessee for leasing out the property or for modification in items of lease. (f) Any obligation of the owner met by the tenant. Actual Rent Note 1 No interest shall be added if the deposit is advance rent for three months or less. Note 2 Interest shall be computed on the monthly outstanding balance and part of the month shall be ignored. Note 3 If property is let out for part of the year and payments referred to in (I), (iv), (v) and (vi) are made for the entire year, then for computing Actual Rent, these payments shall also be taken proportionately for part of the year for which property is let out. Example: A house property is let out to tenant on 1.7.2004 on following terms: (a) Rent of Rs.18,000 per month. (b) Repairs are to be borne by tenant. Actual expenditure on repairs incurred by the tenant Rs.28, 000. (c) Deposit received from the tenant Rs.6, 00, 000. Landlord pays interest @ 9% to the tenant. (d) Tenant is running a taxi-hire concern and it is agreed that the tenant will provide 200 kms of free taxi travel every year. Normal taxi fare is Rs.4 per km. Assessee has utilized 100 kms in the year ended 31.3.2005. (e) Tenant has agreed to bear the municipal taxes of Rs.80, 000 per annum which are due in December every year. (f) The tenant has paid a lease premium of Rs.9, 00, 000 which is not refundable and the lease is for a period of nine years beginning from 1.7.2004. Compute the annual rent for valuation dates 31.3.2005 and 31.3.2006.

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Amit Kumar Practical Problems on Wealth-tax: Q-1. Run furnishes the following details as on 31-3-2006:

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Rs. Commercial complex 21, 60, 000 Units of UTI 7, 50, 000 Silver utensils (market value Rs.1, 75, 000) 75, 000 Farm house (21kms away from municipal limits) 21, 00, 000 Urban land (construction not permitted under the law) 42, 01, 000 Loan taken to purchase units of UTI 3, 00, 000 Cash in hand 11, 00, 000 Wealth-tax paid for assessment year 2006-07 21, 250 Compute the net wealth and the wealth-tax for the assessment year 2006-07. Q-2. R and Co., a partnership firm, is engaged in the business of textile trading at Pune. Minor son, V has been admitted to the benefits of partnership. The abridged balance sheet of the firm as on 31.3.2006 is as under: Capital and Liabilities Rs. Assets Rs. Capitals: Fixed assets 5, 20, 000 R 5, 00, 000 Housing complex 10, 30, 000 Mrs. R 4, 00, 000 Jewellery 2, 00, 000 V 3, 00, 000 Stock-in-trade 1, 50, 000 ICICI loan 2, 20, 000 Receivables 1, 30, 000 Loan creditors 6, 00, 000 Cash-in-hand 60, 000 Trade creditors 1, 25, 000 Cash at bank 90, 000 Income-tax payable 35, 000 21, 80, 000 21, 80, 000 The following further informations are made available: (i) The sharing ratio of partners is 60:40 among R and his wife in the event of loss, and profit is shared among partners in the ratio of 40:30:30 respectively. (ii) Fixed assets include one Urban plot of 350 square metres, the market value of which being Rs.8,000 per square metre and an agricultural land of 1, 000 square metres located beyond 8kms, to Pune municipal limits. (iii) Housing complex consists of three flats, one flat being used by the firm for its business, one flat is on the lease since 1-1-2005 and other flat is also on lease with effect from 10-6-2005. The net maintainable rent of flats under lease stood at Rs.1,03,750 and 60,000 respectively. The capitalization factor may be assumed at 12.5. (iv) The market value of jewellery is Rs.7, 35, 000. (v) ICICI loan relate to acquisition of Urban land (Rs.1, 85, 000) and agricultural land (Rs.35, 000). (vi) Loan creditors of Rs.6, 00, 000 relate to the housing complex. On the basis of above information, find out the interest of all partners in the firm as on 31-32006 for the purpose of computation of net wealth in their respective hands. In whose hands the net wealth of minor son will be assessed?

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Amit Kumar Q-3.

