T N Hegde- MF0012 -Taxation Management - Set 1

Sikkim Manipal University - MBA - MF0012 – Taxation Management===========================================================

Semester: 3 - Assignment Set: 1 (Book Id : 1210)=======================================================

===========================================================TIRUMALESHWAR N HEGDE Reg. No. 511010509 Page 1 of 20

Question 01:- Tax evasion is a menace to the people, economy and the country. In thewake of recent Swiss bank account scandal give your views on the following:a. How does it affect the Indian economy and the growth prospects?b. Does black money cause Inflation?

Answer:

In view of the facts set out so far, it becomes necessary to look at the extent ofcompliance of tax laws in India. Though many estimates of black money have beencoming forth, an attempt was made to determine the extent of tax evasion in theMumbai Income Tax charge, which collected about 35% of the Income Tax collections ofthe country and 43% of the corporate tax collections. The study was made on the basisof results of the survey and search cases for all the years covered by such cases. Itcame to light that none of the taxpayers concerned declared for taxation purposesanything more than 25% of their true incomes after 1999. The figure arrived at wasgiven to the press specifying the basis on which it was so calculated. Not a singleprotest was received from any of the taxpayer, including companies. The said figurewas thereafter cited for some more time, and even thereafter no protest was received.There was, therefore, every reason to believe this estimate. However, there appears 10to be higher tax evasion in the case of companies. Some of the companies have showntheir entire capital as having come from the countries regarded as Tax Havens.Considering the extent of Indian monies stacked in Swiss Bank Accounts, and bankaccounts of the developed countries, and comparing the same with the annual incometax collections of the Central Government, it appears that the real income admitted fortaxation purposes is less than 25% . The extent of evasion appears to be very muchhigher in the case of companies as the companies have resorted to evolution of taxevasion devices in the accounts and such methods have not yet been properlyinvestigated by the Income Tax Department. There are companies which havecamouflaged their capital investments and shown it in the books as if it is explainedcapital for income tax purposes.

The Indian Scenario - Peculiar problems of tax evasion :

It will be appropriate at this stage to highlight some of the key problems from the viewpoint of computerisation in India:

(a) Investments in Real Estate: The one field where black monies have been investedon the largest scale is that of real estate properties. Lands were sold for only 20% oftheir real values and the balance 80% given in cash out of the tax evaded monies, eversince 1947. But later on when the tax rates were lowered to 30% for individuals and35% for companies, the black portion got reduced to 40% . It may be a difficult task totrace such black transactions through the computer system, suggested for adoption onthe U.S. pattern for India. But it is common knowledge that the black monies invested




in land have been reinvested in bank accounts, shares and in other properties, apartfrom real estate property. It is now confirmed knowledge that in regard to buildingsconstructed, only 40% of the cost is shown to income tax. It is possible to detect suchinvestment by analysis of the data obtained from the trade and industry governingcommodities used for construction of buildings. Further, as all the transactionsrelating to sale of real estate properties are now recorded in computers maintained bythe Registration Offices all over the country, and if the same data is brought on thecomputers of the Income Tax Department, it should be possible to know many ownersof property who have not filed their tax returns at all so far. In India, there are only 3corers of tax assesses at present, and thus a large number of people with taxableincome have evidently chosen not to file income tax returns.

(b) Gold and Jewellery Holdings: India is having the largest private holdings of goldand diamond jewellery among all the countries of the world. In the searches conductedby the Income Tax Department, huge unaccounted cash balances and gold anddiamond jewellery have been found in the bank lockers maintained by tax payers inbogus names and in their own names. At current market rates, purchases of gold,silver and diamonds may now reach about Rs. 80,000 crores a year. Gold and diamondtraders are mostly keeping their transactions outside bank accounts. They are alsogiving vouchers to the effect that raw gold has been given by the customers, though; infact, it would have come from the traders themselves. Therefore, it is necessary tointroduce a law requiring them to transact only through bank cheques and issuecomputerized bills, to facilitate proper flow of information to the computer system ofthe tax department.

(c) Shares, Mutual Funds, etc : There are vast investments in shares and debentures,travelers’ cheques, mutual funds and the primary bonds issued by the Reserve Bank ofIndia. The data regarding company shares and other investments mentioned can beeasily transferred to the computer system of the Income Tax Department. The MumbaiStock Exchange is having a separate computer system with complete data on dailytransactions and the Income Tax Department has so far not made use of such data.There is also the data generated in the computers of the organizations in charge ofdemat of shares. Like-wise, the data on post office savings and other accounts is easyto be brought on the computers of the tax department for verification with theindividual returns, which are available with the Government itself.

d) Undisclosed Stock in-trade held by companies and traders : Many firms andindividuals have also a tendency to keep undisclosed business assets like cars andprivate assets, unaccounted cash holdings etc., They have ability to give extensivebribes to protect business and other interests. All such practices would varnish oncefear is caused among the tax payers about the use of computerized data for taxationpurposes.




