THE WEALTH TAX ACT

THE WEALTH TAX ACT

Provisions referred to in the text that follows aims to provide an insight into the Wealth Tax Act, 1957 as it stands today. Only significant and major issues are covered here. For specific queries, a more judicious view of the law shall be required. Readers are advised to contact Shri V. Sudarshan, the author of this text at 111 A, Pashabhai Patel Society, Race Course Circle, Baroda, Gujarat, India, Pin – 390 007 Phones: (O) (91)-(265)-330085 (R) (91)-(265)-310507 in case of any doubts, clarifications or further details.

ASSESSMENT YEAR 1998 – 99

To whom does this act apply? What is the objective behind this Act?

This Act is applicable to all those individuals, Hindu undivided family and company assessees (tax-payers) having taxable wealth except the following:

A Company incorporated under section 25 of the Companies Act, 1956 (whose main object is not to carry out a business or activity in order to derive a profit)
A Co-operative Society duly registered with the co-operative society registrar in any state (whether or not the society carries on a business for making a profit).
A Social Club (whose main object is not to make a profit out of its activities).
A Political Party.
A Mutual Fund specified under section 10(23D) of the Income Tax Act (A mutual fund is a trust whose profits are entirely held in trust for distribution to its constituents, excepting the corpus).

Thus we see that this act excludes Trade Unions, Body of individuals, or any other entities under the law, whose motive may or may not be to earn profits. The objectives behind the act are to identify individuals, Hindu undivided families and companies with unproductive and under utilised assets and to tax the same so as to provide social equity.

What is wealth in the layman’s language?

Possession of a great deal of money, property, richness or other valuables construes wealth. It is better understood when we refer to it in arithmetical terms as the gross value of Assets (both tangible as well as intangible items) in addition to sum receivable (Debtors) as reduced by the gross value of Debts or payables. In accounting terminology this could be referred to as the Net Capital inclusive of free reserves, i.e. Assets less Liabilities.

Does the location or the place where the wealth is held have any effect on the charge to tax? For example, I have deposits in a bank account in Tokyo or own a shop in London?

When we refer to wealth we refer to all the gross assets. It is also material where the property or valuables are situated. Inclusion for the purposes of this Act will not get altered merely because of the actual place where wealth may be kept. The tax implication may only vary based on the taxpayers residential status. The location is important and has to be fixed according to the nature of the assets. The basis for determining as to where an asset is located is basically one of fact and should be determined on the strength of available data. There is no exhaustive list of assets to which the location can be principally attributed. The basis for attributing the location of all such assets has to be fixed having consideration to the characteristic of the assets. We may, however refer to some specific instances below:

Any tangible or immovable property is situated in India, if the property is physically within India. Any right or interest (otherwise than by way of security) in or over tangible and movable property is based in India if the property is physically within India.

Rights or interest in or over immovable property (otherwise than by way of security) or benefits arising out of immovable property are located in India if the immovable property to which the rights are attached, or out of which the benefits arise, are physically within India.

Debts secured or unsecured are located in India if the contract of discharge is for repayment within India or if the debtor resides within India.Money in a bank account in the form of deposits or otherwise are located in India, if the branch of the bank at which the amount is kept is situated in India.

Central / State Government Securities or securities / bonds of any municipality or other local authority in India are located in India, unless they are marked for payment outside India.

Shares, Bonds, Debentures, Fixed deposits or Stock in a company are located at the place where the company has its registered office. (Place of incorporation).Tankers, Yachts, Ships, Imported cars or aircraft are located in India, if they are registered in India

If the rights arising out of Copyright or licence to use any copyrighted material, patent, trademark or design is exercisable in India, the same is located in India. All those patent, trademarks and designs registered in India are located in India.Goods on high seas in transit to India are located outside India.
Rights or cause of action not referred to in any of the items mentioned above are situated in India, if they are enforceable in India.

Does the Residential status of the Assessee have any implication on the tax liability or charge to wealth tax?

Yes, residential status does have an impact on the liability to wealth tax as indicated below:

For convenience we may use the following legends to classify Assets = "A", Debtors or Receivables = "R" and Claims or Debts = "D" for our convenience. Further, we may prefix these abbreviations with "F", if the assets are not held in India.