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Compute taxable wealth and wealth-tax liability of R (who is doing business) for the assessment year 2006-07. R owns the following assets and liabilities as on 31-3-2006: (i) Land situated in rural area, the book value of which is Rs.8lakhs. (ii) Unused land situated in urban area, purchased on 7-11-1966 for construction of factory. Its book value is Rs.9lakh and value as per part D of Schedule III to the Wealth-tax Act, 1957 is Rs.25lakh. (iii) Motor car written down value Rs.4lakh. Value as per Schedule III to the Wealth-tax Act, 1957 is Rs.3.5lakh. (iv) Dumper (machine used for business): written down value Rs.18lakh, value as per Schedule III to the Wealth-tax Act, 1957 is Rs.12lakh. (v) Residential house: written down value Rs.3.5lakh, value as per Schedule III to the Wealth-tax Act, 1957 is Rs.4.25lakh (partly used for residence and partly for business). (vi) Gold and silver: book value Rs.6lakh, value as per Schedule III to the Wealthtax Act, 1957 is Rs.55lakh. However, a loan of Rs.5lakh was taken for purchase of gold/silver and still outstanding for payment as on 31-3-2006. (vii) Shares in companies: book value Rs.11lakh. Quoted value Rs.9, 20, 000. Loan of Rs.5lakh was taken from State Bank of Hyderabad against the shares. (viii) Cash in hand Rs.65, 000. (ix) Cash at bank Rs.5, 25, 000. G furnishes the following particulars for compilation of his wealth-tax return for the assessment year 2006-07. Rs. (i) Flat purchased under installment scheme in 1979 for Rs.5, 50, 000 used for self-Occupation and market value as on 31-3-2006 13, 00, 000 (ii) Gift of jewellery made to wife from time to time aggregating Rs.4,00,000 and market value as on 31-3-2006 9, 00, 000 (iii) Cash in hand 1, 25, 000 (iv) Bank balance with ICICI Bank 2, 50, 000 (v) Urban land transferred to minor handicapped child as on 31-3-2006 8, 00, 000 (vi) 2 motor cars (one is held as stock-in-trade in business and other used for personal purposes) 6,00,000 each (vii) Loan against flat being installments remaining unpaid 50, 000 (viii) Wealth-tax liability outstanding 5, 000 Compute the net wealth of G indicating reasons for the treatment under the provisions of the Wealth-tax Act, 1957? Ajay, an Indian citizen, was ordinarily residing in USA. He visits India every year during Septamber for two weeks. He came to India permanently on 10-8-2005. Comment on chargeability of the following assets owned by him under the Wealth-tax Act, 1957: (i) A residential house (not being let-out) at Delhi gifted by his father-in-law. (ii) A self-occupied house at Kolkata purchased out of money remitted from USA on 5-42004. (This house is sold on 8-8-2006 to purchase debentures and silver utensils). (iii) A house at Mumbai purchased out of money remitted from USA on 16-8-2004. (iv) One kilogram gold bought at the time of transfer of residence on 10-8-2005.

Q-4.

Q-5.

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Amit Kumar

9891463160, 9891026051 (v) Out of money brought into India at the time of return and out of his nonresident (external account), he acquires the following assets during August-October, 2005: 2 cars worth Rs.10,00,000, air-conditioners and shares in companies.

Q-6.

Compute the net wealth of R for the assessment year 2006-07 from the following: Rs.
House property let out for residential purposes for 290 days during the previous year Gold ornaments for personal use Commercial complex in New Delhi Furniture made of costly wood Urban land situated 2kms away from municipal limits of Delhi Residential house allocated to a full-time finance manager whose gross salary is Rs.2, 40, 000 per annum. House property which is used by R for his business purposes Farm house situated within 13kms from the municipal limits of Vadodara Coparcenary interest in his HUF properties Share of net wealth of a partnership firm in which he is one of the partners Jewellery gifted by him to his married daughter 17, 00, 000 18, 00, 000 40, 00, 000 2, 00, 000 72, 50, 000 18, 40, 000 19, 26, 000 17, 60, 000 1, 80, 000 17, 65, 000 1, 60, 000

Q-7.