(e) Benami Investments : Benami investments are typical of the Indian economy. Evenbig companies have indulged in such practices to impart total secrecy to theirundisclosed accounts. It may be difficult to determine whether the investment found inthe computers of the income tax department is benami or not, and benami shares willhave to be traced sometimes by extensive studies to be conducted by teams of revenueofficers. This problem requires comprehensive study because it is peculiar to theIndian Taxation System.

(f) Swiss Bank and other undisclosed bank accounts held abroad: Swiss Bank Accountsare shrouded in secrecy and hence no information will be available to the computersystem of the Income Tax Department. The amounts in Swiss Bank Accounts, whichare held in foreign currency, have been utilised by big companies and other taxpayersin India to import huge machineries at vastly underinvoiced prices. Such practicesenable payment of secret trade commissions in foreign currency and unaccountedfunds in Indian currency to those contesting general elections. Several majorcompanies have converted Swiss Account holdings into benami shares and debentures.The large amounts of Swiss Bank deposits have, thus, been utilized and every year,there are additions to the Swiss Bank Account holdings.

b. Does black money cause Inflation?

Answer:

Illegally earned money is called black money. It is the result of hoarding, smuggling,tax evasion and dealing in immovable property for which the consideration is paid inblack. It has been beyond the control of the Government. The black money has alreadycreated a serious problem in our country.

The Indian economy stands badly shattered because of the huge amount of this taintedwealth lying in the coffers of the rich. It has given rise to parallel economy operating inthe country. As a result, the prices continue to rise in spite of all government efforts tocontrol them. The poor go on becoming poorer while the rich go on becoming richer.The gap between the haves and the have nots is widening every day.

Black money is used by the rich in various evil activities. They use this money forcorrupting and demoralizing social and political life. They display it in ostentatiousliving and wasteful luxuries. They bribe Government officers and lead them tocorruption and dishonesty. They purchase political bosses and control the strings of theGovernment. Thus the entire social structure comes to be badly polluted.

It is difficult to form an exact idea of the amount of black money in circulation in thecountry. Searches and raids by Income Tax authorities are conducted from time totime. Such raids yield crores of rupees. But the people are, at times, cleverer than the




Government. They seek the aid of the best legal brains and get the law twisted in theirfavour. Most of the offenders use all their money and influence and go scot freewhenever they are caught. The Government has, at various times, announced somevoluntary disclosure schemes for unearthing the black money. These schemes haveproved successful to a very limited extent. What has come to the surface is believedonly to be the tip of the huge iceberg lying hidden underneath. The 1997 VoluntaryDisclosure Scheme announced by the Government of India unearthed a big amount ofblack money as the tax rate in this scheme had been reduced to thirty per cent.

The black money, according to some reliable estimates has gone up to Rs. 10,000 croresin our country. It is to a great extent responsible for a great rise in prices because thepurchasing power of the people has increased. People having black money are leadinga life of luxury whereas the poor people are leadinng a miserable life. Some leadingeconomists of the country have suggested stringent measures to the government tounearth black money but successive governments have been rejecting those measures.The vested interests always stand in the way of effective measures and get themdiluted.

The government of the day appears to be doing its best to unearth black money. Anumber of steps have been taken. Taxation structure and system have been madeeasier. At different times, the government has brought forward several schemes andasked the people to declare their wealth. There has been some success. A lot soilremains to be done.

It must be clear to all that the nation cannot shut her eyes to this state of affairs.Smugglers and black-marketeers can no longer be tolerated. They are striking at thevery roots of our democratic structure. All steps to weed the black money out ofcirculation must be taken as early as possible.The government must come down with aheavy hand on smugglers, tax evaders, black-marketeers and hoarders. Black money isa curse. It must be rooted out from public life.

Question.2:- Detail death cum retirement gratuity under Sec 17(1)iii of IT Act. Iscommutation of pension a viable option in terms of tax planning?