In the Case of an Indian National:

Residential Status	Taxable Wealth	Remarks
Resident and Ordinarily Resident.	(A+R-D) + (FA+FR-FD)	All assets are taxable.
Resident but Not Ordinarily Resident.	(A-D)	Only gross assets less debts within India are taxable.
Non- Resident in India.	(A-D)	Only gross assets less debts within India are taxable.

In the Case of a Foreign National:

Residential Status	Taxable Wealth	Remarks
Resident and Ordinarily Resident.	(A-D)	Only gross assets less debts within India are taxable.
Resident but Not Ordinarily Resident.	(A-D)	Only gross assets less debts within India are taxable.
Non- Resident in India.	(A-D)	Only gross assets less debts within India are taxable.

Are all assets charged to tax including personal effects or does the law specify assets?

Only specified assets are charged to tax as indicated below.

HOUSES

A Guest House.

A Residential House.
Any Building or Land appurtenant thereto including commercial premises.

A Farm House which is within 25 kms of the local limits of any municipality.

However, these shall exclude:

Houses exclusively for residential purposes within a metropolitan city worth Rs. 50 lakhs and Rs. 25 lakhs in case of any other city or town.
Where the house owned by a company is allotted to its employee / officer / director who is in whole-time employment, and where the salary of such official is less than Rs. 2 lakhs per annum.
Houses held as stock-in trade. For a builder or a person dealing in buying and selling of houses, a house shall be part of his stock.

MOTOR CARS

All motor cars excluding Motor Cars used for Hire or used as stock in trade.

JEWELLERY, BULLION, UTENSILS OF GOLD, SILVER OR COPPER etc.

Items out of precious metals, gems and other precious stones in whatever forms except otherwise that they are used as stock in trade.

YACHTS, BOATS AND AIRCRAFTS

Other than items which are stock in trade or used for commercial purposes.

5. URBAN LAND

All forms of urban land within 8 kms from the local limits of any municipality or cantonment board.
In any area within jurisdiction of local authority having population not less than 10000 persons.

However, these shall exclude:

Land on which construction is not permissible under any law in force.
Unused industrial land for a period of two years.
Land on which building(s) has been constructed with the approval of the appropriate authority.
Land held as stock in trade and acquired on or after 1^st April 1990 will not be treated as an asset for 5 years. If the land was acquired prior to 1^st April 1990, it shall be deemed to be an asset.

6. CASH ON HAND

In case of an individual or Hindu Undivided Family a sum in excess of Rs. 50000.
In all other cases, any amount not recorded in the books of accounts.

It is understood that there are many other things, which are considered as "Deemed Assets" for the purpose of inclusion in the definition of the term assets. What are they?

There are as many items that are considered as deemed assets on which Wealth Tax is applicable. We may take note of them in the table that follows on the next page.

Serial No.	Section	Provision under the Wealth Tax Act
1	4(1)(a)(i)	Assets transferred from one spouse to another otherwise than for adequate consideration or to live apart.
2	4(1)(a)(ii)	Assets held by a minor child including that of a stepchild or adopted child but excluding that of a married daughter.
3	4(1)(a)(iii)	Assets transferred to a person or Association of Persons for immediate or deferred benefit of the transferor, his or her spouse.
4	4(1)(a)(iv)	Assets transferred under revocable transfers in the following cases. When the transfer is revocable within 6 years or the lifetime of the beneficiary. When the transferor derives any direct or indirect benefit from the assets transferred. When the transferor has the right to either directly or indirectly transfer a part or the whole of the assets or the income derived therefrom. When the transferor has the right to directly or indirectly re-assume power over a part or the whole of the assets or the income derived thereupon.
5	4(1)(a)(v)	Assets transferred to son’s wife directly or indirectly without adequate consideration.
6	4(1)(a)(vi)	Assets transferred for the benefits of son’s wife directly or indirectly without adequate consideration.
7	4(1)(b)	Interest of a Partner in a firm in which that person is a partner. In case of a minor partner, the value of the interest shall be included in the net wealth of the parent.
8	4(1A)	Conversion by an individual of his self-acquired property into joint family property.
9	4(5A)	Gift by means of book entries to persons with whom business connection exists unless the money is actually delivered at the time of making the entries.
10	4(6)	Value of all the properties comprising an Impartible estate in the hands of the holder.
11	4(7)	Property held by the assessee as a member of a housing society, company or an association of persons. This may be in terms of a house, building or any other such property, where the ownership is vested in such forms.
12	4(8)	Property held by a person held against part performance of a contract. Especially with reference to section 53A of the Transfer of Property Act, 1882. Lease rights less than a year on a month to month basis u/s 269UA of the Income Tax Act in respect of a building or part thereof.

