WEALTH TAX ACT, 1957

1. Discuss the provisions relating to Incidence of Wealth Tax

Incidence of Wealth Tax in the case of an individual depends upon his residential
status and nationality. Residential status is decided as per the provisions of of the
Income Tax Act.

The scope of liability to Wealth tax is as follows:

(i) In the case of an individual who is a citizen of India, and resident in India, a
resident HUF and Company resident in India;

Wealth tax is chargeable on net wealth comprising of;

 All assets in India and outside India

 All debts in India and outside India are deductible in computing the net
wealth.
(ii) In the case of an individual who is a citizen of India but non – resident in
India or not ordinarily resident in India; HUF, non – resident or not ordinarily
resident in India and a company non – resident in India;

(i) All assets in India are chargeable to tax

(ii) All debts in India are deductible in computing the net wealth
(iii) All assets and debts outside India are out of the Scope of the Wealth
Tax Act
(iii) In the case of an individual who is not a citizen of India whether resident,
non – resident or not ordinarily resident in India;

(i) All assets in India are chargeable to tax

(ii) All debts in India are deductible in computing the net wealth
(iii) All assets and debts outside India are out of the Scope of the
Wealth Tax Act

2. Explain the provisions of Section 5 of Wealth tax Act, 1957 in relation of assets
which are exempt.

The following assets are exempt under section 5 of the Wealth tax Act, 1957

1. Property held under a trust [ Section 5(i)]

2. Interest in the coparcenary property of the HUF [ Section 5 (ii)]
3. One official residence of a Ruler [ Section 5 (iii)]
4. Heirloom Jewellery of an erstwhile Ruler [ Section 5 (iv)]
5. Money and the assets brought into India by citizen of India or person of Indian
origin [Section 5 (v)]
6. One house or part a house[Section 5(v0)]

1. Property held under a trust [Section 5(i)]

1
 Any property (i.e. six assets) held by the assessee under trust or other legal
obligation for any public purpose of charitable or religious nature in India is
exempt from tax. However, this exemption is subject to the provisions of Section
21A, which has an over-riding effect on Section 5(i). As per Section 21A, the
exemption under Section 5(1) will be forfeited and the trustee of the trust will
become taxable under wealth tax as if the property was held by an individual
who is a citizen of India and resident in India if:

(i). Any part of such property or any income of such trust is used or applied for
the benefit of person referred in Section 13(3) of the income-tax Act, or

(ii). Any part of income of the trustee ensures for the benefit of the person
referred to in Section 13(3); or

(iii). Any funds of the trust are invested or deposited in any mode other than
given under Section 11(5).

2. Interest in the coparcenary property of the HUF [Section 5(ii)]

As the Hindu Undivided Family is itself a unit for taxation under the wealth-tax
Act, the interest of the assessee in the coparcenary property of any Hindu
Undivided Family of which he is a member, shall be exempt.

3. One Official residence of a Ruler [Section 5(iii)]

The erstwhile Ruler of an Indian State has been given an exemption in respect of
any one building in his occupation, being a building which has been declared by
the Central Government as his official residence, immediately before the
commencement of the Constitution (Twenty Sixth Amendment) Act, 1971.

4. Heirloom jewellery of an erstwhile Ruler [Section 5(iv)]

A former Ruler is entitled to an exemption in respect of Jewellery in his

possession provided the following conditions are satisfied:

(i). such jewellery should not be his personal property;

(ii). Such jewellery must have been recognized before 1.4.1957 by the Central
Government as his heirloom; or where no such recognition exists, it must have
been recognized by the CBDT as his heirloom jewellery at the time of his first
wealth-tax assessment.

5. Money and assets brought into India by citizen of India or person of Indian
Origin [Section 5(v)]

An assessee who is an individual is entitled to exemption under this clause in

respect of any money or asset brought into India provided the following
conditions are satisfied:
(i). Such individual should be a citizen of India or a person of Indian origin;

2
 (ii). He was ordinarily residing in a foreign country;

(ii). He, on leaving such country, has returned to India with the intention of
permanently residing in India.