Answer:

Death-cum-retirement gratuity or any other gratuity which is exempt to the extentspecified from inclusion in computing the total income under clause (10) of Section 10.Any death-cum-retirement gratuity received under the revised Pension Rules of theCentral Government or, as the case may be, the Central Civil Services (Pension) Rules,1972, or under any similar scheme applicable to the members of the civil services of the




Union or holders of posts connected with defence or of civil posts under the Union (suchmembers or holders being persons not governed by the said Rules) or to the membersof the all-India services or to the members of the civil services of a State or holders ofcivil posts under a State or to the employees of a local authority or any payment ofretiring gratuity received under the Pension Code or Regulations applicable to themembers of the defence service. Gratuity received in cases other than above onretirement, termination etc is exempt up to the limit as prescribed by the Board.Under the provisions of Section 10(10) of the IT Act, any death-cum-retirementgratuity of a government servant is completely exempt from income tax. However, inrespect of private sector employees gratuity received on retirement or on becomingincapacitated or on termination or any gratuity received by his widow, children ordependants on his death is exempt subject to certain conditions.The maximum amount of exemption is Rs. 3,50,000;. Of course, this is further subjectto certain other limits like the one half-month's salary for each year of completedservice, calculated on the basis of average salary for the 10 months immediatelypreceding the year in which the gratuity is paid or 20 months' salary as calculated.Thus, the least of these items is exempt from income tax under Section 10(10).Any payment in commutation of pension received under the CivilPension(Commutation) Rules of the Central Government or under any similar schemeapplicable to the members of the civil services of the Union, or holders of civilposts/posts connected with defence, under the Union,or civil posts under a State, or tothe members of the All India Services/Defence Services, or, to the employees of a localauthority or a corporation established by a Central,State or Provincial Act, is exemptunder sub-clause (i) of clause (10A) of Section 10. As regards payments in commutationof pension received under any scheme of any other employer, exemption will begoverned by the provisions of sub-clause (ii) of clause (10A) of section 10. Also, anypayment in commutation of pension received from a Regimental Fund or Non-PublicFund established by the Armed Forces of the Union referred to in Section 10(23AAB) isexempt under sub-clause (iii) of clause (10A) of Section 10. The entire amount of anypayment in commutation of pension by a government servant or any payment incommutation of pension from LIC [Get Quote] pension fund is exempt from income taxunder Section 10(10A) of IT Act.

However, in respect of private sector employees, only the following amount ofcommuted pension is exempt, namely: (a) Where the employee received any gratuity,the commuted value of one-third of the pension which he is normally entitled toreceive; and (b) In any other case, the commuted value of half of such pension.It may be noted here that the monthly pension receivable by a pensioner is liable tofull income tax like any other item of salary or income and no standard deduction isnow available in respect of pension received by a tax payer.




Question.3:- Explain the essential conditions to be satisfied by a firm to be assessed asfirm under Section 184.

Answer:

Position of Firm under the Income Tax Act

Legally, a partnership firm does not have a separate entity from that of the partnersconstituting the firm as the partners are the owners of the firm. However, a firm istreated as a separate tax entity under the Income Tax Act. Salient features of theassessment of a firm are as under:

1. A firm is treated as a separate tax entity.

2. While computing the income of the firm under the head “Profits and gains ofbusiness or profession”, besides the deductions which are allowed u/ss 30 to 37, specialdeduction is allowed to the firm on account of remuneration to working partners andinterest paid to the partners. However, it is subject to certain limits laid down u/s 40(b).

3. Share of profit which a partner receives from the firm (after deduction ofremuneration and interest allowable) shall be fully exempt in the hands of the partner.However, only that part of the interest and remuneration which was allowed as adeduction to the firm shall be taxable in the hands of the partners in their individualassessment under the head ‘profits and gains of business or profession.’

4. The firm will be taxed at a flat rate of 30% plus education cess @ 3% plus for thefinancial year 2010-11.

5. The firm will be assessed as a firm provided conditions mentioned under Section 184are satisfied. In case these conditions are not satisfied in a particular assessment year,the firm will be assessed as affirm, but no deduction by way of payment of interest,salary, bonus, commission or remuneration, by whatever name called, made to thepartner, shall be allowed in computing the income chargeable under the head “profitsand gains of business or profession” and such interest, salary, bonus, commission orremuneration shall not be chargeable to income tax in the hands of the partner.

Assessment of firm

From point (5) stated above, it can be concluded that for taxation purposes, a firm canbe of two types:




1. Firm assessed as firm (provided conditions mentioned u/s 184 are satisfied).and thefirm shall be eligible for deduction on account of interest, salary etc while computingits income under the head business and profession). However, it will be subject to themaximum of the limit specified under Section 40(b)

2. If the prescribed conditions are not satisfied, no deduction shall be allowed to thefirm on account of such interest, salary, bonus etc.

Essential conditions to be satisfied by a firm to be assessed as firm (Section 184)

1. In the first assessment year: The firm will be assessed as a firm, also known as‘Firm Assessed as Such’ (FAAS) if the following conditions are satisfied:

(a) Partnership is evidenced by an instrument i.e. there is a written document givingthe terms of partnership.

(b) The individual share of the partners is specified in that instrument.

(c) Certified copy of partnership deed must be filed: A certified copy of the saidinstrument of partnership shall accompany the return of income in respect of theassessment year for which the assessment as a firm is first sought.

