Final Practical Issues in Wealth Tax

Divakar Vijayasarathy & Associates

Practical Issues in Wealth tax

CA. Divakar VijayasarathyJune 2009

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

Presentation Schema

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

**Source: The Economic Times dated 8th April 2009

Statistics of Wealth tax **

For every rupee spent, the Government earns Rs 1.97 of wealth tax.

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 : 1.53%◦ Germany : 2.35%◦ Australia : 1.15%

Comparitive Statistics

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.

Global Wealth Tax Parallels*

Nomenclature Country

Solidarity tax on Wealth France

Wealth tax Greece, Norway, Switzerland and Netherlands

Property tax US

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

Scope and Purpose of Taxation

AssesseesDirect Assessees

Individual

HUF

Company

Indirect Assessees

Firm

AoP

Trust (which is not into religious or charitable activities)

Scope of Taxation

Assessee Residential Status Assets

in

India

Debts

in

India

Assets

outside

India

Debts

outside

IndiaIndividual –

Citizen of India

Resident and ordinary

resident

Included Deductib

le

Included Deductible

Individual – any

other case

including foreign

national who is a

resident and

ordinary resident

Indian Citizens: Non

resident or not ordinary

resident

Foreign Nationals:

Resident or non resident.

Included Deductib

le

Not included Not

Deductible

HUFResident and ordinary

resident

Included Deductib

le

Included Deductible

Non resident or not ordinary

resident

Included Deductib

le

Not included Not

Deductible

CompanyResident Included Deductib

le

Included Deductible

Non Resident Included Deductib

le

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.

Scope of Taxation

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

Location of Assets

Asset When located in India

Tangible Immovable property If the property lies in India

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

If the immovable property lies in India

Benefits arising out of immovable property

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

Aircrafts/ Boats/Yachts If it is registered in India

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

Persons not assessable to Wealth tax – Sec 45

Value of assets as at the Valuation date

Add Deemed Wealth u/s 4Less Exempted Assets u/s 5

Gross WealthLess Debts Owed

Net wealth Less Exemption limit 15 lacs

Taxable wealth

Computation of Wealth tax

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

Rate of Taxation

Taxable Assets – Sec 2(ea)

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

House property

Urban Land

Motor Cars

Cash in Hand

Boats, Yachts & Aircrafts

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

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

Taxable Assets : House / Buildings

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 assessee’s 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

Taxable Assets : House Property

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

Taxable Assets: Motor Car

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

Taxable Assets : Jewellery Bullion etc

Includes all categories of Yachts, boats and aircrafts

Excludes those yachts, boats and aircrafts used for commercial purposes

Taxable Assets: Yachts, boats and aircrafts

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 from an municipality or cantonment

Taxable Assets: Urban land

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

Taxable Assets: Urban land

Assets transferred to spouse /son’s 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/son’s wife

Revocable transfer of assets Converted property of an HUF Holder of an impartible estate

Deemed Assets – Sec 4

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

Deemed Assets – Sec 4

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

Exempted Assets – Sec 5

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

Concept of Debts Owed

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

Assets outside the purview of Wealth tax


Practical Issues- Taxability of assets

.

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

House Property located in a Village

Issues for Consideration: - Property consists of building - A farm house which is located beyond

25kms from municipal limits is not an asset

House property located in a Village

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.

Property of a Partner used by the firm

Issues for Consideration: - Whether a business/profession of a firm is

different from that of its partner

Property of a Partner used by the firm

Asset is exempt from wealth tax in the case of : CIT vs Rasiklal Balabhai Gujarat 119 ITR 303CIT vs P.T.Manuel 47 Taxman 108 (Kerala) 1989CIT 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?

Employer buying cars for and on behalf of the employees

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.

Employer buying cars for and on behalf of the employees

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.

Real Estate Investments - Urban Agricultural Land

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

taxability

Real Estate Investments - Urban Agricultural Land

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?

Building under construction

Issues for consideration:◦ Is building under construction a taxable asset◦ If yes, should the asset be considered as land or

building

Building under construction

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?

Boats/ Aircraft used by Directors

Issues for Consideration:◦ What is commercial purpose◦ Is the aircraft used for a commercial purpose

Boats/ Aircraft used by Directors

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.

Clubbing of Assets- Conversion of Assets

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 fiancé 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.

Clubbing of Assets – Relationship between transferor and transferee

Issues for Consideration:◦ Husband wife relationship did not exist on the

date of transfer◦ Would the provisions of clubbing apply

Clubbing of Assets – Relationship between transferor and transferee

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)


Practical Issues in Wealth tax – Indian

Repatriates.

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

Non residents returning to 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

“Ordinarily Residing” in a Foreign 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.

Assets Exempted

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.

Where an asset brought from outside India is subsequent sold for a consideration and such consideration is invested in an asset in India- exemption shall be available in respect of such converted as well – CWT vs K.O.Mathews Kerala High Court

Case Study 1

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 India- exemption 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).

Case Study 1

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

Case Study 2

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.

Case Study 2


Practical Issues - Valuation of Assets

.

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)

Valuation of Land/ Building

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.

Valuation of Cars

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)

Valuation of Jewellery

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.

Cost of Valuation : Notification No 15/2009

Situation Maximum fees payable

On first Rs 5 lacs of value 0.50%

On the next Rs 10 lacs of value 0.20%

On the next Rs 40 lacs of value 0.10%

On the balance value 0.05%


Practical Challenges.

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

Practical Challenges

Double Taxation relief for wealth tax

Valuation of assets held outside India

Restrictive covenants to be ignored in determining the market value – Rule 21

Practical Challenges


Wealth Tax Planning.

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 fiancé / son’s fiancé cannot be included in the net wealth of the assessee

Wealth Tax Planning

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.

Wealth Tax Planning

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)


Filing of Wealth tax returns

.

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.

Filing of Returns

Interest & Penalties under Wealth Tax

Section Nature of Default Minimum Penalty

Maximum Penalty

INTEREST

17B Non filing of returns within due date Interest @ 1% for every month or part thereof

31(2) Non payment of amount specified in notice u/s 30 within 30 days

Interest @ 1% for every month or part thereof

PENALTIES

15B(3) Non payment of Self Assessment Tax or interest

Discretion of AO

100% of Tax in arrears

18(1)(ii) Non compliance of notice without reasonable cause

Rs 1000 for each failure


18(1)(iii) Concealment of Wealth 100% of Tax sought to be avoided

500% of tax sought to be avoided

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

(c)

Failure to answer questions, sign statements without reasonable cause



18A(2) Non furnishing in due time information required u/s 38 without reasonable cause

Rs 100 for each day of default

Rs 200 for each day of default

Questions????

Thank You

Documents

Final Practical Issues in Wealth Tax