6. One house or part of a house [Section 5(vi)]

Exemption under this clause is allowed only to individual and HUF assessee.

The exemption is allowed in respect of:

(i). One house; or

(ii). A part of the house; or

(iii). A plot of land exceeding 500 sq.mts.

3. Explain Deemed Assets u/s 4 of the Wealth Tax Act, 1957

Following a are the assets which are treated as ‘Deemed Assets’ under section 4 of
the Wealth Tax Act, 1957 subject to certain exceptions and conditions:

(i) Assets transferred by one spouse to another [Section 4(1) (a) (i)]
(ii) Assets held by the minor child [Section 4 (1) (a) (ii)]
(iii) Assets transferred to a person or to association of persons [Section 4 (1)(a)
(iii)
(iv) Assets transferred under revocable transfers [Section 4 (1) (a) (iv)
(v) Assets transferred to son’s wife [Section 4 (1) (a) (v)]
(vi) Assets transferred for the benefit of Son’s wife [Section 4 (1) (a) (vi)

Here spouse means legally wedded person only. Marriage between transferor and
transferee subsists when such transaction of transfer took place. (WT vs. Khan Saheb
Dost Mohammad Aladdin (1973) 91 ITR 170 (AP)

A widow or widower is not a spouse. If an intimate connection is established

between the two transactions, they would fall within Section 4, even though they
may be prima facie separate transactions – S.C Varsheny V. CWT TLR 261.

With regard to section 4 (1) (a), if both the conditions are satisfied, the value of the
assets can not be included into the net wealth of the transferor. Molti Harshey V.
CWT (1980)/121 ITR 676 (MP).

It is normally the value of the assets which are transferred should be taken for
consideration for Section 4 purpose. If the properties are held by the spouse are
‘assets’ under section 2 (ea) on the valuation date and if they are found to be
transferred by the assessee to the spouse (directly or indirectly) otherwise than for
adequate consideration, the requirements of Section 4 are satisfied and accordingly,
the value of such assets would be included in the net wealth of the transfers. It is not

3
 necessary that the properties covered should have been assets on the date of transfer.
– M.G. Kallan Kulam V. CIT [1978] IT 15 160 (ker.)

4. Write short notes on the following under the Wealth Tax Act, 1957

1. Assets
2. Debt owed

1. Assets (Sec. 2(ea)

Under Section 2(ea) of the Wealth Tax Act, 1957, the term assets includes the
following :
(a) Guest House, Residential House, or Commercial Building [Sec. 2(ea) (i)]
(b) Motor Cars [Sec. 2 (ea) (ii)]
(c) Jewellery, bullion, utensils of Gold, Silver etc. [Sec. 2 (ea) (iii)]
(d) Yatch, Boats and Air Crafts [Sec. 2 (ea) (iv)
(e) Urban Land [Sec. 2 (ea) (v)]
(f) Cash In Hand [Sec. (ea) (vi)]

In case of cash in hand, for individuals and HUF, cash in hand on current movement
of the valuation date in excess of `. 50,000. For any other person, any amount not
recorded in the books of accounts. For motor vehicles it come all vehicles except
heavy duty vehicles [Southern Roadways Ltd. V CWT [2002] 122 Taxmann 126
(Mad). Location of asset is not important. Right of ownership and not were
possession is crucial. Assets ceased by Excise authorities but not confiscated is
included in the definition of Asset.

2. Debt Owed

Debt owed generally means sum of money or money’s equivalent, which the
assessee is due to pay for a debt. In Kesoram Industries & Cotton Mills v.
CWT/1966/59ITR767(SC), the expression ‘debt owed’ within the meaning of
liability. Only ‘debt owed’ by the assessee on the valuation date is deductable. There
should a relationship between debt incurred and assets to be included in the net
wealth. No deduction will be allowed for the wealth tax liability in the computation
of net wealth of the assessee vide Circular No.663 dated September 28, 1993

The aforesaid observation of the Board is against the ruling of the Gauhati High
Court in CWT v. Lachmi Devi Chowkhani[1929] 117 ITR 736.

