Tax Planning and Management
Unit –IV
Wealth tax- Part-1 (Basics)
CONTENTS
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What is wealth tax
Legal framework
Charging of wealth tax
What is net wealth
Who is assessee
Valuation date
Deemed assets
Debts owed by the
assessee.
• Summary
What is wealth Tax?
• Wealth Tax is a tax on the value of wealth owned
by a person, levied under the Wealth Tax
Act,1957.
• It is one of the direct taxes.
• It is annual tax.It is charged for every assessment
year commencing from 1st April, 1957
• The tax is levied @ 1 per cent on the amount of
wealth as on 31st March of every year, where
such amount exceeds Rs.15,00,000.
Legal Framework
• Wealth tax is charged under the provisions
of WEALTH TAX ACT,1957 read with
WEALTH TAX RULES, 1957
Contd.
WEALTH TAX ACT, 1957
• THIS Act came in to force with effect from
1st April, 1957.
• This Act extends to the whole of india.
• This Act is divided into 8 chapters and
contains 119 (in numbers) sections and 3
Schdules.
• This Act has detailed provisions regarding
levy and collection of wealth tax.
Charging Of Wealth Tax
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Section 3 of wealth Tax Act, 1957 provides that every
Individual,
HUF or
Company,
who is an assessee shall be charged wealth tax @1% on
the amount by which his net wealth, determined on the
basis of nationality and residential status, on the relevant
valuation date, exceeds Rs. 15,00,000.
But following are not subject to wealth tax u/s 45:
Who are not subject to wealth tax?
Section 45 of Wealth Tax Act provides that
no wealth tax shall be levied in respect of
the net wealth of the following persons:
–
–
–
–
–
Section 25 company
Any co-operative society
Any social club
Any political party
A mutual fund specified u/s10 (23D) of the
Income tax Act.
What is Net Wealth [sec. 2(m)]
• Section 2(m) of Wealth Tax Act, 1957 defines what is
‘Net Wealth’. In simple words, Net Wealth means:
Value of Assets owned by the assessee as on the
Valuation date
Add: Deemed assets u/s 4
------
Less: Exempt assets u/s 5
Total
Less: Debts incurred in relation to assets included
above.
Net Wealth
Contd.
Contd.
Basis of computing net wealth [Sec. 6]
Net wealth is to be computed :
In case of Individual
On the basis of his
Nationality and Residential
status in the previous year
ending on the valuation
date. (for valuation date
31.03.07 previous year is
06-07)
In case of HUF and
Company
On the basis of its
Residential status in the
previous year ending on
the valuation date.
Who is an assessee[Sec.2(c) ]
• Assessee means a person by whom wealth
tax or any other sum of money (I.e.
penalty, interest) is payable under this Act,
and includes:
WHAT IS AN ASSET?[sec. 2(ea)]
• The term Assets has been defined under
section 2(ea) of wealth Tax Act, 1957.
• This definition covers only 6 types of
assets ,basically these are unproductive in
nature.
• It is to be noted that for the purpose of
charging wealth tax “ there must be an
asset with in the meaning of sec.[2(ea)]
1. Building
1. Any building or land
appurtenant
thereto
whether
used
for
Residential purpose or
Commercial purpose or
for the purpose of
maintaining a guest
house
or
otherwise,
including a Farm House
situated within 25 kms
from the local limits of
the municipality BUT
subject to the following
exceptions
Exceptions to the definition of house
The following shall not be included in the definition
of house:
1. Any house allotted by a company for
residential purpose to an employee or an officer
or a director who is in full time employment
having a gross annual salary of less than Rs.5
lakh.
2. Any house for residential or commercial
purpose, which forms part of stock in trade of
the assessee.
Contd.
Contd.
3. House used by the assessee for the
purpose of his business or profession.
4. Any residential property that has been let
out for a minimum period of 300 days in
the previous year,
5. Any property in the nature of commercial
establishment or complexes
2.Motor car(whether Indian or
foreign)
•
But following will
not be considered as
asset
1. A car used for
running on hire
2. A car held as stock
in trade.
3.
Jewellery, Bullion, Furniture, utensils,
or any other article made (wholly or
partly) of gold, silver or any precious
metals
But Jewellery held
as stock in trade is
not an asset.
4. Yachts, boats and aircrafts
• But yachts, boats
aircrafts
used
commercial purpose
not assets.
and
for
are
• Meaning of commercial
purpose (e.g. using for
earning income or held as
stock in trade.
5. Urban Land
•
Urban land means land situated
in any area which is with in the
jurisdiction of a municipality
and which has a population of
not less than 10,000 according to
the preceding published census.
Or
In any area with in such
distance, not being more than 8
km. From the local limits of any
municipality or cantonment
board , notified by the central
government.
But subject to the following
exceptions:
The following urban land shall not be treated as
asset:
• Land on which construction of building is not
permissible under any law.
