direct tax kalpesh

8/3/2019 Direct Tax Kalpesh

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Prof. Kalpesh Sanghavi www.kalpeshclasses.com

PART A

WEALTH TAX

CA final Direct Taxes Page 1


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WEALTH TAXOnline lectures for CA studies

Net WealthAllowableDebts

Total AssetsWealth Tax is charged for every Assessment Year on the Net Wealth of an individual, HUF,Company and certain association of persons, as on a particular date known as valuation date.

Assessment year (A.Y.)

Assessment year means a period of 12 months commencing from 1st day of April every year.

Valuation date

Valuation date means the 31st March, immediately preceding the Asst. year. Wherethere is a changein the Net Wealth on the Valuation date, it is the Net wealth as at the last momentof the valuationdate, which is taxable.

Net wealth sec.2 (m)

Net wealth meansTotal Assets minusspecified Debt. Totalassets includes

Deemed assets u/s 4.However no wealth taxis payable on Exemptassets as per section 5.The value of all thetaxable assets on thevaluation date isclubbed together and isreduced by the amount of debt owed by the assessee. The net wealth so arrived atis charged to tax atthe rates specified. The present rate of tax is 1% of the amount by which the net wealth exceeds Rs.30,00,000. The rate is same for individuals, HUF's and companies.

System of accounting.

System of accounting has no relevance to the assessment under Wealth Tax Act [M.Ramanamma v.CWT (1986) 157ITR 555 (AP)]. For example, J, a wealth-tax assessee, follows cashsystem ofaccounting. He borrowed money to purchase a motor car. Accrued interest on suchloan is deductedas a debt owed even though it does not appear in books of account.

Tax base of wealth tax.

Net wealth, as on the valuation date, is the tax-base for the levy of wealth tax. If there is any change


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in the wealth of an assessee even on the valuation date by way of transfer, saleor gift, and any assethas changed hands or does not exist on valuation date, the same cannot be included in the net wealth.Similarly, an asset received or purchased by an assessee even in the closing hours of valuation date,is inclusible in net wealth and liable to tax. Thus, net wealth on the last mome

nt of the valuation dateis the tax-base for the levy of wealth tax.



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SECTION 45, NO WEALTH-TAX IS CHARGEABLE FOR

1) Any company registered under section 25 of the CompaniesAct, 1956.

2) Any co-operative society;3) Any social club;4) Any political party; and5) A Mutual Fund specified under section 10(23D) of the Income-tax Act.

SECTION 3, CHARGE OF WEALTH-TAX

Subject to the other provisions contained in this Act, there shall be charged forevery financial year, a wealth tax in respect of the net wealth on thecorresponding valuation date of every individual, Hindu undivided family andcompany at the rate or rates specified.

Madras high court in case of Halai Menon Association [2000] 244 ITR 0357 hasheld that Association of persons are not liable to wealth-tax as individual. Thereasons given by the court is that the expression individual cannot be stretched to include entitieswhich were deliberately omitted and left out of the charging section of the Wealth-tax Act. Thesupreme court in case of CWT v. Ellis Bridge Gymkhana it has been held that It is only under theWealth-tax Act that the charge is on "every individual, Hindu undivided family and company" andnot on an association of persons or a body of individuals or a firm. If the lang

uage of section 3 of theWealth-tax Act is contrasted with the provisions of other cognate statutes it will clearly appear thatthe intention of the Legislature was not to treat an association of persons or abody of individuals or afirm as an unit of assessment for the purpose of imposition of wealth-tax.

Imp21 AA DEEMED INDIVIDUAL

21AA of the wealth tax provides for assessment of associationsof persons in certain special cases and not otherwise. Assessmentas an association of persons can be made only when theindividual shares of the members of the association in the income or assets or both of the associationon the date of its formation or any time thereafter are indeterminate or unknown. It is only in such aneventuality that an assessment can be made on an association of persons, otherwise not. Anassociation of persons cannot be taxed at all under section 3 of the Wealth-taxAct.

The Legislature deliberately excluded a firm or an association of persons from the charge of wealth-tax and the word "individual" in the charging section cannot be stretched to inc

lude entities whichhad been deliberately left out of the charge.


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Theory QuestionTheory QuestionCA final Direct Taxes Page 3


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Onlline lectures for CA sstudies lline lectures for CA sstudies

AsseesseeAOFiOP

irmSh.(Sh.(21Det.(4). Not1AA)4SSchemee of law

WWealth tax i s chargeablee for every AAsst. Year inn respect of the Net Weealthas on thhe valuation n date,oof an individdual, HUF aand Companny, at the flaat rate of 1%% of the Neet Wealth iss excess of RRs.15lakhs. For exxample if NNet Wealth i s 31 lakhs tthan 31-30 == 1 lakh * 11% = 1000 Rs. Is wealtth taxliability.

Scoope of WWealth TTax

BasicsAssetD. Asse

E. AsseetetBasichars ofrgeVaaluationRules


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ASSETS DEFINED U/S 2(ea):ImpBuilding or land appurtenant

Exclusion 1

Exclusion 2

Exclusion 3

Exclusion 4

Exclusion 5

Any building or land appurtenant thereto whether used for residential orcommercial purposes or as guest-house or otherwise (including a farm houses

situated within 25 kms. From the local limits of any municipality or acantonment board).

A house meant exclusively for residential purpose and which is allotted by acompany to an employee or an officer or a director who is in whole-timeemployment, having a gross annual salary of less than Rs.5 [FIVE] Lakhs.

Any house for residential or commercial purpose which forms part of stock intrade

Any house occupied by the assessee for the purpose of any business orprofession carried on by him.

Any residential property that has been let-out for a minimum period of threehundred days in the previous year

Any property in the nature of commercial establishments or complexes

Motor cars

Exclusion 1

Motor cars used by the assessee in the business of running them on hire or

Exclusion 2

As stock-in-trade:

Jewellery

Jewellery, or any other article made wholly or partly of gold, silver, platinumorany other precious metal or any alloy containing one or more of such preciousmetals:

Meaning of jewellery

Ornaments made of gold, silver, platinum or any other precious metal or anyalloy containing one or more of such precious metals, whether or not containingany precious or semi-precious stones, and whether or not worked or sewn into


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any wearing apparel

Precious or semi-precious stones, whether or not set in any furniture, utensilsorother article or worked or sewn in to any wearing apparel



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Online lectures for CA studies

Exclusion 1 Those used by the assessee as stock-in-trade.Exclusion 2 Gold Deposit Bonds issued under the Gold Deposit Scheme.Yachts boats and air crafts.Exclusion 1 Those used by the assessee for commercial purpose and held as stock

in trade.Urban landUrban Land means Land situated in any area which is comprised within thejurisdiction of a municipality or a cantonment board and which has a populationof not less than ten thousand according to the last preceding census of which therelevant figures have been published before the valuation date ORIn any area within such distance, not being more than 8 kms. From the locallimits of any such municipality or cantonment board as may be notified.Exclusion 1 Land on which construction of a building is not permissible under any law.Exclusion 2 Land occupied by any building which has been constructed with the ap

proval ofthe appropriate authorityExclusion 3 Any unused land held by the assessee for industrial purposes for a period of twoyears from the date of its acquisition by him.Exclusion 4 Any land held by the assessee as Stock-in-trade for a period of TENyears fromthe date of its acquisition by him.Cash in handCash in hand, in excess of Rs.50,000 of individuals and HUFs and in the case ofother persons any amount not recorded in the books of accounts.