Where certified copy is not filed with the return there is no provision for condonation ofdelay. However where the return itself is filed late then there is no problem if thecertified copy is filed along with such return as the condition that it shall accompanythe return of income is satisfied.

Further Delhi ITAT in the case of Ishar Dass Sahini & Sons v CIT held that whereuncertified Photostat copy of the instrument of partnership is submitted along with thereturn of income and the certified copy is produced at the time of assessment, it willsatisfy this condition.

2. In the subsequent assessment years: If the above three conditions are satisfied thefirm will be assessed as such (FAAS) in the first assessment year. Once the firm isassessed as firm for any assessment year, it shall be assessed in the same capacity forevery subsequent year if there is no change in the constitution of the firm or the shareof the partners.

Where any such change had taken place in the previous year, the firm shall furnish acertified copy of the revised instrument of partnership along with the return of incomefor the assessment year relevant to such previous year. Read the box for someimportant points to be considered in this regard.




Circumstance where the firm will be assessed as a firm but shall not be eligible fordeduction on account of interest, salary, bonus, etc. [Section 184(5)]

The firm will be assessed as a firm but shall not be eligible for any deduction onaccount of interest, salary and bonus etc if there is failure on the part of the firm as ismentioned in Section 144 (relating to Best Judgment Assessment) and where the firmdoes not comply with the three conditions mentioned under Section 184.

Question.4:- List out the steps to compute total income.

Answer:

Step 1 – Determination of residential status

The residential status of a person has to be determined to ascertain which income is tobe included in computing the total income. The residential statuses as per the Income-tax Act are shown below –

In the case of an individual, the duration for which he is present in India determineshis residential status. Based on the time spent by him, he may be (a) resident andordinarily resident, (b) resident but not ordinarily resident, or (c) non-resident. Theresidential status of a person determines the taxability of the income. For e.g., incomeearned outside India will not be taxable in the hands of a non-resident but will betaxable in case of a resident and ordinarily resident.

Step 2 – Classification of income under different heads

The Act prescribes five heads of income. These are shown below – HEADS OFINCOME SALARIES INCOME FROM PROFITS AND GAINS CAPITAL INCOME




HOUSE PROPERTY OF BUSINESS OR GAINS FROM OTHER PROFESSIONSOURCESThese heads of income exhaust all possible types of income that can accrue to or bereceived by the tax payer. Salary, pension earned is taxable under the head “Salaries”.Rental income is taxable under the head “Income from house property”. Incomederived from carrying on any business or profession is taxable under the head “Profitsand gains from business or profession”. Profit from sale of a capital asset (like land) istaxable under the head “Capital Gains”. The fifth head of income is the residuary headunder which income taxable under the Act, but not falling under the first four heads,will be taxed. The tax payer has to classify the income earned under the relevant headof income.

Step 3 - Exclusion of income not chargeable to tax

There are certain income which are wholly exempt from income-tax e.g. Agriculturalincome. These income have to be excluded and will not form part of Gross TotalIncome. Also, some incomes are partially exempt from income-tax e.g. House RentAllowance, Education Allowance. These incomes are excluded only to the extent of thelimits specified in the Act. The balance income over and above the prescribedexemption limits would enter computation of total income and have to be classifiedunder the relevant head of income.

Step 4 - Computation of income under each head

Income is to be computed in accordance with the provisions governing a particularhead of income. Under each head of income, there is a charging section which definesthe scope of income chargeable under that head. There are deductions and allowancesprescribed under each head of income. For example, while calculating income fromhouse property, municipal taxes and interest on loan are allowed as deduction.Similarly, deductions and allowances are prescribed under other heads of income.These deductions etc. have to be considered before arriving at the net incomechargeable under each head

Step 5 – Clubbing of income of spouse, minor child etc.

In case of individuals, income-tax is levied on a slab system on the total income. Thetax system is progressive i.e. as the income increases, the applicable rate of taxincreases. Some taxpayers in the higher income bracket have a tendency to divertsome portion of their income to their spouse, minor child etc. to minimize their taxburden. In order to prevent such tax avoidance, clubbing provisions have beenincorporated in the Act, under which income arising to certain persons (like spouse,




minor child etc.) have to be included in the income of the person who has diverted hisincome for the purpose of computing tax liability.

Step 6 – Set-off or carry forward and set-off of losses

An assessee may have different sources of income under the same head of income. Hemight have profit from one source and loss from the other. For instance, an assesseemay have profit from his textile business and loss from his printing business. This losscan be set-off against the profits of textile business to arrive at the net incomechargeable under the head “Profits and gains of business or profession”. Similarly, anassessee can have loss under one head of income, say, Income from house property andprofits under another head of income, say, Profits and gains of business or profession.There are provisions in the Income-tax Act for allowing inter-head adjustment incertain cases. Further, losses which cannot be set-off in the current year due toinadequacy of eligible profits can be carried forward for set-off in the subsequent yearsas per the provisions contained in the Act.