It seems some assets are exempt from inclusion for purpose of levy of tax. What are they?

The following assets are exempt from inclusion in the taxable wealth.

Serial No.	Section	Provision under the Wealth Tax Act
1	5(i)	Property held under trust (excluding business assets) for any public purpose of charitable or religious nature in India. However, assets for running on a business of publication of religious and related texts. The business is carried only in context of charitable purposes. The business is carried out by institution, fund or trust u/s 10(22), 10(22A), 10(23B), 10(23C) of the Income Tax Act.
2	5(ii)	Coparcenary interests in a Hindu Undivided Family
3	5(iii)	Any one residential building of a former ruler. The choice of building is left to the assessee. Land appurtenant to the building shall be exempt so long as such land is necessary for the proper use and enjoyment of the said building and nothing beyond that. Buildings should be actually occupied for residential purpose by the ruler and not let out.
4	5(iv)	Former Ruler’s Jewellery provided these are impersonal and heirlooms as approved by the Central Government. Jewellery should be kept in India and only removed for specific purpose and period with government approval. Jewellery shall be maintained substantially in original shape. Any person authorised by the government or Board constituted for this purpose shall have the facility to examine the jewellery as and when necessary.
5	5(v)	Assets belonging to Indian repatriates subject to following conditions up to seven successive assessment years from the date of return into India. On money brought into India. Value of asset brought into India. Money to the credit of NRE account in any bank in India on the date of return into India. Value of assets acquired out of money brought into India or from a NRE account within one year prior to the date of his return and at any time thereafter.
6	5(vi)	One house or part of a house belonging to an individual or a Hindu Undivided Family.

What are the debts, which qualify for deduction from the gross value of assets?

All debts that are actually owed and can be properly attributed. But it excludes contingent liabilities. Liabilities likely to be created by the occurrence or non-occurrence of any event, situation, set of circumstances, or law etc. are to be excluded. For example, the additional liability towards income tax that is likely to be created by a court decision.
It includes all past and present debts.
Liability occurred but not quantified is debt. (Devi Raj Chawla vs CWT)
Deceased father’s debt to purchase an "asset" is debt.(Raja Vishwanath Pratap Singh vs CWT)

Are Income Tax, Wealth Tax or other Tax liabilities also considered to be a part of the debt, which qualify for deduction?

Regarding Wealth Tax and Income Tax liability it must be stated that these are not debts. This is because these are not sums owed generally or in respect of any transaction but a legal fiction created by the legislature. Similar stipulation has been laid down in circular no. 663 DT. 28^th September 1993.
However, other taxes such as land revenue and agricultural income tax are considered to be debts in relation to assets such as agricultural land and can be considered as debt for wealth tax purposes. Such taxes could be recovered by appropriating the property itself under the law and are in the nature of lien or debt. Guwahati High Court set a ruling in CWT vs Lachmi Devi Chowkhani in respect of a similar matter.

How do we derive the value of various taxable assets? Our forefathers acquire many assets, some are acquired at various stages during the lifetime and inflationary pressures mean that we do not spend the same sums for similar assets. How should the problems of valuing different assets be resolved?

The lawmakers understood the need for an equitable basis for valuing assets, insofar as the taxes are charged on an equitable basis. Hence, the act itself describes in detail the manner of valuation. We now take a look at the different assets and their methods of valuation.