Existing liability quantifiable on future date is also a debt on decided in the case, v.
Chandramani p. Devi v. CWT[1967]64 ITR 147 (AP). Similarly, liability accord but
not quantified is also debt owed--- Devi Raj Chawla v. CWT [1971] ITR 1444 (AII).

5. Who are the ‘persons’ excluded from the charge of the wealth tax?

The following do not come in the meaning of individual:

4
 (i). A company even though it is apparently what may be described as legal
individual because in reality it constitutes an ‘’association of persons” to which the
character of juristic personality has been given by the Companies Act. It
shareholders are however, taxable individually vis-à-vis shares held by each.

(ii). A corporation established by State or Central Acts, if its property does not
ensure for the benefit of an individual.

(iii). A Co-operative Society, even though it has been defined by Section 2(h)(a) and
at the same time, exempted from tax liability by Section 45(g) with retrospective
effect from 1.4.1957, the very commencement of the Act.

However, under Section 45 Wealth-tax shall not levied in respect of the net wealth
of the following:
1. Any company registered under Section 25 of the Companies Act, 1956;
2. Any cooperative society;
3. Any social club;
4. Any political party within the meaning of explanation to Section 13A of the
Income-tax Act; and
5. Any mutual fund within the meaning of Section 10(23D) of the Income tax Act.

6. Are the following chargeable under the wealth tax Act, 1957

1. Urban land

“Urban Land” is ‘’asset’’. Urban land may be used for any purpose. It may
be agriculture land, abadi land, industrial or commercial land, if it is Urban
Land, it is liable to wealth tax.
Meaning of Urban Land

(a) Lands situated within the jurisdiction of a municipality or a cantonment board

having a population of not less than 10,000. Any land situated within the
jurisdiction of a municipality or a cantonment board which has a population of
10,000 or more, is an Urban Land. Population statistics is taken as per latest
census figures, published before valuation date. The municipality may be known
or called by any name like municipal corporation, notified are committee, town
area committee, town committee or by any other name.
(b) Lands situated within notified distance of not more than 8 km from the local
limits of the aforesaid municipality or cantonment board. Any land which is
situated within notified distance from the local limits of a municipality or
cantonment board, having a population of not less than 10,000 according to the
latest census figures, published before valuation date, is also an Urban Land.
While fixing the distance limit, the Central Government may take into
consideration the extent and scope of urbanization of the area but it cannot fix a
distance of more than 8km from the local limits of the said municipality or
cantonment board.

2. Cash-in-Hand

5
Where the assessee is an individual or an HUF, cash in hand in excess of Rs.50,000
is “assets”. Thus, if cash in hand is Rs. 50,000 or less, it is not “assets”. Where cash
in hand is Rs. 80,000, only a sum of Rs. 30,000 (80,000-50,000) is chargeable to
wealth tax.

In the case of any other assessee, any amount which is not recorded in the books of
accounts is “assets”. For example, while conducting raid on the premises of a
company on valuation date, unaccounted cash of Rs.1,30,000 is seized. It is ‘assets’.
However, if it is fully recorded in cash book, it is not an asset.

Any other Asset not chargeable to wealth Tax: Any asset which does not fall under
the aforesaid list of defined assets is not chargeable to wealth tax. Thus, shares,
securities, bonds, debentures, bank deposits, stock-in-trade, plant, machinery,
surrender value of life insurance policy, deposit in public provident fund, deposit in
post office, animals, etc. are not assets.