Step 7 – Computation of Gross Total Income.

The final figures of income or loss under each head of income, after allowing thedeductions, allowances and other adjustments, are then aggregated, after giving effectto the provisions for clubbing of income and set-off and carry forward of losses, toarrive at the gross total income.

Step 8 – Deductions from Gross Total Income

There are deductions prescribed from Gross Total Income. These deductions are ofthree types.

Step 9 – Total income

The income arrived at, after claiming the above deductions from the Gross TotalIncome is known as the Total Income. It is also called the Taxable Income. It should berounded off to the nearest Rs. 10.

The process of computation of total income is shown hereunder –

Step 10 – Application of the rates of tax on the total income

The rates of tax for the different classes of assesses are prescribed by the AnnualFinance Act.




Taxation For individuals, HUFs etc., there is a slab rate and basic exemption limit. Atpresent, the basic exemption limit is Rs. 1,00,000 for individuals. This means that notax is payable by individuals with total income of up to Rs. 1,00,000. Those individualswhose total income is more than Rs. 1,00,000 but less than Rs. 1,50,000 have to paytax on their total income in excess of Rs. 1,00,000 @ 10% and so on. The highest rate is30%, which is attracted in respect of income in excess of Rs. 2,50,000. For firms andcompanies, a flat rate of tax is prescribed. At present, the rate is 30% on the whole oftheir total income. The tax rates have to be applied on the total income to arrive at theincome-tax liability.

Step 11 – Surcharge

Surcharge is an additional tax payable over and above the income-tax. Surcharge islevied as a percentage of income-tax. At present, the rate of surcharge for firms anddomestic companies is 10% and for foreign companies is 2.5%. For individuals,surcharge would be levied @10% only if their total income exceeds Rs. 10 lakhs.

Step 12 – Education cess

The income-tax, as increased by the surcharge, is to be further increased by anadditional surcharge called education cess@2%. The Education cess on income-tax isfor the purpose of providing universalised quality basic education. This is payable byall assesses who are liable to pay income-tax irrespective of their level of total income.

Step 13 - Advance tax and tax deducted at source

Although the tax liability of an assessee is determined only at the end of the year, taxis required to be paid in advance in certain installments on the basis of estimatedincome. In certain cases, tax is required to be deducted at source from the income bythe payer at the rates prescribed in the Act. Such deduction should be made either atthe time of accrual or at the time of payment, as prescribed by the Act. For example, inthe case of salary income, the obligation of the employer to deduct tax at source arisesonly at the time of payment of salary to the employees. Such tax deducted at sourcehas to be remitted to the credit of the Central Government through any branch of theRBI, SBI or any authorized bank. If any tax is still due on the basis of return ofincome, after adjusting advance tax and tax deducted at source, the assessee has topay such tax (called self-assessment tax) at the time of filing of the return Taxation




Question.05:- Detail the important provisions under Wealth tax Act.

Answer:Wealth tax is not a very important or high revenue tax in view of various exemptions.Wealth tax is a socialistic tax. It is not on income but payable only because a person iswealthy.

Wealth tax is payable on net wealth on ‘valuation date’. As per Section 2(q), valuationdate is 31st March every year. It is payable by every individual, HUF and company.Tax rate is 1% on amount by which ‘net wealth’ exceeds Rs 30 lakhs from AY 2010-11.(Till 31-3-2009, the limit was Rs 15 lakhs). No surcharge or education cess is payable.

No wealth-tax is chargeable in respect of net wealth of any company registered undersection 25 of the Companies Act, 1956; any co-operative society; any social club; anypolitical party; and a Mutual fund specified under section 10(23D) of the Income-taxAct [section 45]Net wealth = Value of assets [as defined in section 2(ea] plus deemed assets (as definedin section 4) less exempted assets (as defined in section 5), less debt owed [as definedin section 2(m)].Debt should have been incurred in relation to the assets which are included in netwealth of assessee. Only debt owed on date of valuation is deductible.In case of residents of India, assets outside India (less corresponding debts) are alsoliable to wealth tax. In case of non-residents and foreign national, only assets locatedin India including deemed assets less corresponding debts are liable to wealth tax[section 6].

Net wealth in excess of Rs. 30,00,000 is chargeable to wealth-tax @ 1 per cent (onsurcharge and education cess).Assessment year - Assessment year means a period of 12 months commencing from thefirst day of April every year falling immediately after the valuation date [Section 2(d)]All.).1-1 AssetsAssets are defined in Section 2(ea) as follows.Guest house, residential house or commercial building - The following are treated as“assets” - (a) Any building or land appurtenant thereto whether used for commercial orresidential purposes or for the purpose of guest house (b) A farm house situated within25 kilometers from the local limits of any municipality (whether known as amunicipality, municipal corporation, or by any other name) or a cantonment board[Section 2(ea)(i)]




A residential house is not asset, if it is meant exclusively for residential purposes ofemployee who is in whole-time employment and the gross annual salary of suchemployee, officer or director is less than Rs. 5,00,000.

Any house (may be residential house or used for commercial purposes) which formspart of stock-in-trade of the assessee is not treated as “asset”.

Any house which the assessee may occupy for the purposes of any business orprofession carried on by him is not treated as “asset”.

A residential property which is let out for a minimum period of 300 days in theprevious year is not treated as an “asset”.

Any property in the nature of commercial establishments or complex is not treated asan “asset”.

Motor cars - Motor car is an “asset”, but not the following - (a) motor cars used by theassessee in the business of running them on hire (b) motor cars treated as stock-in-trade [Section 2(ea)(ii)]. In the case of a leasing company, motor car is an asset.

Jewellery, bullion, utensils of gold, silver, etc. [Section 2(ea)(iii)] - Jewellery, bullion,furniture, utensils and any other article made wholly or partly of gold, silver, platinumor any other precious metal or any alloy containing one or more of such precious metalsare treated as “assets” [Section 2(ea)(ii)]

For this purpose, “jewellery” includes ornaments made of gold, silver, platinum or anyother precious metal or any alloy containing one or more of such precious metals,and also precious or semi-precious stones, whether or not set in any furniture,utensils or other article or worked or sewn into any wearing apparel.

Where any of the above assets (i.e., jewellery, bullion, utensils of gold, etc.) is used byan assessee as stock-in-trade, then such asset is not treated as “assets” under section2(ea)(iii).Yachts, boats and aircrafts - Yachts, boats and aircrafts (other than those used by theassessee for commercial purposes) are treated as “assets” [Section 2(ea)(iv)]Urban land - Urban land is an “asset” [Section 2(ea)(v)]Urban land means land situated in the area which is comprised within the jurisdictionof a municipality and which has a population of not less than 10,000 according to thelast preceding census.

Land occupied by any building which has been constructed with the approval of theappropriate authority is not ‘asset’.




Any unused land held by the assessee for industrial purposes for a period of 2 yearsfrom the date of its acquisition by him is not an asset. Any land held by the assessee asstock-in-trade for a period of 10 years from the date of its acquisition by him is also notan asset.Cash in hand - In case of individual and HUF, cash in hand on the last moment of thevaluation date in excess of Rs. 50,000 is an ‘asset’. In case of companies, any amountnot recorded in books of account is ‘asset’ [Section 2(ea)(vi)]1-2 Deemed assets

Often, a person transfers his assets in name of others to reduce his liability of wealthtax. To stop such tax avoidance, provision of ‘deemed asset’ has been made. Incomputing the net wealth of an assessee, the following assets will be included asdeemed assets u/s 4.

Assets transferred by one spouse to another - The asset is transferred by an individualafter March 31, 1956 to his or her spouse, directly or indirectly, without adequateconsideration or not in connection with an agreement to live apart will be ‘deemedasset’ [Section 4(1)(a)(i)]

If an asset is transferred by an individual to his/her spouse, under an agreement to liveapart, the provisions of section 4(1)(a)(i) are not applicable. The expression “to liveapart” is of wider connotation and even the voluntary agreements to live apart will fallwithin the exceptions of this sub-clause.

Assets held by minor child - In computing the net wealth of an individual, there shallbe included the value of assets which on the valuation date are held by a minor child(including step child/adopted child but not being a married daughter) of suchindividual [Section 4(1)(a)(ii)]

The net wealth of minor child will be included in the net wealth of that parent whosenet wealth [excluding the assets of minor child so includible under section 4(1)] isgreater.

Assets transferred to a person or an association of persons - An asset transferred byan individual after March 31, 1956 to a person or an association of person, directly orindirectly, for the benefit of the transferor, his or her spouse, otherwise than foradequate consideration, is ‘deemed asset’ of transferor [Section 4(1)(a)(iii)]

Assets transferred under revocable transfers - The asset is transferred by anindividual to a person or an association of person after March 31, 1956, under arevocable transfer is ‘deemed asset’ of transferor [Section 4(1)(a)(iv)]




Assets transferred to son’s wife [Section 4(1)(a)(v)] - The asset transferred by anindividual after May 31, 1973, to son’s wife, directly or indirectly, without adequateconsideration will be ‘deemed asset’ of transferor [Section 4(1)(a)(iv)]

Assets transferred for the benefit of son’s wife - If the asset is transferred by anindividual after May 31, 1973, to a person or an association of the immediate ordeferred benefit of son’s wife, whether directly or indirectly, without adequateconsideration, it will be treated as ‘deemed asset’ of the transferor [Section 4(1)(a)(vi)].Interest of partner- Where the assessee (may or may not be an individual) is a partnerin a firm or a member of an association of persons, the value of his interest in theassets of the firm or an association shall be included in the net wealth of thepartner/member. For this purpose, interest of partner/member in the firm orassociation of persons should be determined in the manner laid down in Schedule III tothe Wealth-tax Act [Section 4(1)(b)].Admission of minor to benefits of the partnership firm - If a minor is admitted to thebenefits of partnership in a firm, the value of his interest in the firm shall be includedin the net wealth of parent of minor in accordance with the provisions of section4(1)(a)(ii) [see para 546.2]. It will be determined in the manner specified in ScheduleIII.

Conversion by an individual of his self-acquired property into joint family property - Ifan individual is a member of a Hindu undivided family and he converts his separateproperty into property belonging to his Hindu undivided family, or if he transfers hisseparate property to his Hindu undivided family, directly or indirectly, withoutadequate consideration, the converted or transferred property shall be deemed to bethe property of the individual and the value of such property is includible in his netwealth [Section 4(1A)]

If there was such transfer and if the converted or transferred property becomes thesubject-matter of a total or a partial partition among the members of the family, theconverted or transferred property or any part thereof, which is received by the spouseof the transferor, is deemed to be the asset of the transferor and is includible in his netwealth.

Gifts by book entries - Where a gift of money from one person to another is made bymeans of entries in the books of account maintained by the person making the gift, orby an individual, or a Hindu undivided family, or a firm or an association of persons, ora body of individuals with whom he has business connection, the value of such gift willbe included in the net wealth of the person making the gifts, unless he proves to thesatisfaction of the Wealth-tax Officer that the money had actually been delivered to theother person at the time the entries were made [Section 4(5A)]




Impartible estate - For the purpose of the Wealth-tax Act, the holder of an impartibleestate shall be deemed to be the owner of all the properties comprised in the estate[Section 4(6)]

Property held by a member of a housing society - Where the assessee is a member of aco-operative housing society and a building or part thereof is allotted or leased to him,the assessee is deemed to be the owner of such building and the value of such buildingis includible in computing his net wealth. In determining the value of such building,any outstanding instalments, payable by the assessee to the society towards the costsof such house, are deductible as debt owed by the assessee. The above rules are alsoapplicable if the assessee is a member of a company or an association of persons[Section 4(7)]

Property held by a person in part performance of a contract [Section 4(8)] - A personwho is allowed to take or retain possession of any building or part thereof in partperformance of a contract of the nature referred to in section 53A of the Transfer ofProperty Act, 1882. Similarly, a person can acquire any rights, excluding any rightsby way of a lease from month to month or for a period not exceeding one year, in orwith respect to any building or part thereof, by virtue of transaction as is referred toin section 269UA(f) of the Income-tax Act.

In above cases, the assets are taxable in the hands of beneficial owners, in the samemanner in which they are taxed under the Income-tax Act :1-3 Assets which are exempt from tax

The following assets are exempt from wealth-tax, as per section 5.

Property held under a trust - Any property held by an assessee under a trust or otherlegal obligation for any public purpose of charitable or religious nature in India istotally exempt from tax. [Section 5(i)].

Business assets held in trust, which are exempt - The following business assets held byas assessee under a trust for any public charitable/religious trust are exempt from tax -(a) where the business is carried on by a trust wholly for public religious purposes andthe business consists of printing and publication of books or publication of books or thebusiness is of a kind notified by the Central Government in this behalf in the OfficialGazette (b) the business is carried on by an institution wholly for charitable purposesand the work in connection with the business is mainly carried on by the beneficiariesof the institution (c) the business is carried on by an institution, fund or trust specifiedin sections 10(23B) or 20(23C) of the Income-tax Act.

Any other business assets of a public charitable/religious trust is not exempt.




Coparcenary interest in a Hindu undivided family - If the assessee is a member of aHindu undivided family, his interest in the family property is totally exempt from tax[Section 5(ii)].Residential building of a former ruler - The value of any one building used for theresidence by a former ruler of a princely State is totally exempt from tax [Section 5(iii)]Former ruler’s jewellery - Jewellery in possession of a former ruler of a princely State,not being his personal property which has been recognised as a heirloom is totallyexempt from tax [Section 5(iv)]

The jewellery shall be permanently kept in India and shall not be removed outsideIndia except for a purpose and period approved by the Board. Reasonable steps shall betaken for keeping that jewellery substantially in its original shape. Reasonablefacilities shall be allowed to any officer of the Government, or authorised by the Board,to examine the jewellery as and when necessary.

Assets belonging to the Indian repatriates - Assets (as given below) belonging toassessee who is a person of Indian origin or a citizen of India, who was ordinarilyresiding in a foreign country and who has returned to India with intention topermanently reside in India, is exempt. A person shall be deemed to be of Indian originif he, or either of his parents or any of his grand-parents, was born in undivided India.

After his return to India, following shall not be chargeable to tax for seven successiveassessment years - (a) moneys brought by him into India (b) value of asset brought byhim into India (c) moneys standing to the credit of such person in a Non-resident(External) Account in any bank in India on the date of his return to India and (d)value of assets acquired by him out of money referred to in (a) and (c) above within oneyear prior to the date of his return and at any time thereafter [Section 5(v)]

One house or part of a house - In the case of an individual or a Hindu undividedfamily, a house or a part of house, or a plot of land not exceeding 500 sq. meters inarea is exempt. A house is qualified for exemption, regardless of the fact whether thehouse is self-occupied or let out. In case a house is owned by more than one person,exemption is available to each co-owner of the house [Section 5(vi)]

Question 06:- What is meant by Full value of consideration? How short term capitalgains and long term capital gains are computed using full value of consideration?




Answer:

Full value of consideration means & includes the whole/complete sale price orexchange value or compensation including enhanced compensation received in respectof capital asset in transfer. The following points are important to note in relation tofull value of consideration. The consideration may be in cash or kind. The consideration received in kind is valued at its fair market value. It may be received or receivable. The consideration must be actual irrespective of its adequacy.

COST OF ACQUISITION

Cost of Acquisition (COA) means any capital expense at the time of acquiring capitalasset under transfer, i.e., to include the purchase price, expenses incurred up toacquiring date in the form of registration, storage etc. expenses incurred on completingtransfer.

In other words, cost of acquisition of an asset is the value for which it was acquired bythe assessee. Expenses of capital nature for completing or acquiring the title areincluded in the cost of acquisition.

Indexed Cost of Acquisition = COA X CII of Year of transferCII of Year of acquisition

The indices for the various previous years are given below:S.No. Fin. Year Cost

InflationIndex

S.No. Fin. Year CostInflationIndex

1 1981-82 100 15 1995-96 2812 1982-83 109 16 1996-97 3053 1983-84 116 17 1997-98 3314 1984-85 125 18 1998-99 3515 1985-86 133 19 1999-2000 3896 1986-87 140 20 2000-01 4067 1987-88 150 21 2001-02 4268 1988-89 161 22 2002-03 4479 1989-90 172 23 2003-04 46310 1990-91 182 24 2004-05 48011 1991-92 199 25 2005-06 49712 1992-93 223 26 2006-07 519




13 1993-94 244 27 2007-08 55114 1994-95 259

If capital assets were acquired before 1.4.81, the assesses has the option to have eitheractual cost of acquisition or fair market value as on 1.4.81 as the cost of acquisition. Ifassesses chooses the value as on 1.4.81 then the indexation will also be done as per theCII of 1981 and not as per the year of acquisition.

COST OF IMPROVMENTCost of improvement is the capital expenditure incurred by an assessee for making anyaddition or improvement in the capital asset. It also includes any expenditure incurredin protecting or curing the title. In other words, cost of improvement includes all thoseexpenditures, which are incurred to increase the value of the capital asset.

Indexed Cost of improvement = COA X CII of Year of transferCII of Year of improvement

Any cost of improvement incurred before 1st April 1981 is not considered or it isignored. The reason behind it is that for carrying any improvement in asset before 1stApril 1981, asset should have been purchased before 1st April 1981. If asset ispurchased before 1st April we consider the fair market value. The fair market value ofasset on 1st April 1981 will certainly include the improvement made in the asset.

Provisions for computation of Capital Gain

Provisions under section 48

The income under the head “Capital Gains” shall be computed by deducting thefollowing from the full value of the consideration received or accrued as a result of thetransfer of the capital asset :

Expenditure incurred wholly and exclusively in connection with such transfer.

The cost of acquisition of the asset and the cost of any improvement thereto.

Computation of Short Term Capital Gains

From full value of consideration, deduct

Expenditure incurred wholly and in exclusively

Cost of acquisition




Cost of any improvement of asset

Computation of Long Term Capital Gains

From full value of consideration, deduct

Expenditure incurred wholly and in exclusively connection with the transfer

Indexed cost of acquisition of asset

Indexed cost of any improvement of asset

Documents

T N Hegde- MF0012 -Taxation Management - Set 1