VALUATION OF BUILDING AND OTHER NON-MOVABLE PROPERTY

The basis for valuation of a building is the annual rent.

Step 1 - We first derive the Gross maintainable rent that is based on the following, whichever is closest to as if the property is let out. It goes without saying that if alternative modes for determining this are available, it will be prudent to consider the actual rent.

Annual rent received or receivable.
Annual value of the property as assessed by local authority.
For property outside municipal area, the amount that is reasonably expected to be received as annual rent had such property been let out on rent.

Step 2 – We now derive the Net maintainable rent. Deducting the following amounts enumerated below from the gross maintainable rent arrives at this. (Gross Maintainable Rent is worked out in Step 1).

Any taxes that are levied by the municipal corporation or local authority towards the building / property.
15% of the Gross Maintainable Rent to cover incidentals.

Step 3 – We now have to capitalise the rent. Multiplying the net maintainable rent does this by the arithmetical indices as applicable and as stated below.

For Freehold Land - 12.5
For Leasehold Land where the period of lease is less than 50 years – 8
For Leasehold Land where the period of lease is greater than 50 years – 10

Step 4 – For properties that have been acquired or constructed after 31^st March 1974 there is a special provision. The higher of actual cost or capitalised value of rent shall have to be considered as the final capitalised value.

Step 5 – Calculate premium for unbuilt area over specified area as follows.

(i) We first of all calculate the gross premium.

In Metropolitan Cities – 60 % of the capitalised value.
In Notified Cities - 65 % of the capitalised value.
In Other Areas - 70 % of the capitalised value.

(ii) In order to derive the premium to be added, we will add the following percentage of the gross premium to derive the net premium as per the table below.

Excess of unbuilt area over specified area	Percentage of Gross Premium
Less than 5%	NIL
More than 5 % but Less than 10 %	20 %
More than 10 % but Less than 15 %	30 %
More than 15 % but Less than 20%	40 %
More than 20 %	To be fixed by Assessing Officer

Step 6 - Now the final step is to deduct the unearned increment. In other words, if the property is subject to lease terms in the previous year, such amounts spent on transfer of property eventually subject to maximum of 50% of the Capitalised value plus the premium.

Some Exceptions to the basis for valuation –

Where the assessing officer with the prior approval of the Dy. Commissioner of Wealth Tax is of the opinion that provisions do not apply.

In cases where the unbuilt area exceeds 20 % of the aggregate area.

The property is on leasehold hand wherein the balance lease period is less than 15 years.

2. VALUATION OF SELF-OCCUPIED PROPERTY

The value of one house or part thereof belonging to the assessee and used exclusively for his residential purposes for a period not less than 12 months preceding the valuation date may be taken at the option of the assessee. This value will be on the basis as laid down for buildings and property. The following points should however be noted:

In cases where the assessee has constructed the house, the deemed date of ownership shall be the date on which the construction of such house was completed.
The option here is not irrevocable and can be exercised in each year for a different residential house and only once for one residential house only.

3. VALUATION OF BUSINESS ASSETS

The method for valuation of business assets is simple as we see under.

For Depreciable assets we should consider the Written Down Value.
For Non-Depreciable assets excluding stock in trade we should consider the Book Value.
In respect of Closing Stock of items, we should take the value adopted for the purposes of the Income Tax Act.

Where the value determined under this provision exceeds 20% of that in the books, such higher value should be adopted.

Advance Tax, Bad debts, assets on which wealth tax is not payable, Amounts not representing any value of a asset, non-business assets and debit balance of Profit and Loss account should be excluded.

Borrowings, Reserves and Provisions excluding for taxation by whatever name called, Provisions for contingent liability, Non-business liability and any debt for acquiring an asset should be excluded.

4. VALUATION OF INTEREST IN FIRM OR ASSOCIATION OF PERSONS

The value in the Books of accounts without considering any of the exemptions as is available in respect of the firm.

The net wealth should be allocated in the same ratio as the partners to the firm or association of persons contributes the capitals.
In respect of assets located abroad, the debts and assets will be segregated and allocated based on the proportion of assets and debts located in India.
If the wealth of such firm or association of firms includes any exempt assets, the value of interest of a partner will also include a portion of the value of such assets.

