ISSUES RELATED TO WEALTH TAX

WEALTH TAX CHARGING AND PROCEDURAL ASPECTSNasik Branch of WIRC of ICAI10th May 2014CA Abhijit ModiBasicThe Wealth Tax Act came into force on 1st April 1957.The Wealth tax Act, 1957 is applicable to the whole of India , including Jammu and Kashmir.The purpose of the introduction of Wealth tax Act:To tax idle wealth and to de-motivate to hold idle wealthTo support the revenue collectionThe Regulatory Body - CBDT

Wealth tax Session planSession can be divided into two parts

The Charging provisions

The Procedural ProvisionsCoverage of Wealth TaxCharging ProvisionsSection 2(ea) Definition of an AssetSection 2(q) Valuation DateSection 2(m) Net WealthSection 3 Charging SectionSection 4 Deemed AssetSection 5 ExemptionSection 7 Valuation of Assets

Coverage of Wealth TaxProcedural ProvisionsSection 14/14A/14B Filing of Return of Net WealthSection 15 Belated Return and Revised ReturnSection 16 AssessmentSection 16A Reference to Valuation OfficerSection 17 Wealth Escaping AssessmentSection 17A Time Limit to Complete the AssessmentSection 17B Interest for Late Payment and Late Filing of returnSection 18 - PenaltiesValuation Date (section 2(q)The valuation date means the last date of the previous year in respect of the assessment year for the purpose of income tax assessment.Since the tax is charged on the net wealth of an assessee on the corresponding valuation date, the existence of assets on the valuation date is a necessary condition for the levy.Where there is change of ownership of assets on the valuation date Net wealth at the last moment of the day shall be the subject of assessment of Wealth Tax.Section 2(m) Net Wealth"net wealth" means the amount by which the aggregate value computed in accordance with the provisions of this Act (Schedule III Valuation Rules) of all the assets, (Section 2(ea) Definition of Asset)wherever located, belonging to the assessee (section 6)on the valuation date, (section 2(q))including assets required to be included in his net wealth as on that date under this Act, (section 4 Deemed Assets) is in excess of the aggregate value of all the debts owed by the assessee on the valuation date which have been incurred in relation to the said assets. (Deduction allowed)Section 3 Charging SectionEvery Individual, HUF and Company,to pay tax @ 1% on net wealth (section 2(m))exceeding Rs.30,00,000on the corresponding valuation date (section 2(q))

(No Education Cess prescribed on Wealth tax)Other Assessees WealthPartnership Firm/LLP/AOP/BOIAs per section 3, Partnership Firm/LLP/AOP/BOI are not liable to pay wealth tax.However, Rule 15 and 16 of the Valuation Rules as per Schedule III, prescribes the mechanism to club the net wealth of the Partnership Firm/LLP/AOP/BOI in the hands of partners/members in the proportionate manner.Other Assessees WealthSection 21AA AOP where share of members is unknown or indeterminatewealth tax leviable in like manner and to the same extent as applicable to an Individualthus, AOP has to be treated as individual, in such cases, and liable for tax.Other Assessees WealthTrustAny property held under trust or other legal obligation for any public purpose of a charitable or religious nature in India is exempt from Wealth Tax u/s 5.Thus, any property held by a trust for the purpose other than a charitable or religious purpose, will be taxable, to the same manner and extent to an individualAsset (section 2(ea))The definition of Wealth Tax is exhaustive (i.e. exclusive). Section 2(ea) defines an asset and contains 6 assets liable to wealth tax. Any asset owned, other than the six specified assets, as per section 2(ea) as on valuation date is not liable to wealth tax.

Section 2(ea)6 assets are covered and liable for Wealth Tax:BuildingMotor CarJewelleryYachts, Boats and AircraftsUrban LandCash in handBuildingAny building or land appurtenant thereto,whether used for residential or commercial purposes or for the purpose or maintaining a guest house or otherwise,including a farmhouse situated within 25 kilometres from local limits of any municipality (whether known as Municipality, Municipal Corporation or by any other name) or a cantonment Board,but does not include:

Buildinga house meant exclusively for residential purposes 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.10,00,000/-any house for residential or commercial purposes which form part of stock-in-trade.any house which the assessee may occupy for the purpose of any business of profession carried on by him.any residential property that has been let out for a minimum period of 300 days in the previous year.any property in the nature of commercial establishments or complexesBuildingDefinition of Building - not defined in the ActGeneral Dictionary meaning of Building: a structure with a roof and walls, such as a house or factory

Definition of Farm House not defined in the ActIf reference is taken from Income Tax Act, 1961, farm house could be considered as - any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any agricultural process is carried on.Building Exemptions (Sec. 5)any one building in the occupation of a Ruler, being a building which was his official residence by virtue of a declaration by the Central Government.one house or part of a house or a plot of land (comprising an area of five hundred square metres or less) belonging to an individual or a Hindu undivided family.