Whether the following assets are assets under section 2(ea) of the Wealth-tax Act, 1957: (i) Urban land on which a building (residential or commercial) is constructed: (a) with the approval of an appropriate authority; and (b) without the approval of an appropriate authority. (ii) Shares, debentures, fixed deposits in bank, plant and machinery, units of a mutual fund, amount recoverable from Government, sundry debtors, goodwill, stock-in-trade. (iii) In the cash book of an individual/HUF opening balance on 31-3-2005 is Rs.1, 85, 000, out of which the assessee deposits Rs.1, 35, 000 in his current account with the City Bank before the close of banking hours on 31-3-2006 (no other inflow or outflow of cash on 31-3-2006). (iv) Motor car used by a person in the business of running them on hire to tourists (Indian or foreign citizens) or to other persons. (v) Residential house owned by a company and allotted to a part-time director whose salary is Rs.1,00,000 per annum. (vi) Farm house which is not situated within 25kms of any municipality or a Cantonment Board. (vii) Diamonds held as: (a) Stock-in-trade; (b) Fixed assets; and (c) Personal assets by a businessman.

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Amit Kumar Q-8.

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From the following information, compute the net wealth of R for the assessment year 2006-07: Rs. (i) House property gifted to son-in-law without any consideration 5, 20, 000 (ii) House property let-out for commercial purposes 20, 00, 000 (iii) Land situated 5kms away from municipal limits 10, 00, 000 (iv) Super market in Chennai 20, 00, 000 (v) Boat used for commercial purposes 7, 00, 000 (vi) Gold deposit binds issued under the Gold Deposit Scheme, 1999 2, 00, 000 (vii) Electronic goods 7, 00, 000 (viii) Diamonds 4, 50, 000 (ix) Professional books 1, 75, 000 Outstanding debits of the assessee: (i) Loan from bank for the purpose of professional books 70, 000 (ii) Personal loan for buying diamonds 90, 000 (iii) Wealth-tax payable for the assessment year 2004-05 3, 200 Raman, an Indian citizen, who has been residing in Germany for the past 10 years, returned to India on 21-9-2005 with an intention of permanently residing here. Discuss the wealth-tax liability in the following case: (i) He brought Rs.10, 00, 000 along with him and purchased a Honda car. (ii) He had sent Rs.30, 00, 000 to India on 5-10-2004. This money was utilized for purchase of diamonds on 28-10-2004. (iii) He sent 15,00,000 to India 5-7-04 & purchased a residential flat in Delhi on 157-04. (iv) On his return, he also brought gold jewellery worth Rs.11, 00, 000. (v) He purchased a residential house for Rs.10, 00, 000 on 15-3-2006 by withdrawing the money from his non-resident ordinary account.

Q-9.

Q-10. Raja is the owner of a house which is constructed on leasehold land aquired from Haryana Urban Development Authority (HUDA). He has let-out this house to Basu for Rs.15, 000 per month. The other terms are as under: (i) Basu will pay 50% of the municipal taxes and bear the cost of repairs. (ii) Basu will give interest-free advance of Rs.3, 00, 000. This amount will be refunded at the time of vacating the house. (iii) Basu will also pay Rs.1, 00, 000 as premium for leasing the property for five years. The annual value assessed by the local authority is Rs.2, 50, 000 and taxes levied are Rs.30, 000. Basu spent Rs.20, 000 on the repair of the house. Compute the net maintainable rent of the house. Q-11. R owns a house property which is situated at Delhi and is used for residential purposes throughout the year. The annual value of the property as per the municipal records is Rs.1, 00, 000 whereas the rent received from the tenant is Rs.80, 000. The municipal taxes are paid partly by R (Rs.3, 000) and partly by the tenant (Rs.5, 000). The tenant bears the entire repair expenses of Rs.5, 000. He also deposited with the landlord a sum of Rs.25, 000 as refundable security which, however, does not carry any interest. The difference between unbuilt area and specified area does not exceed 5%. What will be the value of the house property on 31-3-

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Amit Kumar

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2006, if(i) the house is built on freehold land; (ii) it was acquired after 1-4-1974 for Rs.10, 00, 000; and (iii) the cost of improvement is Rs.20, 000?

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