5. VALUATION OF LIFE INTEREST

Step 1 – Take the average net annual income for the last three years from the life interest. Any expenses on account of the income, subject to a ceiling of 5% of the average net annual income may be deducted.

Step 2 – Multiply the average net annual income from Step 1 by the following formula. {1/(P+D)-1} where P = The annual premium for a whole life insurance policy without profits. D = (6.5/100)/(1+6.5/100) = . Hence the formula is {1/(P+0.061)-1}

The Assessing Officer has the right to vary (increase) the premium if found tenable on circumstances.
Value shall not exceed the value on valuation date under Schedule III of the trust corpus from which life interest is derived.

6. VALUATION OF JEWELLERY

This is to be estimated at the open market value on the valuation date as per the table given below.

Value Of Jewellery	Remarks
Up to Rs. 5,00,000	If the variation according to the assessing officer is Rs. 50000 or more than 33.33% of the figure stated in the return of wealth, a valuation officer shall be appointed to determine the value.
More than Rs. 5,00,000	The assessing officer shall appoint a valuation officer.

The Valuation officer’s estimation will be valid for four subsequent assessment years. (Subject to substitution of current values, if higher)

7. VALUATION OF OTHER ASSETS

This is to be estimated by the assessing officer at the marketable price.

What are the special provisions in respect of some assessees?

There are specific provisions as follows:

1. Charitable or religious trusts –

When properties are held under trust for a religious or charitable public purpose, tax shall be levied on the trustee or the manager of the property in case the trust forfeits exemption due to contravention of any of its objectives originally designed for. The contravention is described below.

Trust property or income or voluntary contributions are utilised for the benefit of the settlor, trustee and their relatives etc. either indirectly or directly.
Trust funds are invested or deposited in contravention to the investment pattern for trust funds.

However, in respect of a scientific research association only the second proviso will apply. For institutions, funds and trusts covered u/s 10(22), 10(22A), 10(22B) or 10(22C) of the Income Tax Act; these provisions shall not apply.

2. Association of persons where shares of members are indeterminate / unknown –

When there is an association of persons other than in the form of a company, co-operative society or a society under the societies registration act holding assets on which tax is to be levied. In such a case, where the individual shares of members are indeterminate, tax will be levied as if such an institution is an individual.

3. De-recognition of partial partition of Hindu undivided family –

When Hindu undivided families are partially partitioned they are liable to be assessed with the same status prior to partition actually taking place. Each member of such a Hindu undivided family shall be jointly and severally liable for all taxes, penalties, interest and fines before or after the partial partition. The liabilities shall be viewed in relation to the amounts allotted at the time of partial partition.

What is the due date for filing Wealth Tax returns?

In case the assessee is a company, the due date is November 30^th.
Where the assessee is required to get the accounts audited under any law the due date is October 31^st.
In cases the assessee is other than a company, but derives income from business or profession but not required to get the accounts audited, the due date is August 31^st.
In all other cases the due date is June 30^th.

What are the interest and penalties prescribed under the Wealth Tax Act?

The following interest / penalties are liable to be charged on the assessee under the act.

Section	Nature of default	Minimum Penalty	Maximum Penalty
17B	Failure to submit the Wealth tax return within the due date.	Interest @ 2% per month.	Interest @ 2% per month.
15B(3)	A failure to pay taxes or interest payable on self-assessment.	NIL	100% of tax in arrears.
18(1)(ii)	Failure to comply with notices without reasonable cause u/s 16(2) & u/s 16(4)	Rs. 1000 for each failure	Rs. 25000 for each failure.
18(1)(iii)	Concealment of wealth.	100% of tax sought to be avoided.	500% of tax sought to be avoided.

What is the amount on which Wealth Tax is chargeable? What is the rate of Wealth tax?

The law provides that the first Rs. 15 lakhs (15,00,000) shall be exempt from tax. Any taxable wealth over and above this limit is liable to be charged to tax at the flat rate of 1%.

NOTES: