CA.

Divakar Vijayasarathy June 2009

Divakar Vijayasarathy & Associates

Introduction Scope and Purpose Computation Taxable Assets Practical Issues:

Taxability of Assets Indian Repatriates Valuation of Assets Challenges

Wealth tax planning Filing of Wealth tax returns

For the Financial year 2008-09: - Estimated tax collection of Rs 400 crores - Estimated tax collection cost of Rs 174 crores
Projections for the Financial 2009-10: - Projected tax collection of Rs 425 crores - Projected tax collection cost of Rs 216 crores
For every rupee spent, the Government earns Rs 1.97 of wealth tax.
**Source: The Economic Times dated 8th April 2009

For every Re spent, the Government collects Rs 60 of income tax (all categories) For every Re spent, the Government collects Rs 701 of corporate income tax Cost of collection (Direct Taxes) in other countries:
Britain Germany Australia : : : 1.53% 2.35% 1.15%

Nomenclature Solidarity tax on Wealth Wealth tax Property tax

Country France Greece, Norway, Switzerland and Netherlands US

Note: In Austria, Denmark, Germany, Finland, Iceland, Spain and Luxembourg wealth tax was abolished during the last decade The concept of Wealth tax does not exist in Belgium and Great Britain.

Conceptually wealth tax is a levy on unproductive assets held by an assessable person. Fundamental conditions for wealth tax levy:
Asset must covered u/s 2(ea) Asset must belong to the assessee Asset must be held by the assessee on the valuation date

Direct Assessees

Indirect Assessees

Individual HUF Company

Firm AoP Trust (which is not into religious or charitable activities)

Assessee

Residential Status

Assets in India

Debts in India

Assets outside India

Debts outside India

Deductible

Individual Citizen Resident and ordinary resident of India

Included

Deductibl e

Included

Individual

any Indian Citizens: Non resident or Included

Deductibl
e

Not included

Not Deductible

other case including not ordinary resident foreign national who Foreign Nationals: Resident or is a resident and non resident. ordinary resident Resident and ordinary resident HUF Non resident or not ordinary Included resident Resident Company Non Resident Included Included Included

Deductibl e Deductibl e Deductibl e Deductibl e

Included

Deductible

Not included

Not Deductible

Included

Deductible

Not included

Not Deductible

Debts owed in India:

If it is repayable in India or If the debtors is in India

Assets outside India are not assessable to wealth tax in the case of foreign nationals Debts incurred outside India in relation to assets located in India shall be deductible for all categories of assessees.

Circular No 3 dated 28.09.1957 as amended by Circular No 392 dated 24.08.1984

When located in India If the property lies in India

Asset Tangible Immovable property

Rights or interests in or over immovable property (otherwise than by way of security)

Benefits arising out of immovable property

If the immovable property lies in India

If the immovable property lies in India

Rights or interests in or over a movable property (otherwise than by way of security)

If the movable property lies in India. Goods on high seas cannot be considered to be in India CWT vs Consolidated Pneumatic Tools Co Ltd Supreme Court. (1971) 81 ITR 752
If it is registered in India

Aircrafts/ Boats/Yachts

Company registered u/s 25 of the Companies Act (non profit organizations) Co operative society Social club Political party Mutual fund u/s 10(23D) of the Income tax Act

Value of assets as at the Valuation date Add Deemed Wealth u/s 4 Less Exempted Assets u/s 5 Gross Wealth Less Debts Owed Net wealth Less Exemption limit 15 lacs Taxable wealth

1% on taxable wealth in excess of Rs 15 lacs Exemption limit of Rs 15 lacs is applicable to all category of assessees No surcharge levy on wealth tax No cess levy on wealth tax

House property

Cash in Hand

Urban Land

Boats, Yachts & Aircrafts

Jewellery, bullion, furniture, utensils etc made of precious metals

Motor Cars

Please Refer to Annexure 1 for detailed explanation on taxable assets.

Includes: Any building or land appurtenant thereto

whether used for the purpose residential, commercial, guest house etc
Any farm house if situated within 25 kms from local limits of any municipality or cantonment board

A building which is not a farm house is taxable irrespective of its place of location subject to exceptions provided.

Excludes:

House meant exclusively for residential purposes occupied by an employee/ officer/director of a company, having a gross salary of less than Rs 5 lacs House held as stock in trade by the assessee Any house occupied by the assessee for the purpose assessees business or profession Any residential property let out for not less than 300 days in the previous year Any property in the nature of commercial establishments or complexes

Includes all motor cars whether Indian or Foreign Excludes:

Cars held as stock in trade Cars used by the assessee in the business of running them on hire

Includes 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 metal
Excludes assets held as stock in trade

Includes all categories of Yachts, boats and aircrafts Excludes those yachts, boats and aircrafts used for commercial purposes

Urban land means land situated:

In any municipality or cantonment which has a population of not less than 10,000 as per latest available census prior to the valuation date. Within 8 kms cantonment from an municipality or

Excludes:

Land on which construction is not possible

Land on which building has been constructed with approval of the appropriate authority
Unused land held by the assessee for industrial purposes for a period of 2 years from the date of acquisition Land held as stock in trade for a period of 10 years from the date of acquisition

Assets transferred to spouse /sons spouse for inadequate consideration Assets transferred to minor child Assets transferred to any AoP/ person for inadequate consideration - for the benefit of the individual /spouse/sons wife Revocable transfer of assets Converted property of an HUF Holder of an impartible estate

Interest in a firm or AoP Gifts made by means of book entries where money has not been actually delivered Membership under a house building scheme Possession of a building u/s 53A of Transfer of Property Act Lessee in a lease transaction u/s 269 UA

Property held under trust for charitable and religious purposes in India Interest in the coparcenary property of the HUF One official residence of a Ruler Heirloom jewellery of an erstwhile Ruler Money and assets brought into India by Indian repatriates One house or part of a house or plot of land not exceeding 500 sq mts for an individual or HUF assessee

Debts owed must be in relation to the taxable asset. Where a debt is taken against multiple assets, proportionate value of the debt shall be allowed. Debts may be in India or outside India Un paid purchase consideration is debt owed for the purpose of wealth tax

Ships Farm house located beyond 25 kms from any municipality or cantonment Cars owned by cab operators and tourist cars Antique furniture not containing any precious or semi precious stones or metals Paintings , sculptures and other similar works of art Archeological possessions Computers, laptops and other gadgets Two wheelers, trucks, buses and lorries

Divakar Vijayasarathy & Associates

An assessee has an ancestral property (residential house) which is located in a village beyond 30kms from the Municipality limits. The value of the property as per Sch III is Rs 40 lacs. Is the property assessable to wealth tax

Issues for Consideration: - Property consists of building - A farm house which is located beyond 25kms from municipal limits is not an asset

The property would be regarded as a taxable asset.

A firm of chartered accountants, operates out of an apartment owned by one of its partners. The value of the property is Rs 60 lacs. The partner claims the property is being used for profession hence it is not an asset for wealth tax purposes.

Issues for Consideration: - Whether a business/profession of a firm is different from that of its partner
Asset is exempt from wealth tax in the case of : CIT vs Rasiklal Balabhai Gujarat 119 ITR 303 CIT vs P.T.Manuel 47 Taxman 108 (Kerala) 1989 CIT vs K.M.Jagannathan 180 ITR 191 (Madras) (1989) Contrary judgment in the case of : CIT vs K.N.Guruswamy Karnataka High Court 146 ITR 34 (1984)

An employer has an employee scheme whereby the employee would pay 20% of the cost of a car and pay the balance with an interest of 3% over five years. The car would be used by the employee however it would be owned by the employer till the repayment of loan is complete. In whose hands is the car assessable to tax?

Issues for Consideration: - Who is the owner of the vehicle - What is the value of the car for wealth tax - Is there any loan which is deductible in either case.
The car would be assessed in the hands of the employer. The contribution of the employee shall be considered as Debt Owed in respect of the vehicle Thermax Ltd vs CWT (2008) 110 ITD 591 (Pune)

An assessee has 2 acres of land at Chennai which is classified as agricultural land by the local authorities. The assessee claims that the property is not assessable to wealth tax as it is agricultural land. Discuss.

Issues for Consideration: - When is land considered as a taxable asset - Does the nature of the land determine its taxability

An urban land is an asset whether it is agricultural land or non agricultural land Meena Jacob vs WTO (2007) 14 SOT 486 (Cochin)

An assessee purchased a piece of land on 1st of Jan 2009 and started construction on the property on 10th of February 2009. The property was complete on 15th of July 2009. Is this property a taxable asset for the previous year 2008-09?

Issues for consideration:

Is building under construction a taxable asset If yes, should the asset be considered as land or building

Land on which construction has started loses the its character of urban land and is outside the purview of Sec 2(ea) Mathew L. Chakola vs CWT (2006) 9 SOT 617 (Cochin)/ Meera Jacob vs WTO (2007) 14 SOT 486 (Cochin). However Karnataka High Court in the case of CWT vs Giridhar G. Yadalam (2007) 163 taxman held a contrary view.

Kingfisher Airlines is into operating commercial aircrafts within and outside India. During the year the company acquired an aircraft for the exclusive use of its Chairman Mr Vijay Mallya for Rs 150 crores. Is this asset a taxable asset for wealth tax purposes?

Issues for Consideration:

What is commercial purpose Is the aircraft used for a commercial purpose

If an asset is used for doing business, the object of which is to make profits, such asset would be deemed to have been used for commercial purposes. It is not necessary for the asset to be let out on hire. Amalgamated Electricity Co Ltd vs State of Rajasthan AIR 1983 Raj 154.

An assessee gifted a sum of Rs 10 lacs to his spouse. His spouse invested the amount towards purchase of shares (Rs 4 lacs) and purchase of an urban plot (Rs 6 lacs). The values of the assets as on the valuation date were Rs 8 lacs and 16 lacs respectively. Determine the amounts to be clubbed.

Issues for consideration:

What should be clubbed (original asset or converted asset) What is the value for clubbing (valuation of the original asset or converted asset)

Where the asset transferred is converted into another asset, the value of the converted asset (if such converted asset is assessable to wealth tax)on the valuation date shall be clubbed V.Vaidya Subramaniam vs CWT (1977) 108 ITR 538 (Madras) Therefore in this case only Rs 16 lacs being the value of land shall be clubbed.

An assessee gifted 10000 shares of HLL to his spouse. She sold these shares in the market for Rs 20 lacs and invested in a house property. The value of the house property on valuation date is Rs 35 lacs. Discuss.

Issues for consideration:

The original asset transferred is not a taxable asset The converted asset is a taxable asset Value for the purposes of clubbing

Based on the rationale pronounced in V.Vaidya Subramaniam vs CWT (1977) 108 ITR 538 (Madras) the value of the house property on the valuation date ie Rs 35 lacs shall be clubbed in the hands of the assessee.

An assessee gifted a property to his fianc on 1st of December 2008. They both got married on 28th February 2009. The value of the property on 31st of March was Rs 35 lacs. Discuss.

Issues for Consideration:

Husband wife relationship did not exist on the date of transfer Would the provisions of clubbing apply

Relationship between husband and wife should subsist both at the time of transfer and on the valuation date CWT vs Khan Saheb Dost Mohd Alladin (1973) 91 ITR 179 (AP)

Divakar Vijayasarathy & Associates

Exemption u/s 5(v) is available provided: Assessee is an individual Assessee is a citizen of India or a PIO Assessee was ordinarily residing in a foreign country Assessee has returned to India with an intention to permanently reside in India

The term ordinarily residing has not been defined Madras High Court in the case of Periannan vs CWT has enunciated that:
Ordinarily residing refers to residence of long duration outside India A person for whom India is a permanent residence cannot claim exemption under this section merely by travelling abroad and residing abroad for a period of one year and thereafter returning to his own country

Money Value of assets brought into India Value of assets acquired out of such money:
Within one year prior to the date of return Any time after the date of return

Period of Exemption: - 7 consecutive previous years beginning from the year of return.

An assessee being an Indian citizen returned from Dubai after having served there for almost 25 years during the previous year. He bought 10 kgs of gold and a Rolls royce car (estimated at Rs 1 crore) along with him. Immediately on landing, he sold the gold in the open market for a consideration of Rs 10 lacs per kg and invested the consideration towards acquiring a piece of land in Chennai. Fair market value of the land in Chennai on valuation date is Rs 1.3 crores.

Issues for Consideration:

Is the converted asset liable for wealth tax If yes, what is the value for wealth tax. Conclusion: - Rolls Royce car is eligible for exemption u/s 5(v) - Where an asset brought from outside India is subsequent sold for a consideration and such consideration is invested in an asset in Indiaexemption shall be available in respect of such converted as well CWT vs K.O.Mathews Kerala High Court (2003) 133 Taxman 418. Therefore the land shall also eligible for exemption u/s 5(v).

An assessee being an Indian citizen purchased an urban land for Rs 3 crores out of remittance from outside India on 01.01.2009. He returned to India with an intention to permanently reside in India on 10.10.2009. Discuss the taxability of the Urban Land. Issues for Consideration: Is the asset eligible for exemption u/s 5(v) For the previous year 08-09 is the assessee eligible for exemption

Exemption u/s 5(v) is available on assets purchased one year prior to the date of return However the exemption is available prospectively from the year of return ie 2009-10. Conclusion
Urban land purchased is eligible for exemption for the previous year 2009-10 However the asset is a taxable asset for the previous year 2008-09.

Divakar Vijayasarathy & Associates

No specific rules prescribed for valuation of land Guideline value may not be real indicator of the market value of the property House Property with huge vacant land (rule 20) Valuation of property under construction (Karnataka jurisdiction) Cost of valuation (also refer notification no 15/2009 dated 30/01/2009)

Cars shown in the balance sheet are generally valued on the basis of book value Cars held by individuals not claiming depreciation:
Consider the estimated book value of the car assuming depreciation was being claimed Consider the insured value.

In CWT vs T.V.Sundaram Iyengar and Sons Ltd (2007) 16 Taxman 140, the Madras High Court has held that written down value and not the insured value should be taken as market value for the purpose of wealth tax. Mumbai Tribunal in the case of Samarath Knitters Pvt Ltd vs DCWT (140 Taxman 105) has held that fair market value of cars can be considered at 80% of the insured value.

Fair market value and realisation value could be atleast 20% different Where there is exchange of jewellery / significant addition/deletion of jewellery it makes it imperative for another valuation certificate Cost of valuation (also refer notification no 15/2009 dated 30/01/2009)

Situation On first Rs 5 lacs of value

Maximum fees payable 0.50%

On the next Rs 10 lacs of value On the next Rs 40 lacs of value

On the balance value

0.20% 0.10%
0.05%

Note:

Minimum fees payable per valuation shall be Rs 500 Where two or more assets are required to be valued all such assets shall be deemed to constitute, a single asset for the purposes of calculating the fees payable.

Divakar Vijayasarathy & Associates

Property purchased during the previous year and owned for less than 300 days even though it is fully let out Valuation of motor cars held for personal use Valuation of vintage cars Valuation of unapproved portion of the building

Double Taxation relief for wealth tax

Valuation of assets held outside India Restrictive covenants to be ignored in determining the market value Rule 21

Divakar Vijayasarathy & Associates

Land / Building held as investment assets can be considered as stock in trade A car let on hire even for a short duration during the previous year is not a taxable asset. Land co operative society can be formed for the purpose of acquiring a parcel of land as investment Kishore B Setalvad vs CWT (2002) 256 ITR 637 (Guj). Property transferred to fianc / sons fianc cannot be included in the net wealth of the assessee

Transfer of property to spouse:

Individual can extend a loan to spouse towards purchase of the property Benefits are:
Spouse can claim exemption of one property u/s 5 Where spouse has more than one property the debt owed to the individual can be reduced from the value of the asset. Clubbing provisions under the Income Tax Act Sec 64 shall also not apply on income from such property.
Provisions of Sec 4(1) are not attracted where there is a loan transaction between the husband and wife CWT vs N.R.Sirkar (1988) Tax LR 1662 (Gau)

Divakar Vijayasarathy & Associates

Wealth tax returns to be filed in Form BA Due date for filing is similar to 139(1) due date Sec 14(1) Delay is furnishing returns shall attract penal interest @ 1% p.m Sec 17B (similar to 234A) Wealth tax is payable on before the due date of filing Belated Return and revised return can be filed within one year from the end of the relevant assessment year Sec 15.

Section

Nature of Default
INTEREST

Minimum Penalty

Maximum Penalty

17B 31(2)

Non filing of returns within due date Non payment of amount specified in notice u/s 30 within 30 days

Interest @ 1% for every month or part thereof Interest @ 1% for every month or part thereof Discretion of AO Rs 1000 for each failure 100% of Tax sought to be avoided Rs 500 for each failure Rs 100 for each day of default 100% of Tax in arrears Rs 25000 for each failure 500% of tax sought to be avoided Rs 10000 for each failure Rs 200 for each day of default

PENALTIES
15B(3) 18(1)(ii) 18(1)(iii) Non payment of Self Assessment Tax or interest Non compliance of notice without reasonable cause Concealment of Wealth

18A(1) (a),(b),(c) 18A(2)

Failure to answer questions, sign statements without reasonable cause Non furnishing in due time information required u/s 38 without reasonable cause