Computation of Wealth Tax Liability

CA Rajesh C. Shah

1] ApplicabilitySec. 1

(1) This Act may be called the Wealth-tax Act, 1957.(2) It extends to the whole of India.(3) It shall be deemed to have come into force on the 1st day of April, 1957.

CA Rajesh C. Shah

Sec. 2(ea) Assets means(i)any building or land appurtenant thereto

• whether used for residential or commercial purpose or

• for the purpose of maintaining a guest house or

• including a farm house situated within 25 kms from local limits of any municipality or a Cantonment Board

CA Rajesh C. Shah

Exclusions from building or land appurtenant thereto

1. A house meant exclusively for residential purpose and allotted by a company to whole-time officer having gross annual salary less than Rs. 10 lakh

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

3. Any house occupied by the assessee for his own business or profession

4. Any residential property let out for >= 300 days5. Any property in the nature of commercial

establishments or complexesCA Rajesh C. Shah

Sec. 2(ea) Assets means

(ii) Motor Cars other than those

used by the assessee in the business of running them on hire

As stock in trade

Case Law : In the case of Southern Roadways Ltd. Vs. CWT[2002] 122 Taxman 126 (Mad.), it was held that “Motor Car” does not cover Heavy Vehicles”

CA Rajesh C. Shah

Sec. 2(ea) Assets means

(iii) Jewellery, bullions, 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 metalsProvided thatwhere 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 in this sub-clause

Note : Gold Deposit Bond is not an AssetCA Rajesh C. Shah

Sec. 2(ea) Assets means

(iv) Yachts, boats and aircrafts

(Other than those used by the assessee for commercial purposes)

Case Law : In the case of Amalgamated Electricity Co. Ltd. V State of Rajasthan AIR 1983 Raj. 154, it was held that if the asset is used for doing business, the object of which is to make profit, then the asset is said to be used for “Commercial Purposes”. It is nowhere laid down that in order to satisfy the requirements of Commercial Purpose, aircraft should be used as air taxi.

CA Rajesh C. Shah

CA Rajesh C. Shah

(v) Urban LandUrban Land means land situated—- In jurisdiction of Municipality or Cantonment Board with population >= 10000- In any area with inDistance from PopulationLocal Limits of Municipalityor Cantonment Board - 2 Kms >10000<=100000 - 6 Kms >100000<=1000000 - 8 Kms >1000000(w.e.f. 01/04/2014 amendment made -distance is to be measured aerially)

Exclusions from Urban Land1.Agriculture Land used for Agriculture Purpose2.Land on which Construction of Building is not

Permissible 3.Land occupied by any Building which has been

constructed with approval of appropriate authority

4.Unused Land held by assessee for Industrial Purpose for 2 years from the date of Acquisition

5.Any Land held by assessee as Stock In Trade for 10 Years from the Date of Acquisition

CA Rajesh C. Shah

(vi) Cash in Hand- For Individuals & HUF : >Rs.50000/-

- For other Persons : Amt. not recorded in books of account

CA Rajesh C. Shah

Sec. 3(2) – Charging SectionThere shall be charged for every assessment year, wealth tax in respect of net wealth on

corresponding Valuation DateOf every Individual, HUF and Company@ 1%Of the amount by which net wealth exceeds Rs.

30 Lacs

CA Rajesh C. Shah

Exclusions from Applicability of Wealth Tax Act, 1957

By virtue of Sec. 45 of the Act No tax shall be levied in respect of Net Wealth of

- Any Company registered u/s 25 of the Companies Act, 1956

- Any Co-Operative Society- Any Social Club- Any Political Party- A Mutual Fund specified u/s 10(23D) of the

Income Tax act- The Reserve Bank of India

CA Rajesh C. Shah

Sec. 4 Net Wealth to Include Certain Assets (Clubbing of Assets)

In computing the net wealth- Of an individual1.Assets transferred to spouse[Sec. 4(1)(a)(i)]2.Assets held by a minor child[Sec. 4(1)(a)(ii)]3.Assets transferred to a person or AOP for the

benefit of the Individual or his/her spouse[Sec. 4(1)(a)(iii)]

4.Assets transferred to a person or AOP under revocable transfer[Sec. 4(1)(a)(iv)]

5.Assets transferred to sons’ wife[Sec. 4(1)(a)(v)]6.Assets transferred to a person or AOP for the

benefit of son’s wife[Sec. 4(1)(a)(vi)]CA Rajesh C. Shah

Exclusions from Clubbing of Wealth in the Case of an Individual

1.Where the transfer of assets is chargeable to Gift Tax or the assets are not chargeable to tax u/s 5 of that Act.