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Prof. Kalpesh Sanghavi www.kalpeshclasses.comCA final Direct Taxes Page 7Illegal asset.There is no difference between legal asset and illegal asset. The revenue is notconcerned with theillegality of the transaction. Thus, cash-in-hand representing sale proceeds of

smuggled items ischargeable 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 Rs1,20,000 is taxable to the extent of Rs 70,000 (1,20,000 - 50,000).Legal ownership.An asset belongs to its legal owner. For example, an assessee has purchased thejewellery. Thejewellery belongs to him as he is its legal owner. Where the assessee is the legal owner of an asset,the lack of possession is no criterion to hold that the asset does not belong to

the assessee. Take anexample. J purchased a residential house in April. Conveyance deed was executed.However, thepossession could not be taken over as the validity of the sale deed was disputedby K, brother of J.The suit is pending on 31 March being the valuation date. The value of the residential house is to beMotor CarsAssetsJewelleryYachtsBoats andAir Crafts

Urban LandCash inHandBuilding orLandAppurtenant


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included in the net wealth of J as the house legally belongs to him [U.S. Nayakv. CWT (1968) 65ITR ITI (Mys.)].

Articles seized by excise authorities but not confiscated are included in net wealth as they belong tothe assessee. Mere seizure of an asset does not in any way impair the ownershipof an assessee in theasset. unless it is confiscated lawfully, it belongs to the assessee and is inclusible in his net wealth[CWT v. Meghji Girdharilal (1989) 176 ITR 63 (MP)]. Thus, cash, jewellery, gold,silver, etc.,seized in tax raids belong to the assessee.

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Building or land appurtenant scope of :

Multi storayed house

Residential house: A building used for human habitation is a residential house [Shiv NarainChaudharv (1997) 108 1TR 104 (All.)] In the present times when multi-storeyed flats are becomingthe order of the day, a flat may also be considered as a residential unit or a residential house [VidvaVakash Talwar (1981) 132 1TR 661 (Del.)]. Thus, a house or a flat used as a dwelling place isresidential house. It is an asset.

Guest house:

A house used for the purpose of maintaining a "guest house" is an asset, liableto wealth tax. Guesthouse refers to a place where the guests of the assessee are received gratuitously or at a concessionalrate [Sliri Durga Enterprises v. I.T.O. (1976) 102 ITR 745 (Ker.)]. Where an accommodation ismaintained either in the principal place of business or in a place of business or in place where thefactory is located for directors and other employees, the accommodation cannot be described a "guesthouse". It is a "residential accommodation". The term "guest house" refers to aplace for thereception of strangers. Employees cannot be treated as strangers. Hence, unless

the guest house isintended for use by a complete stranger, it cannot be called a guest house [CITv. Aruna Sugars Ltd.(1980) 123 ITR 6l9(Mad.)j.

Farm house:

A farm house is an asset, provided it is situated within 25 km from the local limits of anymunicipality or cantonment board. For example, Mr J owns a farm house on Delhi-Mathura Road. Itis located at 30 km from Delhi but 15 km from Faridabad. It is an asset becauseit is situated within25 km from the municipality of Faridabad. The municipality may be known by any name, that is,municipal corporation, notified area committee, town area committee, town committee or by anyother name.

A "farm house" would mean a house for dwelling on a farm (that is, a tract of land, held for thepurpose of cultivation). Thus, a house on an agriculture land may constitute a farm house, provided itis situated within 25 km from the local limits of any municipality or cantonmentboard.

If there is no municipality within a radius of 25 km around a farm house, it isnot an asset.


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House maintained otherwise

A house which is not used either for residential or commercial purpose or whichis not maintained asa guest, or farm house, within the radius of 25 km for the local limits of any municipality or

cantonment board, but used for any other purpose, would also be an asset. Thus,where a building isused to promote art, charity, religion or any object of general public utility,neither, it is a residentialor commercial use of the building nor it is being used as a guest house or farmhouse, such buildingwould be an asset as it is being used "otherwise". Similarly, a building used asa social club orwelfare centre or health centre would also be an asset. Thus, a building used for any purpose is an"asset". However it can be subject to exclusions.

Land appurtenant to the house:



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"land appurtenant to the house" is also being treated as asset to avoid any controversy in the matter.The expression "land appurtenant thereto" has not been defined in the Act. It must, therefore, be

understood in its popular and non-technical sense of "relating to", usually enjoyed or occupied with ahouse. The words "land appurtenant to" in the context of house property means the lands belongingto house property or the lands necessary or connected with the enjoyment of thehouse [ITO v.Goverdhan Dass and Sons (1987) 20 ITD 681 (Amr.)].

Thus, the appurtenant land in respect of a residential building may be in the form of a compound andplayground, courtyard and backyard, kitchen-garden, cattle-shed, motor-garage, etc., forming part of

the building.

In respect of a non-residential building, the appurtenant lands may be in the form of car-parkingspace, connecting roads between different departments of the factory area, drying grounds and playgrounds,forming part of the building.

Where the land, contiguous to the building, can be used for purpose other than enjoyment of thebuilding, the whole of the land may not be treated as land "appurtenant thereto". For example, wherea building has got 10 acres of adjoining land, the entire adjoining land may not

be treated as "landsappurtenant to the building". The tax authorities have got jurisdiction to determine the extent of landappurtenant to the building taking into account a variety of circumstances thatmay be relevant todetermine whether the land contiguous to the building should be treated as "landappurtenantthereto". Some of the relevant tests have been cited in [CIT v. Ziabunisa Begum(1985) 151ITR 321(AP)] as follows:

(i) If the building together with the land is treated as an indivisible unit andenjoyed as such by thepersons enjoying the building, it is an indication that the entire land is appurtenant to the building.(ii) I If the building has extensive lands appurtenant thereto, and even if thebuilding and the landhave been treated as one single unit and enjoyed as such by the occupiers, an enquiry could be madeto find out whether any part of the land contiguous to the building can be put to independent usewithout causing any determent to the effective and proper enjoyment of the building as such.Such an enquiry should be conducted not based on any artificial considerations but from the point of

view of the persons occupying the building, that is, the number of persons of different branches offamilies, residing in the building, the requirement of the persons occupying the


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building consistentwith their social standing, etc. If any surplus is arrived at on such enquiry, the extent of such surplusland may not qualify to be treated as land appurtenant to the building.

(iii) If there is any evidence to indicate that any portion of the land contiguous to the building was

put to use other than the enjoyment of the building, such land does not qualifyto be treated as landappurtenant to the building. For instance, the land used by the occupants for commercial, agriculturaland horticultural purpose, although forming part of the land adjacent to building, does not qualify tobe treated as land appurtenant to the building.(iv) If the owner or occupant is deriving any income from the land which is notliable to be assessedas income from the house property under Sec. 22 of the Income-tax Act, then theextent of such landdoes not qualify to be treated as lands appurtenant to the building.

(v) Any material pointing to the attempted use of the building for purpose otherthan the effectiveand proper enjoyment of the house would also afford a safe guide to determine the extent of surplusland not qualifying to be treated as land appurtenant to the building.CA final Direct Taxes Page 10


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The above tests are only illustrative and not exhaustive. Thus, whether or not,the land contiguous tothe building, is land appurtenant thereto, is a question of facts.

Building under construction

Section 2(ea) refers to any building or land appurtenant thereto whether used forresidential or commercial purposes or for the purpose of maintaining a guesthouseotherwise including a farm house situated within 25 kms from local limitsof any municipality with some exceptions provided therein. No where in thedefinition of the word assets, an incomplete building has been referred to. Thecharging section of the Act has to be strictly construed and, accordingly, thevalue of the incomplete building cannot be added in the net wealth of the assessee. In the absence of

any provision in the Act for inclusion for value of incomplete building, the building in question is notincludible in the computation of the net wealth of the assessee on the relevantvaluation date.However land can be subjected to wealth tax on its own merit.

ImpHouses excluded from the purview of chargeability:

(1) Residential house allotted by a company to a whole-time employee, drawing agross annualsalary of less than Rs 5,00,000:The exclusion applies only to a company assessee, provided the following conditi

ons are satisfied:

(i) The house is allotted by the company to its employee/officer/director who isin the whole-timeemployment. Thus, no exclusion applies where the employee is a part-time employee or where thealloottee is not an employee.The whole-time employee may be a permanent employee or temporary employee. For example, Mr Jis appointed by a company in leave vacancy for 3 years as a whole-time employee.The condition issatisfied even though he is not a permanent employee,

(ii) The annual gross salary of the employee/ officer/ director should be less than Rs5,00,000. Thus, if the annual gross salary is Rs 5,00,000 or more, the exclusionis gone. The term"gross salary" has not been defined in the Act. It may be construed as per its dictionary meaning."Salary" refers to a fixed compensation paid to a person for regular work or service. Accordingly,salary would include all cash allowances but not perquisites. The limit of Rs 5lakh is applicablefrom the assessment year 1999-2000.(iii) The house is allotted exclusively for residential use. Thus, where the hou

se is allotted partly forresidential purposes and partly as a showroom to display company's products or as a godown to store


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company's products, the exclusion does not apply.(2) Any house for residential or commercial purposes, held as stock-in-trade:Any house for residential or commercial purposes which forms part of stock-in-trade is excludedfrom the purview of "assets". Thus, construction companies/concerns/real estatedealers, holdingresidential houses as stock-in-trade are not liable to wealth tax. Similarly, wh

ere shops, godowns,warehouses, office premises, factory premises, etc., are held as stock-in-trade,all of them are excludedfrom the purview of the assets. Like-wise, constructing guest houses and sellingthem at profitwill take them out from the ambit of wealth-tax laws. If guest house is used.forentertainingcustomers, it is an asset.



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(3) Any house occupied by the assessee for any business or profession carried onby him:From the assessment year 1997-1998 and subsequent years, any house which is occupied by the

assessee for the purposes of any business or profession carried on by him, has been excluded fromthe purview of "assets". Accordingly, commercial building or any other building,occupied by the assesseefor the purposes of business or profession, carried on by him, is not an asset.Thus, a nursinghome building owned and occupied by the owner for treating the patients, is notan asset. Similarly,the studio owned and occupied by a photographer is excluded from the purview ofassets. Officebuilding owned and occupied by a chartered accountant for his practice is not liable to wealth tax.

Factory building, office premises, showroom, godown and shop, etc., owned and occupied by thecompany assessee for its business would not be an asset. Where a welfare building, like guest house,club house, school building and temple, etc., is owned by the assessee and usedfor the purposes ofbusiness, its exclusion from wealth tax would be doubtful. The narrow view may be that"occupancy" would mean personal and physical occupation by the owner himself forthe purposes ofbusiness. Hence, exclusion would not apply. The broader view may be that "occupancy" by theagents is 'occupancy' by the principal. Accordingly, the occupancy of the welfar

e building by theemployees/agents, etc., would be regarded as occupancy by the owner. Hence, theexclusion wouldapply-Where an assessee is engaged in the business of constructing building andlet them on hire forbusiness purposes, he is not entitleci to claim the exclusion in respect of suchbuildings under thisclause as he has not occupied them for his own business.

Where the assessee has occupied only a part of the premises for his business orprofession, theexclusion would apply to that part only. The balance part of the premises whichis not occupied forthe purposes of business or profession would be an asset and liable to wealth tax. For example, Dr Downs a house. One-third portion is used as a "clinic" for practice and two-thirds portion is used asresidence. Clinic portion of the house is not an asset.

Similarly, where a businessman uses the ground floor of the building for his business purposes andthe first floor is occupied for residential purposes, the ground floor of the building is not an asset.The residential portion is an asset.

Where a building, owned by a partner, is occupied by the firm for the purposes of its business, thepartner would be entitled to claim the exclusion of such building. Partnership b


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usiness is nothing butthe business carried on by every partner, acting for all the partners. The building used by the firmwould he treated as used by the partner for the business carried on by him. Majority of the HighCourt opinions support this view [Addl. CIT v. N. Vaidayanathan (1989) 180 ITR198 (Mad.). Also

see: CIT v. P.M. Thomas (1990) 181ITO 247 (Ker.); CIT v. Syed Anwar Hussien (1990) 180 ITR749 (Pat.); CIT v. Rasiklal Balabhai (1979) 119 ITR 303 (Guj.)]' However, the Karnataka High Courthas dissented from this view [CIT r. K.N. Guruswami, (1984) 148 ITR34(Kar.)].

Used for the purpose of business and profession

The assessee-company, which carried on various businesses, owned several buildings, most of whichwere let to its employees. The rental of the premises was fixed, it did not change with the change of

the occupant, and it was deducted from the wages of the employee or employees occupying thepremises. Held that, That the income of the assessee from the buildings or landsappurtenant theretorented out to its employees was income from business and not as "Income from property". [1966]059 ITR 0152- Commissioner of Income-tax vs. Delhi Cloth and General Mills Co. Ltd. (PunjabHigh Court)



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A bungalow owned by the assessee-company was in the occupation of G and K as employees anddirectors free of charge. The assessee-company effected repairs to the bungalowand also provided

modern amenities including air-conditioners. The questions were whether the income from thebungalow was to be computed as income from business and whether the assessee wasentitled toclaim allowance for actual repairs and depreciation.

Held that

1)In view of the finding of fact by the Tribunal, occupation of the property by Gand K for thepurpose of effective discharge of their duties vis-a-vis the business of the ass

essee-companyamounted to occupation by the assessee for the purpose of its business and the income thereforehad to be assessed as income from business;

2)That the assessee was entitled to deduction of actual repairs and depreciation.