7. Whether ‘illegal asset’ falls within ‘assets’ as defined under Section 2(ea) of
the Wealth Tax Act, 1957?

Ans: Illegal Asset: There is no difference between legal asset and illegal asset. The
revenue is not concerned with the illegality of the transaction. Thus, cash-in-hand
representing sale proceeds of smuggled items is chargeable to wealth tax, provided
the statutory condition regarding chargeability is satisfied. Thus, where the assessee
is an individual, cash sale of smuggled goods on valuation date amounting Rs.
1,20,000 is taxable to the extent of Rs. 70,000 (1,20,000-50,000).

8. Distinguish between “Assets” and ’’Deemed assets” under the wealth tax
Act,1957?

As per Section 2(ea) of the wealth tax Act, 1957, Assets means following:

(i) Guesthouse, residential house and commercial building;

(ii) Motor Car
(iii) Jewellery
(iv) Yachts, boats and aircrafts
(v) Urbanland
(vi) Cash in hand (for individual and HUF in excess of Rs. 50,000 and for any
other person any amount not recorded in the books).

According to Section 4, there are certain assets which belong to others but
includible in the net wealth of an individual. They are:

(i) Assets transferred to spouse

(ii) Assets held by a minor child
(iii) Assets transferred to a person or association of persons for the benefit of
individual, his/her spouse.
(iv) Assets transferred under revocable transfers
(v) Assets transferred by an individual to son’s wife
(vi) Assets transferred to person or association of persons for the benefit of
son’s wife.

6
 (vii) Converted property.
(viii) Holder of an impartiable estate.

9. State the circumstances under which a residential house shall not be treated
as an asset?

According to Section 2(ea)(i) of the wealth tax Act, 1957, residential house is not
treated as “asset” under the following circumstances and therefore, it is not liable
to wealth tax:

1. If the house is used as residential house subject to satisfying the following

conditions:

(a) It is meant exclusively for residential purposes;

(b) It is allotted by a company to an employee or an officer or a director who

is in whole-time employment;

(c) The gross salary of such employee, officer, or director is less than Rs.
5,00,000 [Section 2(ea)(i)(1)].

2. If the house is held as stock in trade [Section 2(ea)(i)(2)].

3. If the house is used for own business or profession[Section 2(ea)(i)(3)].

4. If the residential property is let out for a minimum period of 300 days in the
previous year [Section 2(ea)(i)(4)]

10. Under what circumstances land will not be considered as urban land for
wealth tax purpose?

As per Explanation (1)(b) to Section 2 of the wealth tax Act, 1957, urban land
shall not be treated as assets in the following cases:

(i) Land on which construction of building is not permissible under any law
for the time being in force in the area in which such land is situated.
(ii) Land occupied by any building which has been constructed with the
approval of the appropriate authority.
(iii) Any unsued land (i.e., not put to any use) held by the assessee for
individual purposes for a period of two years from the date of its
acquisitions by him.
(iv) Any land held by the assessee as stock-in-trade for a period of ten years
from the date of acquisition by him.

11. Explain in brief the meaning of the term ‘Assets’ under Section 2(ea) of
wealth tax Act, 1957?

(i) Guest house, residential house or commercial building [Section 2(ea)(i)]

7
 1. Any building or land appurtenant thereto whether used for commercial or
residential purposes or for the purpose of guest house.
2. A farm house situated within 25 kilometers from the local limits of any
municipality or a cantonment board.

Exceptions:
(i) A residential house allotted by a company to an employee whose salary
does not exceed Rs. 5 lacs P.a. [Section 2(ea)(i)(1)]
(ii) A house held as stock-in-trade [Section 2(ea)(i)(2)]
(iii) A house used for own business or profession [Section 2(ea)(i)(3)]
(iv) A property which is let out for at least 300 days during the previous year
[Section 2(ea)(i)(4)]
(v) A commercial complex [Section 2(ea)(i)(5)].

(ii) Motor Cars [Section 2(ea)(ii)]

Exceptions:

(a) Motor cars used by the assessee in the business of running them on hire.
(b) Motor cars held as stock in trade.

(iii) 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 metals.
Provided that where any of the said assets is used by the assessee as stock-in-
trade, such asset shall be excluded from the assets specified in this sub-clause;

(iv) Yachts, boats and aircrafts (other than those used by the assessee for
commercial purposes);
(v) Urban land

Exceptions:
(a) Land occupied by any building which has been constructed with the
approval of appropriate authority.
(b) Land on which construction is not permitted.
(c) Land held as stock-in-trade for ten years.
(d) Land held for industrial purpose for two years.

(vi) Cash in hand, in excess of fifty thousand rupees, of individuals and Hindu
Undivided Family and in the case of other persons any amount not
recorded in the books of account.

12. Under the wealth tax Act, 1957 who can rectify a mistake in the “Return of
wealth and at whose request? Mention the time limit for rectification of a
mistake.

Rectification of Mistake [Sec. 35]

With a view to rectifying any mistake apparaent from the record, following
authorities (Suo moto or on Application by assessee) may amend (in writing):

8
 Authority Order which may amended
Assessing Officer Any order of assessment or of refund
or any other order passed by him
Wealth Tax Authority Any intimation or deemed intimation
U/s 16 (1)
Valuation Officer Any Order passed by U/s 16A
Commissioner (Appeals) Any Order Passed by U/s 18A
Commissioner Any Order Passed by U/s 25
Appellate Tribunal Any Order Passed by the Tribunal U/s
25

Time Limit for rectification [Sec. 154(7)]

Within 4 years from the end of the financial year in which the order sought to be
amended was passed.

Opportunity of being heard [Sec. 154(3)]

If such rectification order is prejudicial to the assessee, an opportunity of being heard

must be given to the assessee, before passing such order.

Other Notes:

 Where any such amendment has the effect of enhancing the assessment or
reducing a refund already made, the AO shall serve on the assessee a notice
of demand in the prescribed from specifying the sum payable and such notice
of demand shall be deemed to be issued u/s 30 and the provisions of this Act
shall apply accordingly.

 Where any amendment made by the Valuation officer has the effect of
enhancing the valuation of any asset, he shall send a copy of his order to the
AO who shall thereafter proceed to amend the order of assessment in
conformity with the order of the valuation officer.

 Where the valuation of any asset has been enhanced by the valuation officer,
the consequential amendment to the order of assessment may be made by the
AO at any time before the expiry of one year from the date of the order of the
valuation officer.

13. How the valuation of Jewellery to be made under the Wealth Tax Act, 1957?

The value of Jewellery shall be estimated to be the price which it would fetch, if
sold, in the open market on the valuation date, which may be referred to as fair
market value.

Valuation of Jewellery shall be determined in the following manner.

I. Where the fair market value, as estimated by the assessee, does not
exceed Rs. 5, 00,000.

9
 In case, the assessee shall have to file a statement in Form No: O-8A
along with a return of net wealth submitted by him. However, if the
assessing officer is of the opinion that the fair market value of the
Jewellery exceeds the value of the Jewellery declared by the assessee in
his return by more than 33 1/3 % of the returned value or Rs. 50,000, he
may refer the valuation of such Jewellery to a valuation officer U/s 16A
(1) and the value of the Jewellery in such case shall be the fair market
value as estimated by the valuation officer.

II. Where the fair market value, as estimated by the assessee, exceeds Rs.
5,00,000

In this case, the assessee has to obtain and furnish a report of a registered
valuer in Form No O-8 along with return of net wealth submitted by him.
However, if the assessing officer is of the opinion that the fair market
value of the Jewellery exceeds the value of the Jewellery declared by the
assessee in his return, he may refer the valuation of such Jewellery to a
valuation officer’s/s 16 A (1) and the value of jewellery in such case,
shall be the fair market value as estimated by the valuation officer. It may
be observed, that in this case, the reference to the valuation officer can be
done irrespective of the excess of the fair market value, as estimated by
the assessing officer over the fair market value estimated by the
registered valuer.

14. Wealth Escaping Assessment

10