2.Assets acquired by the Minor Child out of his own income and which are held by him on the valuation date.Note :1.Assets held by Minor should be added to the wealth of that parent whose net wealth is greater(excluding the assets of Minor Child)2. Assets held by Minor should be added to the Net Wealth of the Parent who maintains the child in case the marriage of his parents does not subsist

CA Rajesh C. Shah

Sec. 5 Exemption in respect of certain assets(i) Property held under a Trust for any public

purpose of charitable or religious nature in IndiaHowever, the exemption is not available in respect of business assets of the above trust except where the business is referred to in clause (a) or (b) of Sec. 11(4A) of the I.T. Act ,1961 in respect which separate Books of Accounts are maintained

orthe business is carried on by an institution,

fund or trust referred to in 10(23B) or 10(23C) of the I.T. Act ,1961

CA Rajesh C. Shah

Sec. 5 Exemption in respect of certain assets

Case Laws :1.In order to avails the exemption u/s 5(i), it is not

necessary to hold the property in India but it is necessary that the public purpose of charitable or religious nature should be in India. [Trustees of H.E.H. The Nizam’s Pilgrimage Money Trust vs. CWT (2000) 243 ITR 676 (SC)]

2.If Under a Trust Deed the purposes for which the trust property could be put to use are not confined to religious or charitable use and they can be used for social, cultural and other allied purpose at the discretion of the trustees then the exemption is not available u/s. 5(i). [Gangabai Charities vs. CWT (2001) 250 ITR 666 (SC)]

CA Rajesh C. Shah

Sec. 5 Exemption in respect of certain assets

(ii) Interest in Co-parcenary Property of HUF (iii)Any one building (being official residence)

occupied by a former ruler of a princely stateCase Law : 1. An ex-ruler can not have the benefit u/s 5(vi) if he has opted for exemption u/s 5(iii) of the Act.[ Gaj Singh Vs. Settlement Commission (2000) 113 Taxmann 32 (SC)] 2. U/s 5(iii), the assessee is entitled to exemption only in respect of those building or palaces which were occupied by the ruler and not in respect of the buildings let out to tenants.[Mohd. Ali Khan Vs. CWT(1997) 224 ITR 72 (SC)]

CA Rajesh C. Shah

Sec. 5 Exemption in respect of certain assets(iv) Jewellery in possession of a former ruler of a

princely which has been state Recognised as heirloom

Conditions for recognition as heirloom1.Jewellery must be kept in India except approved

by Board.2.Reasonable steps should be taken so as to keep

jewellery substantially in original shape.3.Reasonable facilities to be allowed to officer of

the government to examine the jewellery.

CA Rajesh C. Shah

Sec. 5 Exemption in respect of certain assetsThe recognition can be withdrawn with retrospective effect from 09/09/1972 and wealth tax is payable for all A.Y. commencing from the A.Y. relevant for the valuation date falling after 9/9/1972 for which the jewellery was exempted on account of such recognition subject to following conditions.a. FMV on the date of withdrawal of recognition shall be deemed to be FMV for all successive valuation date relevant for A.Y.s referred to above.b. The aggregate W.T. payable can not exceed 50 % of FMV on valuation date relevant to the AY in which recognition was withdrawn.

CA Rajesh C. Shah

Sec. 5 Exemption in respect of certain assets(v) Assets belonging to Indian Repatriates

Conditions for Exemption:1. Assessee should be a person of Indian origin or a citizen of India.2. He was ordinarily residing in a foreign country.3. Such person has returned to India with the Intention of permanently residing in India.

CA Rajesh C. Shah

Sec. 5 Exemption in respect of certain assetsIf above conditions are satisfied then following shall not be chargeable to tax for 7 successive A.Y.(commencing with the A.Y. next following to the date on which such person returned to India.)a. moneys brought by him into India.b. Value of asset brought by him in to India.c. Balance of a Non-resident(External) Account in any bank in India on the date of his return to India.d. value of assets acquired by him out of money referred to in (a) and (c) supra within one year prior to the date of his return and at any time thereafter.

CA Rajesh C. Shah

Sec. 5 Exemption in respect of certain assetsCase Laws :1.Even if assessee has converted assets, which were

brought by him from outside India into money, and used that money for acquisition of other assets, the asset which is acquired with sale consideration of original asset, is also eligible for exemption.(CWT vs. K.O. Mathews [2003] 133 Taxman 418 (Ker)

2. The exemption does not extend to the income or interest earned out of the use of the aforesaid funds in India after the date of Return.( CWT vs. Dr.(Mrs.) Issac[2002] 125 Taxman 417(Mad.))

CA Rajesh C. Shah

Sec. 5 Exemption in respect of certain assets(vi) One house or Part of a house

- Applicable to Individual or HUF- Either a house or a part of house

OR- a pot of land up to 500 Sq. Meters in area.Note :A house eligible for exemption whether it is self occupied or let out.In case a house is owned by more than one person, exemption is available to each co-owner oh the house.

CA Rajesh C. Shah

Computation of Net Wealth(Sec. 2(m))Particulars Rs.

Value of Assets u/s 2(ea) as on 31-3 XX+Value of Deemed Wealth u/s 4 XX

Total Wealth XX- Debt in relation to assets included (XX)

- Net Wealth XXNet Wealth in excess of Rs. 30 Lacs is charged to tax @ 1%.

Note : No deduction shall be allowed for the wealth Tax Liability in the computation of the Taxable Net Wealth of the assessee. Cirular No. 663, dated 28-9-1993

CA Rajesh C. Shah

Sec. 6 : Exclusion of assets and debts outside India

Particulars R&OR RBNOR NR

1. In the case of an Indiavidual who is an Indian National, HUF and Company

Taxable Wealth=All Assets-All Liabilities

Taxable Wealth=All Assets located in India-All Liabilities located in India

Taxable Wealth=All Assets located in India-All Liabilities located in India

2. In case of an Individual who is a foreign national

Taxable Wealth=All Assets located in India-All Liabilities located in India

Taxable Wealth=All Assets located in India-All Liabilities located in India

Taxable Wealth=All Assets located in India-All Liabilities located in India

CA Rajesh C. Shah

Sec. 7 : Valuation of assets(1) The value of any assets other than Cash

should be determined in the manner laid down in Sch. III as on the Valuation date.

CA Rajesh C. Shah

Rule 3 : Part B Schedule III : Valuation of Immovable Property

Value of Free-hold Property = Net Maintainable Rent * 12.5

Value of Lease-hold Property1. Where unexpired period of lease >=50 yrs

Value of Property = Net Maintainable Rent * 102. Where unexpired period of lease <50 yrs Value of Property = Net Maintainable

Rent * 8Properties acquired/constructed after 31/03/1974 :

If the value so arrived at is lower than the cost of acquisition/construction of property then cost of acquisition is taken as capitalized value.

CA Rajesh C. Shah

Particulars Amount

Gross Maintainable Rent XXLess :

1. Municipal Taxes (XX)2. 15 % of GMR (XX)

Net maintainable Rent XX

CA Rajesh C. Shah

Rule 4 : Part B Schedule III : Computation of Net Maintainable Rent

Rule 5 : Part B Schedule III : Computation of Gross Maintainable Rent

A. If the Property is Let OutAnnual Rent received/receivable by the owner or annual value of the property as assessed by local authority, whichever is higher

B. If the Property is Not Let OutAnnual Rent assessed by the Local Authority or if the property is situated outside the jurisdiction of a local authority, the amount which the owner can reasonably be expected to receive as annual rent had such property been let

CA Rajesh C. Shah

Rule 5 : Part B Schedule III : Computation of Gross Maintainable Rent

Annual Rent : Annual rent is nothing but the actual rent received or receivable, had the property been let out for 12 months.

Case Law : Where the tenant commits default in the payment of rent and makes part payment of the rene, then the GMR shall not be determined on the basis of the actual rent received but on the basis of the amount payable under the agreement. ( CIT vs. Bhagawati Ammal 262 ITR 622 (mad.))

CA Rajesh C. Shah

Rule 5 : Part B Schedule III : Computation of Gross Maintainable Rent

Annual Rent shall be increased in the manner specified below :

1.Municipal Taxes borne by the Tenant2.If Repairs in respect of property is borne by the tenant

then 1/9th of the Actual rent3.Notional Interest @ 15% p.a. ( If any interest paid then

the increase should be limited to 15% p.a.) on the amount of deposit ( not on advance payment towards rent for a period of three months or less )

4.Amount equivalent to Lease Premium divided by number of years of the lease

5.Any Benefit or perquisite whether convertible in to money or not received as consideration for leasing the property.

CA Rajesh C. Shah

Rule 6 : Part B Schedule III : Add Premium to NMR as calculated under Rule 3, for unbuilt area of plot of landThe excess of unbuilt area over specified area

Premium

<= 5 % of Aggregated Area NIL

> 5% but <=10% of Aggregated Area

20% of Capitalized Value

> 10% but <=15% of Aggregated Area

30% of Capitalized Value

> 15% but <=20% of Aggregated Area

40% of Capitalized Value

> 20% of Aggregated Area Rules given in Part B of Schedule III are not applicable.

CA Rajesh C. Shah

Rule 6 : Part B Schedule III : Add Premium to NMR as calculated under Rule 3, for unbuilt area of plot of land1.Aggregate Area = Area on which property

is Built + Unbuilt Area2.Unbuilt Area means that part of such

aggregate area on which no building has been erected

3.Specified Area is a. In Metro city, it is 60% of aggregate areab. In Other Specified Cities, it is 65% of aggregate areac. In other cities, it is 70% of aggregate area

CA Rajesh C. Shah

Rule 7 : Part B Schedule III : Adjustment for unearned increase in the value of the land

If the property is built on land obtained on lease from the local authority or any authority referred to in Sec. 10(20A) of the Income Tax Act, 1961 and if the lease provides for claim or recovery of a specified part of unearned increase in the value of the land at the time of transfer of the property, then areduction is to be made by the LEAST of the following :1. Amount so liable to be claimed or recovered by the concerned authority2. 50% of the Value arrived at after giving effect of rule 6

CA Rajesh C. Shah

Rule 8 : Part B Schedule III : Rule 3 not to apply in certain cases

If the AO, with prior approval of Dy. Commissioner, is of the opinion that it is not practicable to apply aforesaid provisions to a particular case or

Where the unbuilt are exceeds the specified area by more than 20% of the aggregate area or

Where the property is built on lease land and the lease expires within a period not exceeding 15 years from the relevant valuation date and the lease deed does not give an option to the lessee for renewal of the lease.

CA Rajesh C. Shah

Rule 18: Part G Schedule III : Valuation of Jewellery

The value of the jewellery shall be estimated to be FMV.FMV shall be determined in the following manner:1.A statement in the prescribed form, where the value of

the jewellery on the valuation date is <=Rs. 5 lakhs.

If AO is of the opinion that that FMV of the jewellery exceeds the value of the jewellery declared by the assessee in his return by more than 33.33% of the returned value or Rs. 50000, he may refer such valuation to the V.O. u/s 16A(1) and the value of the jeweleery in such case shall be the FMV as estimated by the V.O.

CA Rajesh C. Shah

Rule 18: Part G Schedule III : Valuation of Jewellery

2. A report of registered valuer in the prescribed form where the value of the jewellery on the valuation date is >Rs. 5 lakhs.

If AO is of the opinion that that FMV of the jewellery exceeds the value of the jewellery declared by the assessee in his return, he may refer such valuation to the V.O. u/s 16A(1) and the value of the jewellery in such case shall be the FMV as estimated by the V.O.

CA Rajesh C. Shah

Rule 19: Part G Schedule III : Adjustment in the Value of the Jewellery for subsequent A.Y.

The value of the jewellery determined in accordance with Rule 18 for any A.Y., shall be taken to be the value of such jewellery for the subsequent FOUR years subject to following adjustments:

a)Rate Adjustmentb)Quantity Adjustment

CA Rajesh C. Shah