• The land occupied by any building which has
been constructed with the approval of appropriate
authority.
• Any unused land held by the assessee for
industrial purpose for a period of two years from
the date of its acquisition.
• Any land held by the assessee as stock in trade
for a period of ten (10) years from the date of its
acquisition.
6. Cash in Hand
• In case of Individual and
HUF: cash in hand in
excess of Rs. 50,000,
whether
recorded
in
books of account or not.
• In case of Company: any
cash not recorded in the
books of account
What is valuation date
• A very important date in
the wealth tax.
• All the assets held by the
assessee on that day are
counted for the purpose
of wealth tax.
• 31 March preceding the
relevant assessment year
is the valuation date.
Problem:
• Determine whether following are assets or
not under Sec.2(ea):
Deemed Assets [sec. 4]
• Deemed assets means those assets which do not belong
to assessee but they are included in computing the net
wealth of the assessee.
Types of deemed assets
A
Deemed assets which
are
included
in
computing net wealth
of an individual
assessee only.
B
Deemed assets which are
included in computing
net wealth of any
assessee
(individual,
HUF, Company).
Conditions for inclusion of Deemed
Assets
The individual (transferor) must be the
owner of the asset transferred on the date
of transfer.
These assets must be transferred without
adequate consideration.
These assets must be held by the transferee
on the valuation date.
‘Type A’ Deemed Assets
• Following deemed assets will be included
in the net wealth of individual assessee
only:
1.
Asset transferred
[Sec.4(1)(a)(I)
to
spouse
• If any asset has been
transferred by an individual to
his/her spouse, directly or
indirectly without adequate
consideration, then such asset
shall be included in the net
wealth of the transferor.
EXCEPTION:
• If such asset has been
transferred in connection with
an agreement to live apart then
such asset shall not be included
in the net wealth of the
transferor.
Contd.
• The relationship of husband and wife must
exist on both the dates, I.e, date of transfer
and valuation date.
• ‘Love and affection’ is a good
consideration but not an ‘adequate
consideration’.
2. Assets held by a minor child [sec.
4(1)(a)(ii)]
• Assets held by a minor
child are included in the
net wreath of the parent.
• However, the following
assets shall not be
included in the net wealth
of parent and would be
taxable in the hands of the
minor only.
Contd.
Contd.
• Assets held by a minor child suffering from any
disability of the nature specified u/s 80U of
Income Tax Act,
• Assets held by a minor married daughter.
• Assets acquired by a minor child out of the
following income referred to in proviso to
Section 64 (1A) of the Income Tax Act:
– Income from manual work done by him,
– Income from activity involving application of his/her
skill, talent or specialised knowledge or experience.
Contd.
• It should be noted that the child must be
minor on the valuation date , otherwise,
clubbing provision shall not apply.
• Question:
in which parent’s income the net wealth of
the minor child will be clubbed?
contd.
• If marriage subsist:
– In the net wealth of that parent whose net wealth (excluding the
assets of minor child) is greater.
• If marriage does not subsist:
– In the net wealth of that parent who maintains the minor child in
the previous year,
and where any such assets are once included in the net
wealth of either parent, they will not be included in
the net wealth of other parent unless permitted by the
assessing officer.
3. Assets transferred to a person or association
of persons [sec.4(1)(a)(iii)]
• If any asset [within the meaning of Sec2(ea) ]
has been transferred by an individual to a person
or association of person, directly or indirectly,
without adequate consideration for the immediate
benefit of the :
– Individual himself or herself
– His/her spouse,
then such asset will be included in the net
wealth of the transferor.
Again the relationship of husband and wife must
exist on the valuation date.
4. Asset transferred under Revocable
Transfer [sec.4(1)(a)(iv)]
• If any asset [within the meaning of Sec2(ea) ] has
been transferred by an individual to a person or
association of person, directly or indirectly,
otherwise than under an IrrevocableTransfer,
then such asset will be included in the net wealth
of the transferor.
Contd.
Contd.
Meaning of revocable transfer
•
Following transactions are treated as revocable:
1. Transfer revocable within a period of six years or
during the transferee’s lifetime; or
2. If the transferor derives any benefit, directly or
indirectly, from the assets transferred; or
3. If the transferor has a right to re-transfer, directly or
indirectly, whole or any part of the assets or income
from the assets transferred.
4. If the transferor has a right to re-assume power,
directly or indirectly, over the whole or any part of
the assets or income from the assets so transferred.
5. An Asset transferred to son’s wife
[sec.4(1)(a)(v)]
• If any asset [within the meaning of Sec2(ea)] has
been transferred by an individual to his/her son's
wife directly or indirectly, without adequate
consideration , then such asset shall be included
in the net wealth of transferor.
• Imp.
It is be noted that relationship between individual
(transferor) and daughter-in law must exist on both
the date- date of transfer and valuation date.
Problem on previous slide
• Mr. X have transferred his building (with
in the meaning of Sec.2(ea) ) to MS. Y who
later on married Mr. Z (son of Mr. X).
• Problem: In whose net wealth this asset
will be included?
6. Asset transferred to person or
association of person [sec.4(1)(a)(vi)]
• If any asset [within the meaning of Sec2(ea) ] has been
transferred by an individual to a person or association of
person, directly or indirectly, without adequate
consideration for the immediate, or deferred benefit of the
son’s wife then such asset will be included in the net
wealth of the transferor.
• It is be noted that relationship between individual
(transferor) and daughter-in law must exist on both the
date- date of transfer and valuation date
Some important facts or points
• Asset transferred must be an asset with in
the meaning of Sec. 2 (ea) on the
‘valuation date’ and not on the date of
transfer.
• Example:
7. Converted Property [Sec.4(1A)]
• Where an individual, who is a member of a Hindu
Undivided Family, converts his individual property in to
the property of the family
• through the act of impressing such separate property with the
character of property belonging to the family, or
• throwing it into the common stock of the family,or
• By way of gift,
then such property is know as ‘converted property’.
• And the value of such converted property on the
valuation date shall be included in the net wealth of the
individual.
8. Holder of an impartible estate
• The holder of an impartible estate shall be
deemed to be the owner of all the
properties comprised in the estate.
Type “B” Deemed Assets
• The following assets will be included in
the net wealth of any of assessee (i.e.
individual, HUF, or Company)
1. Interest in a firm or Association of
Persons [Sec. 4 (1) (b)]
• In case of an assessee who is a partner in a firm
or a member of an association of persons, then
the value of his/her interest in the assets of the
firm or association, determined in a manner laid
down in Schedule III.
• If a minor is admitted to the benefits of the
partnership in a firm, the value of the interest of
such minor in the firm shall be included in the net
wealth of the parent of the minor.
2. Gift made by means of book
entries [Sec.4 (5A)]
• Where a gift of money from one person to
another person is made by means entries in
the books maintained by anyone or more of
the following:
– Donor
– An individual or HUF or firm or an AOP or
body of individual with which the donor has
business or other relationship,
Then the value of such gift shall be
included in the net wealth of the donor.
3.Building or part allotted under a House
Building Scheme[Sec.4
• Where the assessee is a member of a co-operative
society, company or other association of persons
and a building or part thereof is allotted or leased
to him under a house building scheme of the
society, company or other association, as the case
may be,
the assessee shall be deemed to be the
owner of such building or part thereof.
Some important facts or points
• Asset transferred must be an asset with in the
meaning of Sec. 2 (ea) on the ‘valuation date’ and
not on the date of transfer.
• The asset transferred need not be in the same
form in which it was transferred by the transferor.
• Any accretions to the asset transferred do not
come with in the scope of Section 4. [CWT v.
Saraswathi Achi (1980)]
Case-1
• ‘X’ gifts units of UTI to his wife on
21.10.05. The units were sold by Mrs.X on
04.01.07 and she purchased gold
ornaments on 05.02.07 out of the sale
proceeds of the units.
Solve the case with justification.
Case-2
• ‘X’ gifts gold ornaments to his wife on
21.10.05. These gold ornaments were sold
by Mrs.X on 04.01.07 and she purchased
shares of RIL on 05.02.07 out of the sale
proceeds of the gold ornaments.
Solve the case
Case-3
• ‘X’ gifts gold ornaments to his wife on 21.10.05.
Mrs.X further makes a gift of gold ornaments to
her sister on 4.01.07.
• If these gold ornaments are destroyed by fire on
4.01.07, then what will be the situation?
• If these gold ornaments were gifted by Mrs. X to
her daughter in law, then what will be the
situation?
Solve the case.
Debt owed by the assessee
•
For calculating net wealth of an assessee debts owed by
the assessee shall be deductible subject to the following
condition:
1. Debs should have been incurred in relation to taxable
assets.
2. Such debt should be still outstanding on the valuation
date.
3. Debts located in India or outside India shall be
deductible on the basis of nationality and residential
status, as the case may be.
Liability under wealth tax Act is not a debt.
Summary
 For charging Wealth Tax the following points should
be kept in mind:
 Wealth tax is chargeable only in case of three categories of persons,
namely, individual, HUF, Company.
 Wealth tax is charged @ 1% on the net wealth exceeding Rs. 15,00,000.
 Net wealth of the assessee is to be computed as on the valuation date.
 For computing net wealth residential status and nationality of the
assessee will be considered.
 Asset must be an asset within the meaning of Sec.2 (ea).
 Such asset must belong to the assessee, however, deemed asset under
sec. 4 will also be considered.
 Such asset must be held by the assessee or the transferee under section 4
on the valuation date.
 For calculating net wealth exempt assets will not be considered.
 For calculating net wealth debts owed by the assessee on the valuation
date will be considered.
Thanks