BuildingTo sum up, following building are not taxable to Wealth Tax:Any commercial building or part of the commercial building (irrespective of use)Farm house situated beyond 25 kms from the municipality limitsBuilding held as stock in tradeBuilding used for business or professionHouse property let out for 300 days or more during the previous yearResidential house owned by company and provided for accommodation to the employees drawing annual salary less than Rs.10,00,000One self occupied residential house (for Individual and HUF)On residential house (palace) of Ex RulerBuilding - ValuationRule 3 to 8 of the Valuation Rules prescribe the procedure of Valuation of BuildingPegging Down value ConceptDeduction of Unearned Increase of Leased AssetsAdjustment for Excess of Un-built Area over a Specified Area.

If not covered by Rule 3 to 8, buildings has to be valued as per Residuary Rule 22 (Market Value)Building - FAQIs Farm House liable to wealth Tax?

Whether incomplete building is liable for wealth tax?CIT v. Smt. Neena Jain (2011) 330 ITR 157 (P & H)[2010] 189 TAXMAN 225 (KER.) Apollo Tyres Ltd.[2007] 107 ITD 451 (COCHIN) Federal Bank Ltd.

Whether residential flat used for the purpose of business or profession liable for Wealth tax?Tracstar Investments (P.) Ltd. [2008] 23 SOT 290 (MUM.) [2009] 123 TTJ 945 (Mumbai)

Building - FAQWhether a temporary shed on plot be construed as asset liable for Wealth Tax?

Whether vacant shop, office, godown, warehouse, not being used for the purpose of business or profession be treated as an asset for Wealth Tax purpose?

Can assessee claim exemption of all the residential house properties for Wealth tax purpose?

Whether a house owned by the partner, which is being used for the purpose of business or profession by the partnership firm is also an asset?

Motor Carother than those used by the assessee in the business of running them on hire or as stock-in-trade

Motor CarDefinition of Motor car not defined under the ActAs perWebsters Dictionarya motor car is an automobile which produces motion through the help of engine operating on gasolene.Indian Rayon & Industries Ltd. [2002] 81 ITD 47 (MUM.)

Motor Car Exemption (Sec.5)No specific exemption provided for any type of Motor Car in Section 5.Motor Car - ValuationNo specific rule provided for the valuation of Motor car in Schedule III Valuation RulesThus, Residuary Rule 22 will apply (Market Value as on the Valuation Date)Motor Car - FAQWhether the motor car used for the purpose of profession or business liable for Wealth Tax?

Whether the vehicles other than Motor cars are assets?

Whether buses and trucks are covered by the definition of an asset? Whether delivery vans or display vans will be covered by the definition of an asset?

JewelleryJewellery, 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,Providedthat where any of the said assets is used by the assessee as stock-in-trade, such asset shall be deemed as excluded from the assets specified

Jewellery"jewellery" includesornaments 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 apparelprecious or semi-precious stones, whether or not set in any furniture, utensils or other article or worked or sewn into any wearing apparelJewellery Exemption (Sec 5)Jewellery in the possession of any Ex-Ruler, not being his personal property, which has been recognised by the Central Government as his heirloom or the Board may, subject to any rules, recognise as his heirloomJewellery - ValuationRule 18 and 19 of Valuation Rules as per Schedule IIIThe value of jewellery shall be taken to the price which it would fetch if sold in the open market on the valuation date.Return of Net Wealth shall be supported by A statement in the prescribed form where the value of jewellery on valuation date does not exceed Rs.5,00,000A Report of a registered valuer in the prescribed form where the value of jewellery on valuation date exceed Rs.5,00,000Jewellery - ValuationAs per Circular No. 646 issued by CBDT, it has been decided that the report of the registered valuer obtained for one assessment year can also be used in the subsequent 4 assessment years subject to the adjustments of gold and silver rate applicable as on relevant valuation date.Jewellery - FAQWhether missing jewellery is includible in the net wealth?

Is jewellery in the nature of Stri Dhan exempt from Wealth Tax?

Is silver utensils owned by assessee liable to Wealth Tax?

Is bullion kept as deposit (which bears interest) with the Jeweler be treated as an asset for Wealth Tax purpose?

Is gold and silver bought as ETFs, bonds and on MCX Commodity be subject to Wealth tax?

Yachts, boats and aircraftsYachts, boats and aircrafts (other than those used by the assessee for commercial purposes)It does not include Ship, Vessels, Cruise Lines

Yachts, boats and aircrafts Exemption (sec 5)No specific exemption provided for any type of Yachts, boats and aircrafts in Section 5.

Yachts, boats and aircrafts ValuationNo specific rule provided for the valuation of yachts, boats and aircrafts in Schedule III Valuation RulesThus, Residuary Rule 22 will apply (Market Value as on the Valuation Date)Global Valuation of BusinessYachts, boats and aircrafts FAQAny boat or yacht owned by the company for business purpose marketing, advertisement purpose be considered as an asset liable for Wealth Tax?

Any aircraft owned by the company for the Directors personal use be subject to Wealth tax?[2013] 37 taxmann.com 348 (Delhi) Jay Pee Ventures LtdUrban Land"urban land" means land situatein any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand; or

Urban Landin any area within the distance, measured aerially,not being more than two kilometres, from the local limits of any municipality or cantonment board referred to in sub-clause (i) and which has a population of more than ten thousand but not exceeding one lakh; ornot being more than six kilometres, from the local limits of any municipality or cantonment board referred to in sub-clause (i) and which has a population of more than one lakh but not exceeding ten lakh; ornot being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in sub-clause (i) and which has a population of more than ten lakh,Urban Landbut does not include land classified as agricultural land in the records of the Government and used for agricultural purposes or 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 or the land occupied by any building which has been constructed with the approval of the appropriate authority or any unused land held by the assessee for industrial purposes for a period of two years from the date of its acquisition by him or any land held by the assessee as stock-in-trade for a period of ten years from the date of its acquisition by him.Urban land Exemption (sec 5)one house or part of a house or a plot of land (comprising an area of five hundred square metres or less) belonging to an individual or a Hindu undivided family.No other specific exemption provided for any type of Urban Land in Section 5.

Urban LandTo sum, following lands are not liable for Wealth tax:Agricultural land (as per records and used for agricultural purpose)Land situated in rural area (as per discussed territorial limits)Stock in trade for less than 10 yearsLand occupied by legally constructed buildingVacant land upto 2 years for industrial purposeLand on which construction is not permissible (No development Zone)Plot (Area less than 500 square metres)

Urban Land - ValuationRule 22 of the Valuation Rules as per Schedule III, specifically provides that the Urban Land shall be valued as per Market Value on the Valuation DateUrban land - FAQIs agricultural land situated in Urban Area, liable to wealth tax; prior to A.Y 2014-15, where exemption has been claimed by the assessee and additions being made in the Assessment Orders?[2013] 36 taxmann.com 547 (Amritsar - Trib.) Bawa Yadwinder Singh

Is N.A. plot used for the purpose of agricultural activities (produce) will be liable to Wealth tax?

Whether a land on which unauthorized building was being constructed, the construction of which has been stopped by local authorities, can be excluded from asset for the purpose of wealth tax on the ground that the construction is not permitted on such land?DCM Ltd. [2005] 147 TAXMAN 42 (DELHI)Urban land - FAQWhether incomplete building on urban land will be an asset for Wealth Tax purpose?CIT v. Smt. Neena Jain (2011) 330 ITR 157 (P & H)[2010] 189 TAXMAN 225 (KER.) Apollo Tyres Ltd.[2007] 107 ITD 451 (COCHIN) Federal Bank Ltd.

Whether a piece of Urban Land, on which temporary shed is being constructed and used for the purpose of business, will be subject to Wealth tax?[2012] 19 taxmann.com 29 (Delhi) Sohna Forge (P.) Ltd.

Urban land - FAQAn assessee transferred its immovable property before its valuation date but the same was not registered in favor of the buyer. Can the same be included in the net wealth of the assessee on the ground that he still is the legal owner of the property?

Whether holding development rights for the land amount to asset as per Wealth tax?[2006] 7 SOT 101 (MUM.) Irani Foods & Investment Co. (P.) Ltd.

Whether the Right to Purchase an asset (land) given by the Court amount to asset as per Wealth Tax Act?[2010] 326 ITR 451 (BOM.) Ardeshir Behram Dubash

Cash in handCash in hand, in excess of fifty thousand rupees, of individuals and Hindu undivided familiesand in the case of other persons any amount not recorded in the books of account.

Cash in hand Deemed Asset (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 giftor by an individual or a Hindu undivided family or a firm or an association of persons or body of individuals with whom or which he has business or other relationship, the value of such gift shall be liable to be included in computing the net wealth of the person making the gift unless he proves to the satisfaction of theAssessing Officer that the money has actually been delivered to the other person at the time the entries were made.Cash in hand - FAQDoes advances given in cash as on Valuation Date, which is found out by A.O., not to be genuine, subject to Wealth Tax?

Whether cash in hand held for business purpose liable for wealth tax (whereby, a valid evidence is produced to substantiate that the cash is held for business purpose)?[2010] 229 CTR 52 (KER.) Smt. K.R. Ushasree[2007] 13 SOT 446 (COCHIN TRIB) A.A. Salam

Whether cash held in Foreign Currency will be subject to wealth tax?

Deemed Assets (section 4)In case of Individual, assets held by the spouse of such individual to whom such assets have been transferred by the individual, directly or indirectly, otherwise than for adequate consideration or in connection with an agreement to live apart, orby a minor child, not beinga minor child suffering from any disability of the nature specified in section 80U of the Income-tax Act or a married daughter, of such individual,by a person or association of persons to whom such assets have been transferred by the individual otherwise than under an irrevocable transfer,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,

Deemed Assets (section 4)An assessee who is a partner in a firm or a member of an AOP, there shall be included, as belonging to that assessee, the value of his interest in the assets of the firm or AOP determined in the manner laid down in Schedule IIIAn individual being a member of a Hindu undivided family, any property having been the separate property of the individual has been converted by the individual into property belonging to the family or been transferred by the individual, directly or indirectly, to the family otherwise than for adequate considerationDeemed Assets (section 4)The holder of an impartible estate shall be deemed to be the individual owner of all the properties comprised in the estate.Where the assessee is a member of a co-operative society, company or other association of persons and a building or part thereof is allotted or leased to him under a house building scheme of the society, company or association, as the case may be, the assessee shall be deemed to be the owner of such building or part .

Deemed Assets (section 4)Where a gift of money from one person to another is made by means of entries in the books of account maintained by the person making the gift or by an individual or a Hindu undivided family or a firm or an association of persons or body of individuals with whom or which he has business or other relationship, the value of such gift shall be liable to be included in computing the net wealth of the person making the gift unless he proves to the satisfaction of theAssessing Officer that the money has actually been delivered to the other person at the time the entries were made.Deemed Assets (section 4)A personwho is allowed to take or retain possession of any building or part thereof in part performance of a contract of the nature referred to in section 53Aof the Transfer of Property Act, 1882who acquires any rights (excluding any rights by way of a lease from month to month or for a period not exceeding one year) in or with respect to any building or part thereof by virtue of any such transaction as is referred to in clause (f) of section 269UA of the Income-tax Act, 1961Return of Net WealthThe due date to file wealth tax return is similar to section 139(1) i.e. either 31st July or 30th September of the Assessment Year, depending upon the due date to file Income Tax return. (section 14) The Wealth Tax Return can be filed belated (like 139(4)) within one year from end of relevant assessment year or completion of assessment whichever is earlier. (section 15)The Wealth Tax Return can be revised, if any mistake apparent from record, within one year from end of relevant assessment year or completion of assessment whichever is earlier. (similar to section 139(5) of Income Tax Act) (section 15)Return of Net WealthA return of net wealth which shows the net wealth below the maximum amount which is not chargeable to tax shall be deemed never to have been furnished.However, a return can be file any time in response to valid notice issued u/s 17 (similar to section 148 of Income Tax Act)The new section 14B (w.e.f. 01.06.2013) says about filing wealth tax return online. However, the same utility is not yet provided on www.incometaxindiaefiling.gov.in by CBDT.

Wealth Tax ChallanWealth Tax can be paid manually or online vide Form No. 282. The same is available at the site www.incometaxindia.gov.in or on TIN Website (https://onlineservices.tin.egov-nsdl.com/etaxnew/tdsnontds.jsp)Interest on Late Payment of taxInterest is leviable u/s 17B of Wealth Tax Act if Return of Wealth is filed after the due date of filing Return of Wealth.Interest is payable at the rate of 1% for every month or part of the month comprised in the period commencing on the date immediately following the due date and ending on the date of furnishing of return (where no return is being filed, up to the date of completion of assessment).The interest has to be calculated on the total amount of tax payable on the net wealth and should be paid before filing the return.No advance tax is payable under the wealth tax. Thus, no provisions similar to section 234B and 234C in Wealth Tax Act.Penalty for non-filing of Return of Net wealth (Section 18)There is no penalty for non-filing of return as per section 14 or for late filing of return u/s 15.However, if the assessee is liable to file wealth tax return (where net wealth is exceeding Rs.30,00,000/-) and does not file return before issuing notice u/s 17 or assessment u/s 16 or 17, then tax liability arising in assessment will be said to be tax sought to be evaded. Penalty in such case would be ranging from 100% to 500% of tax sought to be evaded. (section 18(1)(c))No penalty to be levied if the assessee proves that there was reasonable cause for the delay or non-filing of return.Penalty for non-filing of Return of Net wealth (Section 18)Concealment Explanation 4.Where the value of any asset returned by any person is less than seventy per cent of the value of such asset as determined in an assessment under section 16 or section 17, such person shall be deemed to have furnished inaccurate particulars of such asset within the meaning of clause (c) of this sub-section, unless he proves that the value of the asset as returned by him is the correct value

Time limit to issue notice for Assessment u/s 16The time limit to issue notice for assessment u/s 16 is within 12 months from the end of the month in which return is furnished.Notice shall be served within expiry of 12 months from the end of the month in which return is furnished.Wherein, the return of net wealth is not furnished u/s 14 (return within due date) or 15 (Revised Return or Belated Return), the Assessing Office may serve, a notice to file return of wealthAssessment - FAQIs there any time limit for issuance of notice U/s. 16(2) of the Wealth Tax Act, 1961? Whether service of notice u/s 143(2) under Income Tax Act tantamount to service of notice u/s 16(2) of the Wealth Tax Act?

Whether non-filing of return of wealth (either u/s 14/15 of in response to notice u/s 16) will deter the A.O. from Assessment?

Time limit to issue notice for Reassessment u/s 17Notice for wealth escaped from assessment u/s 17 can be issued only if A.O. has reason to believe that wealth has escaped from assessment. Time limit to issue notice is as follows:If Net Wealth believed to escape from assessment is upto Rs.10,00,000/- - within 4 years from the end of relevant assessment year.If Net Wealth believed to escape from assessment is above Rs.10,00,000/- - within 6 years from the end of relevant assessment year.If any asset related to Net Wealth located outside India - within 16 years from the end of relevant assessment year.

Time limit to issue notice for Reassessment u/s 17The findings of A.O. during income tax assessment u/s 143(3) or 147 or any other proceeding can be a valid reason to believe for wealth escaped from assessment.

Time limit to pass an order u/s 16/17 section 17A Time limit to pass an order u/s 16 within 24 months from the relevant Assessment YearTime limit to pass an order u/s 17 within 12 months from the end of the financial year in which notice is served

Reference to Valuation Officer Section 16AWhere the assessment is pending;The A.O. may refer the matter to Valuation OfficerIn case where Value of Asset has been estimated by a Registered Valuer if the A.O. considers that the estimate made by the Registered Valuer is less than its fair market value,In other cases if the A.O. considers its necessary to do so on account of the nature of the asset and other relevant considerations; Or, if he is of the opinion that the fair market value of the asset exceeds the value of the asset as returned by more than 33% of the assets as returned or more than Rs.50,000

Reference to Valuation Officer Section 16AValuation Rules are binding on Valuation Officer to followAssessing Officer shall complete the assessment in conformity with the estimate of the Valuation officer.

--------------------------------------------------------------------------------------------------Disclaimer & Acknowledgements Views expressed in the presentation are personal and can not be construed of ICAI or Branch or any other authority These views do not and shall not be considered as professional advice Acknowledge the efforts and inputs given in by CA Jagat Bajaj in the FAQsAcknowledge the Branch for giving me opportunity to share my views Thank you all the for the patience hearing

CA. Abhijit ModiReach me at 0253 2311716 OrMail me at abhijitmodi@gmail.com

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