3)When a house property is occupied as residence by employees or directors, etc.,of the assesseecompany,if concerned with the promotion of the business of the assessee-company, whetheron

payment of rent or otherwise, to enable them to discharge their functions efficiently and theletting out of the property is subservient and incidental to the main business of the assessee, suchan occupation amounts to occupation and user of the property by the assessee itself for thepurpose of its business, even though no business is actually run in such premises. [1994] 210 ITR0001-CIT vs. Modi Industries Ltd. (Delhi High Court)

(4) Residential property let out for 300 days or more during the previous year:Where, a residential property is let out for a minimum period of 300 days duringthe previous year, itis excluded from the purview of "assets". It is operative from the assessment year 1999-2000 andsubsequent years.

Where a residential property is let out for mixed purposes, that is, residentialand commercial, theportion let out for residential purposes would not be treated an asset. Where aresidential buildingconsists of several units, some of them remain let out for 300 or more days andsome are layingvacant or let out for less than 300 days, it appears that exclusion would applyfor units which

remained let out for 300 or more days.

Where a commercial property is let out for residential purposes for 300 or more


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days during theprevious year, it appears that exclusion would not apply as it is not a residential property.

Similarly, where a residential property is let out for 300 or more days for commercial purposes,exclusion would not apply.

(5) Commercial complexes/establishment:Any property in the nature of commercial establishment or complexes isexcluded from the purview of "assets". The exclusion is applicable from theassessment year 1999-2000 and subsequent years. The terms "commercialestablishment" and "commercial complexes" have not been defined.'Commercial establishment' would refer to a place where products aresold/exchanged or a profit-making establishment. Thus, where a place is let outto a trader, the placeis used for a commercial establishment, that is, to carry on any trade or business. Thus, it should beexcluded.

ImpCA final Direct TaxesPage 13


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"Commercial complex" is a large building or group of buildings with common facilities like banks,post office, telecommunication, security, parking spaces, storage, etc. Such complexes are built by

the builders to let them on hire under lease or tenancy. Thus, exclusion would apply when suchcomplexes are in use as such. Exclusion would not apply to commercial complexesremainingvacant.

Thus, commercial establishment complex held as investment would be chargeable towealthtax. The shops, offices, factory buildings situated in commercial complex/commercial establishmentare excluded from the purview of assets, provided they are let out.






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Motor cars :

Motor cars are "assets". "Motor car" means any motor vehicle other than a transport vehicle,

omnibus, road roller, tractor, motor cycle or invalid carriage [Sec. 2(26) of the Motor Vehicle Act,1988]. "Transport vehicle" means a public service vehicle, private service vehicle, bus of aneducational institution or a goods carriage [Sec. 2(47) of the Motor Vehicle Act, 1988]. Transportvehicle is not a motor car. "Invalid carriage" means a motor vehicle specially designed andconstructed, and not merely adapted for the use of a person suffering from somephysical defect ordisability and used solely by or for such a person [Sec. 2(18) of the Motor Vehicle Act, 1S'88].

"Invalid carriage" is not a motor car.

Motor car held as stock-in-trade or used in a hiring business excluded from chargeability: Two exclusionshave been provided in respect of motor cars.

(1) Motor cars held as stock-in-trade: Where the assessee holds motor cars asstock-in-trade, the motor cars are excluded from the purview of "assets". Thus,automobiledealers/manufacturers are not assessable on the value of motor cars, held as stock-in-trade. No time-limit is provided to hold them as stock-in-trade.

(2) Motor cars held as taxies: Where the assessee holds the motor cars to be used ina business of running them on hire, such motor cars are not "assets".Unregistered motorcars

Motor car purchased by an assessee but not registered under Motor Vehicle Actlegally belongs to the assessee as the ownership of moveable property passes underthe Sale of Goods Act and not under Motor Vehicle Act. Where a motor car of anassessee is stolen before valuation date but theft is not certified by the policeauthorities till valuation date, the stolen motor car still belongs to the assessee. It isto be included in his net wealth.

ImpCA final Direct Taxes Page 15


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Aircrafts used for business purposes :

The wordings in section 2(ea) make it clear that there is difference between the

term commercial purposes and the term used by the assessee in the business ofrunning them on hire. Wherever the Legislature wanted that a particular assetshould be used for hire for claiming exemption, they have specifically mentionedthis fact. In other cases, the term commercial purposes has been used to indicatethat the asset should be used for the purpose of business and there is no conditionthat it should be let out on hire. The term commercial purposes has to be distinguished frompersonal purposes. In other words, if the aircraft, i.e., helicopter, is used forpersonal purposes, itwould be liable to wealth-tax. If it is used for commercial purposes, i.e., for bu

siness purposes, itwould not be chargeable to wealth tax.

In the case of Amalgamated Electricity Co. Ltd., it was held that if the asset is used for doing abusiness, the object of which is to make a profit, then the asset is used for commercial purposes. It isnowhere laid down that in order to satisfy the requirement of commercial purposes, aircraft should beused as air taxi. One can use it for his own business also to meet the exigencies of the business.Admittedly, it was treated as business asset. The depreciation was allowed on the same. As such, it

can be said that the helicopter was used for commercial purposes. It is therefore beyond the ken ofwealth-tax.

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Membership Type 1 2 3Membership Name Free DT IDTDescriptionWealth Tax

(excludingvaluationrules andquestions /answers.)Direct Taxesfor CA final(Includesmembershiptype 3) (alsoincluded130 + Class

workproblemsandsolution)Indirecttaxes of CAfinal.(included+100 Classworkproblemsandsolution)

Hours of video access Granted 5 Hrs 100 Hrs 75 HrsMembership commence (May 2011 Exam) 16th May 16th May 16th MayFair Usage of Hours for attending all lectures for givensubject once.(approximately in this many hours once all lectures can beattended, some extra time is given considering revision of anychapters that may be required. Particularly for DT if studentsattend basic topics of IPCC lectures also when we post from timeto time then students will have to buy more hours at additionalcost.)5 Hrs 100 Hrs 65 HrsTime of Access / Viewing(You can access the lectures any time with user name andpassword. Subject to your membership expiry date and hours ofusage.)24/7 24/7 24/7Download of video files(Video files are copy right protected, It is not allowed to bedownloaded. User must not copy or distribute it any mannerwhat so ever, audio or video or both.)Yes(SelectedFiles Only)No NoViewing online(You must be connected to internet with at least broadband

connection. You can also access these lectures with help of smartmobile phone if it supports Java and gives you speed of 384 kbpsminimum.)


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Yes Yes YesWeb meeting with professor(From time to time it will be scheduled for solving doubt andimportant discussion.)No Yes YesE-mail support for handling queries(generally accepted response time of 48 hours.) No Yes Yes

Maximum time each video can be Logged in.(This limit is kept for security purposes. Video Logged in for lessthen 3 min is not counted for this purpose.)10 10 10Fees (Including taxes if any)(Not Refundable in any circumstances.) Rs. Nil Rs. 15,500 Rs. 12,500Charges for additional hours (if required). Not available 100 P/hr 100 P/hr



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Membership Activation time.(You can Commence online lectures any time, you are never toolate for classes.)automatic 48 Hours of

payment.48 Hours ofpayment.Study notes in softcopy provided for download.(*likely to be provided.) No Yes No*Membership expiry for May 2011 exam(Respective hours or this date whichever is earlier.) No 18th May 18th MayNew Batch for Nov 2011Online lectures commence for May 2011 students of CAfinal.20th May 20th May 20th MayCopy right protected Yes Yes Yes

Amount of fees can be deposited in HDFC bank account name :EducationUnlimited A/c No. 04232000004324 (Bank code if required : 400240056

004827 11, Novelty cinema branch, mumbai.) if you are paying by demand draftthen it should be in favour of Education Unlimited A/c No. 04232000004324payable at Mumbai.CA final Direct Taxes Page 19


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INCIDENCE OF TAXATION SEC.6Incidence of Tax depends on the residential and citizenship status of the assessee and location ofassets. The following table summaries this:

Category 1 Category 2STATUSTAXABLEASSETSDEDUCTIBLEDEBTSINDIVIDUAL, if he is both ordinarilycitizen in India AND citizen of IndiaHUF, if it is ordinarily resident in India.COMPANY, if it is Resident in India.ALL ASSETS Wherever located

I.E. In India + AbroadALL DEBTS Wherever locatedALL OTHER ASSESSEESASSETS IN INDIADebts in India

Location of the assets

The location of assets and debts is of prime importance for computation of taxable net wealth andincidence of tax. The location of assets or debts is essentially a question of fact and should bedecided in the light of evidence. The following instruction have been issued by

the Department inthis connection for general guidance:

Property Located in india1)2)3)4)5)Tangible immovable propertyRights or interest in or over Immovable property(otherwise than by way of security) or benefitsarising out or immovable property.Rights or interest in or over Movable property(otherwise than by way of security).DebtsShips or Aircrafts.If the property LIES in IndiaIf the said immovable property liesin India.If the said movable property isLOCATED in India.If they are contracted to be repaid inIndia.If REGISTERED in India.



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DEEMED ASSETS - SEC 4 CLUBBINGIn computing the net wealth of an Individual, there shall be included as belonging to that individualthe value of assets, which on the valuation date are held.

(i)By the SPOUSE of such individual to whom such assets have been transferred by theindividual, directly or indirectly, otherwise than for adequate consideration orinconnection with agreement to live apart, or(ii)By a MINOR CHILD, not being a married daughter of such individual, or A minor childsuffering from any disability of the nature specified in the sec 80U of the I.T.Act.

Clubbing provision shall not apply in respect of such assets as have been acquired by theminor child out of his income referred to in the proviso 64(1A) of the Income-tax Act andwhich are held by him on the valuation date:

Where the assets held by a minor child are to be included in computing the net wealth ofan individual, such assets shall be included, (a) where the marriage of his parents subsists,in the net wealth of that parent whose net wealth (excluding the assets of the minor childso includible) is greater; or (b) where the marriage of his parents does not sub

sist, in thenet wealth of that parent who maintains the minor child in the previous year.

Where any such assets are once included in the net wealth of either parent, anysuchassets shall not be included in the net wealth of the other parent in any succeeding yearunless the Assessing Officer is satisfied, after giving that parent an opportunity of beingheard, that it is necessary so to do.

(iii)By a person or association of persons to whom such assets have been transferredby theindividual directly or indirectly otherwise than for adequate consideration fortheimmediate or deferred benefit or the individual, his or her spouse, or both.(iv)By a person or association of persons to whom such assets have been transferredby theindividual otherwise than under an IRREVOCABLE TRANSFER.(v)By the SONS WIFE of such individual to whom such assets have been transferred bytheindividual, directly or indirectly, otherwise than for adequate consideration.

(vi)By a person or association or persons to whom such assets have been transferredby the


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individual, directly or indirectly otherwise than for adequate consideration fortheimmediate or deferred benefit of the sons wife, of such individual.CA final Direct TaxesPage 21


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Online lectures for CA studiesCA final Direct Taxes Page 22Relation ship of husband and wifeThe word "spouse" means lawfully-wedded husband and wife and not therelationship of concubine. The word "wife" or "spouse" does not include a femalewith whom the

assessee has an illicit connection for however long a period.The "spouse" does not include a prospective wife orprospective husband: For example, M was engaged to K. He settled jewellery/motorcar/cash, etc., on a trust with a direction that the said assets would be givento K at the time of hermarriage with him. However, the trustees delivered the said assets to K, 20 daysprior to her marriagewith M. The Assessing Officer included the said assets in the net wealth of M onthe ground that thetrustees were not empowered to deliver the said assets to K prior lo her marriage with M. Hence, the

HUFClubbingSons WifeIrrevocableTransferPerson orAOP forbenefit ofspouse / swMinor ChildSpouse


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transfer should be deemed to have taken place at the time of her marriage with Mwhen the relationof the spouse was there. The action of the Assessing Officer is not justified. It is not relevant to

consider that there was violation of the terms of the trust deed. Even if the delivery of the said assetsis against the terms of the trust deeds, it is not possible to ignore the factumof delivery before hermarriage with M. The value of the assets transferred is not assessable in the net wealth of thetransferor. It is taxable as the wealth of the transferee-spouse [CWT v. M. K. Ananthkumar (1986)157ITR 598 (Mad.)],

In order to attract the application of clubbing provisions of spouse the relationship of husband and

wife must subsist not only at the time of the accrual of income from the assetsbut also when thetransfer of assets is made. The words "wife" and "husband" must be taken in their primary sensewhich is clearly indicative of a marital relationship. [1963] 049 ITR (S.C.) 0097- Philip John PlasketThomas vs. CIT (Supreme Court of India)

If H has gifted to W jewellery worth Rs.100,000/- on 1.12.1996 and subsequentlyH marries w onsay 1.1.1997 then the value of jewellery will never be clubbed with the Net wealth of H at any time:even after their marriage. This is because the relationship of husband and wife

did not exist on thedate of transfer. E.g. (b) if H & W are husband and wife and H gifts jewellery worth Rs.100,000/- toW on 15.12.1997 but dies on 31.12.1997 then (although on 31.3.1997 clubbing didtake place) on thevaluation date 31st march, 1998 no clubbing will take place since on the valuation date 31.3.98 therelationship of husband and wife does not exist. A widow or widower is not a spouse.

What value to be clubbed

It may be noted that the value to be clubbed will be the value (of the transferred asset) as on thevaluation date irrespective of what its value was when transferred.

Property was sold by assessee to wife for inadequate consideration. There shallbe inclusion ofincome from property sold, in husband's income to the extent of inadequacy of consideration. [1970]076 ITR 0279 Patwardhan (H.N.) vs. CIT (Bombay High Court)

Where there is Transfer of house property to spouse otherwise than for adequateconsiderationassessee is deemed to be owner of house property. In this case entirety of incom

e arising to spousefrom house property includible in assessee's total income. Principle of proportionality determined by


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inadequacy of consideration not postulated by section 64. [1988] 173 ITR 0003- CIT vs. Junus HajiUmmer Sait (Kerala High Court)

Payement of meher

Any transfer of an asset in discharge of legal obligation is for adequate consid

eration. Thus, paymentof "Meher" to the wife by the husband during the life-time is not a transfer without "adequateconsideration" [Ghiasuddin Babu Khan v. CIT (1985) 153 ITR 707 (AP)(F.B.)]. Therefore, theproperty purchased out of such meher cannot be included in the hands of the husband under Sec.4(l)(a)(i) [CWT v. Nawab Fazalyar Jung (1993) 66 Taxman 168 (AP)].

Asset transferred in connection with divorce

Transfer by one spouse to another under an agreement to live apart (DIVORCE) not

covered byclubbing provisions: Any transfer effected either by the husband to the wife orvice-versa under anagreement to live apart does not fall within the purview of the deeming provision. Accordingly, thetransferred asset is to be excluded from the net wealth of the transferor.



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When asset change its form

Further the clubbing provisions will apply irrespective of whether the assets are held by the

transferee in the original form (i.e. in the same form as he received them) or in any other form on thevaluation date. Where the asset transferred by the assessee us disposed of by the transferee & thetransferee acquires (with the consideration received) another asset, the value of that new acquiredasset as on the valuation date will be clubbed. CWT Vs Kishan Lal Bubna 204 ITR600 (SC).Reading section 4(1)(a) of the Wealth-tax Act, 1957, there is no doubt that theprovisioncontemplates that where the assets which have been transferred have been converted to some other

assets, it is the value of the converted assets on the valuation date that has to be taken into account incomputing the net wealth of the transferor assessee. [1993] 204 ITR 0600- CWT vs. Kishan LalBubna (Supreme Court of India)

Where there is transfer of assets to spouse or minor child there shall be inclusion of transferred assetsin net wealth of assessee if such assets are assets as per section 2(ea) on thevaluation date. Suchproperties transferred need not have been "assets" on the date of transfer. [1978] 115 ITR 0160AKollankulam (M.G.) vs. CIT (Kerala High Court)

Indirect transfer / cross transfer

For the purpose of clubbing provision it was not necessary that the same assetsbelonging to thehusband should have reached the wife. The assets might, in the course of being transferred, bechanged deliberately into assets of a like value of another person, as happenedin this case. A chainof transfers such as those in this case was comprehended by the word "indirectly". That if twotransfers were inter-connected and were parts of the same transaction in such away that they couldbe said to have been adopted as a device to avoid the implications of clubbing provision then the casewould fall within the section even though one was not in the consideration for the other in thetechnical sense. Commissioner of Income-tax Vs. Kothari (C.M.) 49 ITR 109.

Minors income out of specified source

The clubbing provision of sec. 4(1)(a)(ii) will not apply in respect of assets,acquired by the minorchild out of income earned by him, form any manual work done by him or from activity involving

application of his skill, talent. Specialised knowledge & experience.

If on the valuation date the child already has become a major the value of asset


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s cannot be includedin the Net Wealth of the transferor (CIT Vs. Ashokabhai Chimanbhai 56 ITR 42 (SC). In other wordsthe child should be minor on the valuation date.

Accreation to value of asset

Where shares are transferred by an assessee to his spouse and subsequently bonusshares are allottedto her, the bonus shares are an accretion to the assets transferred by the assessee but they cannot beregarded as "assets transferred" by the assessee and the dividend income from those bonus sharescannot be regarded as arising even indirectly from the assets transferred by theassessee and cannotbe included in the total income of the assessee. Held that the dividend income on the bonus sharesheld by the assessee's wife was not taxable in the assessee's hands under section 64 as the bonus

shares could not be regarded as "assets transferred" by the assessee. [1983] 142ITR 0377- CIT vs.Birla (M.P.) (Bombay High Court)



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Sec.4 (1)(b): share in firms or aops:

Where the assessee is partner in a firm or is a member of an association of persons the value of his

interest in the assets of the firm or the association is to be included in his Net Wealth u/s 4(1)(b).

If a person is a partner in a firm on behalf of the HUF then value of his interest in the firm isineludible in the Net wealth of HUF.

The value of interest of a minor in a firm (in which he is admitted to the benefits of partnership) it tobe included in the net Wealth of that parent whose Net wealth (exclusive of thisvalue) is greater. Soordinarily a minors share in a firm will be clubbed in the hands of the parents w

hose Net wealth ishigher. However if the marriage of his parents does not subsist then the same will be included in theNew Wealth of that parent who maintains the minor child.

Sec 4(1A): HUF clubbing provisions:

When an individual converts his separate property into joint family property ofHUF or transfersthe property to the HUF (of which he is a member) otherwise than for adequate consideration then:

1) The entire value of the property so converted or gifted will be included in t

he Net Wealth ofthe individual and2) Subsequently if the converted or gifted property becomes the subject matter of total or partialpartition then the share allotted to the SPOUSE out of the converted or gifted property will beincluded in the Net Wealth of that individual.

This Sec. Will apply only to conversions or gifts made after 31.12.1969.

Minor converting property

If a minor child of the converting member or donor member also gets a share in the partition ofconverted property or gifted property the share of the property received by theminor child is not tobe included in the net wealth of the converting member/donor member such property held by theminor is to be clubbed with the net wealth of that parent whose wealth is greater provided themarriage of the parents subsists on the valuation date if the marriage of the parents does not subsistsuch asset is to be included in the net wealth of that parent who maintains thechild.



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Sec.4 (5) irrevokable transfer

The value of any assets transferred under an irrevocable transfer shall be liable to be included in

computing the net wealth of the transferor as and when the power to revoke arises to him.

Further in order to constitute an irrevocable transfer the following conditionsmust be satisfied.

1)The instrument of transfer must not contain any provisions for the RETRANSFER directly orindirectly over the whole of any part of the assets or income.

2)

The instrument of transfer must not give the transferor rights to REASSUME powerdirectly orindirectly over the whole or any part of the assets or income.

However, it is stated that an irrevocable transfer includes a transfer, which isnot revocable for aperiod exceeding 6 years or during the lifetime of the transferee.

We have seen above that a transfer not revocable for a period exceeding 6 yearsis treated as anirrevocable transfer Hence the value of the transferred assets will not be clubbed with the Net wealthof the transferor. However sec.4 (5) states that as soon as the power to revoke

arises (say after 7Years), clubbing will start and the value of the assets will have to be includedin the Net wealth ofthe transferor.

Where R transfers a motor car to S for 6 years, the transfer is revocable even if the car is wholly usedfor the benefit of S. The motor car so held by S is to be included in the net wealth of R. If the transferis for a period exceeding 6 years or for the life-time of the transferee, the transfer may still berevocable if the transferor derives any benefit or exercises control over the income or the asset.

Computation of the period of irrevocability:

The minimum period or irrevocability, that is, 6 years and one day would be counted from, the dateof the execution of the deed. If the deed is irrevocable originally for a periodof 6 years or less and ismade irrevocable for a period of 6 years and one day by executing another extension deed, suchtransfer cannot be treated an "irrevocable" eventhough the extension deed is executed before theexpiry of the original deed.

CA final Direct TaxesPage 26


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Sec.4 (5A) gifts by book entries

Where a person makes a gift of money by means of entries in the books of accounts (maintained by

him or any other individual, HUF, firm, AOP or BOI with whom he has a business or otherconnection) the value of such gifts will be includible in his Net Wealth unlesshe proves to thesatisfaction of the AO (Assessing Office) that the money has actually been DELIVERED AT THETIME ENTRIES WERE MADE.

Sec.4 (7) property held as member of co-operative housingsociety etc

Where the assessee is a member of a co-operative housing society company or asso

ciation of personsand building or part thereof is allotted or leased to him he shall be deemed tobe owner of suchbuilding or part and its value shall be includible in his Net Wealth. In determining its value howeverany outstanding installments payable by the assessee to the society, company, orassociation ofpersons towards cost of the house is deductible as debt owned.

Sec.4 (8) 53A of the transfer of property act

A Person:

a)Who is allowed to take/retain possession of any building or part thereof inpart performance of a contract of the nature referred to in sec.53A of theTransfer of Property Act.

b)Who acquires any rights in any building or part thereof by virtue of atransaction of the type referred to in Sec. 269 UA (f) of the I.T. Act. Is deemed to be the ownerof that building or part and the value thereof would be includible in his Net Wealth.

Sec 33. Liability of transferees of properties in certain cases

Where by reason of the provisions contained in section 4, the value of any assetstransferred to any of the persons mentioned in that section have to be includedinthe net wealth of an individual, the person in whose name such assets stand shall,notwithstanding anything contained in any law to the contrary, be liable, on theservice of a notice of demand by the Assessing Officer in this behalf, to pay thatportion of the tax assessed on the assessee as is attributable to the value of t

heasset standing in his name as aforesaid. Provided that where any such asset isheld jointly by more than one person, they shall be jointly and severally liable


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to pay the tax as isattributable to the value of the asset so jointly held.

ImpWhere any such person as is referred defaults in making payment of any tax demanded from him, heshall be deemed to be an assessee in default in respect of such sum, and all the

provisions of this Actrelating to recovery shall apply accordingly.

ImpCA final Direct TaxesPage 27


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EXEMPT ASSETS: SEC.5Sec.5 (i): public charitable trustsAny property held by the assessee under trust or other legal obligation for anypublic purpose of a charitable or religious nature in India, is exempt However

business assets (subject to some exceptions) will not be exempt.

Charitable or religious purpose:

The expression "charitable purpose" has not been defined in the Act. It is saidto mean relief of thepoor, educational and medical relief or the advancement of any other object of general public utility.The relief to poor does not necessarily mean giving them free doles or alms, itmay take some othershape, e.g. seeking better reward for labour. Raising of moral, intellectual, economic, social and

political conditions of people in general is an object of general public utility. 'Public religiouspurpose' means any purpose related to the advancement, support or propagation ofreligion. Propertydedicated to an idol to which public have free access is a public religious trust and is entitled toexemption.The charitable or religious purpose should be confined to India. If the charitable or religious purposefor which the property is held lies outside India, the right to exemption is lost. Thus, if a Muslim inIndia settles certain property on trust and directs the trustees to spend the income for the benefit of

Mecca and Medina, no exemption can be claimed in respect of such properties. Theexemption is tobe denied completely even if some objects of the charitable trust confine outside India [CWT v.Trustees of the Nizam's Religious Endowment Trust (1977) 108 ITR 229 (AP)].



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Sec.5 (ii): coparcenercy interest in hufInterest of the assessee in coparcenercy property of an HUF is exempt.The exemption avoids double taxation of the same property once in the hands of the

coparcener and then in the hands of Hindu undivided family.Sec.5 (iii): residential building of a rulerAny one building used by a Ruler as his official residence immediately before thecommencement of the Constitution (26th Amendment) Act. 1971 is exempt.

One Official Residence of Ex-Indian Ruler [(Sec. 5(iii)]

Any one building which is in the occupation of ex-Indian ruler and which has been declared by theCentral Government as his official residence, is exempt from wealth tax. If theruler ceases to occupy

the building, notified by the Central Government as his official residence, theRuler is not entitled toexemption in respect of such building.If a ruler has more than one official residence, the exemption is available onlyin respect of one suchresidence, as is declared to be his official residence by the Central Government. The choice of suchofficial residence to be exempted from wealth tax left to ruler.The exemption applies only to building or part of the building which has been declared by the CentralGovernment as official residence of the ex-ruler and which is in his occupation,therefore, thebuilding let put to tenants is not entitled to the exemption as it is not in the

occupation of ex-rulers[Mohammedan Khan and others v. CIT (1997) 224 ITR 672 (SC)].

The expression 'ruler' means the Prince, Chief or other person who, at any timebefore thecommencement of the Constitution (Twenty-sixth Amendment) Act 1971) was recognised by thePresident as the ruler of Indian State, or any person who at any time before such commencement wasrecognised by the President as successor of such ruler.



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Sec.5 (iv): rulers jewelleryJewellery in possession of Ruler, which is not his personalproperty, is fully exempt if it is recognised by the CentralGovernment before 1.4.1957 or the Board after that date.

Where such recognition does not exist, the Central Board ofDirect Taxes is empowered to accord such recognition but itshould be obtained by the ex-ruler at the time of his first assessment under this Act.If the Board recognises the jewellery in the possession of an ex-ruler at the time ofhis assessment as his "heirloom jewellery", it will be exempt from wealth tax.Imp

Heirloom jewellery of ex-rular 5(iv)

The exemption is available if the following conditions are also satisfied by an

ex-ruler:

(i) The jewellery is permanently kept in India and is not removed outside Indiaexcept for a purposeand period approved by the Board.(ii) The reasonable steps are taken for keeping the jewellery substantially in its original shape,(iii) The reasonable facilities are allowed to any office of the government authorised by the Board inthis behalf to examine jewellery as and when necessary.If any of the conditions is not satisfied, the Board is empowered to withdraw the recognition retrospectivelyfrom 9 September 1972. The Board has to record the reasons for such withdrawal.

If theBoard withdraws the recognition retrospectively, wealth tax becomes payable by the ex-ruler for allthe assessment years for which the jewellery was exempted on account of the recognition. In such acase, the back assessment years have to be rectified. For this purpose, the fairmarket value of thejewellery on the date of the withdrawal of the recognition is deemed to be the market value on eachvaluation date relevant to back assessment years. But the aggregate amount of wealth tax in respectof jewellery for all the back assessment years cannot exceed 50% of its fair market value on thevaluation date relevant for the assessment year in which the recognition is withdrawn.CA final Direct Taxes Page 30


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Sec.5 (v): for person of indian origin or a citizen of indiaIf any person of Indian origin or a citizen of India who wasordinarily residing in a foreign country, leaves such countryand returns to India with an intention of permanently residing

in India then he will enjoy exemption on the following assetsfor the next 7 successive Asst. Years after his return.ImpMoney brought in to India Provided they are brought into India within one-year prior to return to India or thereafter.Value of assets brought in toIndiaValue of assets acquired outof moneys brought in toIndiaA person shall be deemed to be of Indian origin if he, or either of his parentsor any

of his grandparents, was born in undivided India;Moneys standing to the credit of such person in a Non-resident (External) Accountin any bank in India on the date of his return to India, shall be deemed to bemoneys brought by him into India on that date.



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Sec.5 (vi) one house or part of a house or a plot of landOne house or part of a house or a plot of land belonging to anindividual or a Hindu undivided family Provided that wealth-tax shall not be payable by an assessee in respect of an asset

being a plot of land comprising an area of five hundred squaremeters or less. (1 sq meter = 10.794 feets)Several self-contained units which are contiguous and situate in the samecompound and with common boundaries and having unity of structure could beregarded as one building. The exemption would be available in respect of the valueof the entire building, [1992] 197 ITR 0258- CWT vs. Najima Nizar (Mrs.)(Kerala High Court).The Act has not defined "house". The word "house" would include any buildingirrespective of its use, that is to say, it may be used for business purpose oras aresidence or as a school and it should not be restricted to a dwelling house. Th

us,where the assessee lets out a part of the house as a godown for business purposesand remaining part for residence, he is entitled to the exemption for the entirehouse, comprising residential unit and godown which constituted one building[CWT v. Mahal Chand Pandia (1996) 219 ITR 733 (Guw.)].Imp






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Prof. Kalpesh Sanghavi www.kalpeshclasses.comCA final Direct Taxes Page 33One House orPart of a Houseor a plot of land ExemptFor person of

Indian Origin or aCitizen of IndiaRulers JewelleryResidentialBuilding of aRulerCoparcenercyInterest in HUFPublic CharitableTrusts


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DEBT OWED DEBT OWEDOnline lectures for CA studies

Net wealth = total assets allowable debts

Format of computation

Particulars Asset Value Debt Net1 Jew 12 10 2234Total XX XX XX

Deduction of Debts Owed by the Assessee on Valuation Date and which have been Incurred in relationto Chargeable Assets: The next step in computing the net wealth is to deduct thevalue of all

debts owed by the assessee on valuation date and which have been incurred in relation to the chargeableassets

The deduction of such debts is allowed from the aggregate value of the chargeable assets, whereverlocated, belonging or deemed belonging to the assessee on the valuation date.

A contingent liability is not a debt owed, and cannot be deducted.

A question has arisen regarding the admissibility of deduction of the wealth-taxliability for thepurpose of computing the taxable net wealth. The Board has been advised that the

liability under theWealth-tax Act is not a debt owed by the assessee incurred in relation to the assets taxable under theWealth-tax Act. The liability to wealth-tax is a personal liability of the assessee. Moreover, thisliability not a debt incurred by the assessee but is created by the statute. Therefore, no deduction is tobe allowed for the wealth-tax liability in the computation of the taxable net wealth of the assessee.[1993] 203 ITR (Stat) 0134- Circular Number: 663

The assessee borrowed a sum of Rs. 40,000, from the LIC on the security of his house in which hewas residing. Out of this Rs. 30,000 was invested in a fixed deposit in a bank for one year. On thesecurity of the fixed deposit the assessee borrowed monies which he utilised forvarious purposes.The amount of the loan borrowed was adjusted against the fixed deposits on maturity. In his returnfor wealth-tax, the assessee claimed deduction of the amount outstanding on thevaluation date out ofthe amount borrowed from LIC. The debt in question was one acquired by the mortgage of theresidential house which was not chargeable to wealth-tax thus the debt could notbe allowed as a

deduction. [1980] 123 ITR 0464- Srinivasan (T.V.) vs. CWT (Madras High Court)

Section 80L can be availed of only by an assessee and as the total income of a h


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usband as defined in

s. 2(45) would include the income arising to the wife in respect of which s. 64(1)(iii) would operate,the provisions of SEC. 80L cannot be applied to the income arising to the wife which has to beincluded in the hands of the husband under s. 64(1)(iii), because, in respect of

that income, the wifeCA final Direct Taxes Page 34


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cannot be considered as the assessee Consequently, the relief under s. 80L wouldbe available to thehusband after the wife's income has been clubbed with his income. [1984] 146 ITR0627- CIT vs.

Ramaswamy (P.N.) (Madras High Court)

The first step to be taken in arriving at the net wealth of the assessee is to take the aggregate value ofall his assets which are required to be included in his net wealth in accordancewith the provisions ofthe Act. The assets which are specified in section 5(1) of the Wealth-tax Act, 1957, have to beexcluded in arriving at the aggregate value of all his assets for the purpose ofsection 2(m) of the Act.The aggregate value of all the debts thereafter will be deducted from the aggregate value of all the

assets so arrived at. I.E. debts in relation to exempt assets shall not be allowed as deduction. [1996]217 ITR 0159-CWT vs. Chockalingam (P.R.) (Madras High Court)

The assessee, one of the co-owners of a house having a one third share therein,had received advancerent. That amount remained unadjusted out of the advance received by the assessee was a "debt owed". [1991] 192 ITR 0163- SHAKTI SIKAND (Delhi High Court)






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Family settlement

On the death of B, the Maharaja of Gondal, disputes arose between his two sons,viz., V and his younger brother, S. Their mother, the assessee, intervened and

gave a letter to S, to the effect that if V did not give in full Rs. 50 lakhs whichwas the amount B had desired to give S, then S will get the balance of the amountfrom her. V paid only Rs. 20 lakhs and S claimed the balance from the assessee.

ImpPursuant to her commitment, the assessee transferred war stock valued at Rs. 11lakhs to S and also agreed to hand over certain ornaments in full settlement ofhis claim. Theornaments were not given and disputes arose between S and the assessee which were also eventually

settled in writing and by virtue of that settlement the assessee paid a sum of Rs. 10 lakhs to S. Thequestion was whether for the purpose of computing the assessee's net wealth on the valuation datesthe liability to pay the balance of Rs. 19 lakhs could constitute a debt owed bythe assessee within themeaning of section 2(m) of the Wealth-tax Act, 1957, and was deductible. [1979]117 ITR 0784CWTvs. Vijayaba (H.H.), Dowager Maharani Saheb of Bhavnagar Palace (Supreme Court of India)

Held that

1)On the facts, that this was a case of a family settlement or family arrangementbinding on theparties; the assessee agreed to purchase peace for the family and to pay her son, S, the amountwhich fell short of Rs. 50 lakhs if her elder son, V, did not pay him and such aconsideration wasgood consideration which brought about an enforceable agreement between the parties;

2)The liability of the assessee became enforceable by law,

3)The liability of the assessee was created by the family arrangement arrived at between the parties,and even if it was a contingent liability, the contingency did happen and the assessee becameliable to pay the sum of Rs. 19 lakhs as a debt.

4)The sum of Rs. 19 lakhs was a subsisting debt on the valuation dates and was deductible incomputing the assessee's net wealth. [1979] 117 ITR 0784- CWT vs. Vijayaba (H.H.), Dowager

Maharani Saheb of Bhavnagar Palace (Supreme Court of India)

CA final Direct Taxes


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Page 36


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GENERAL PRINCIPAL OF DEBT OWEDIt should be a debt.The expression "debt" signifies a sum of money which is now payable or will become payable in

future by reason of present obligation (Keshoram Industries & Cotton Mills Ltd v. CWT (1996) 59ITR 67 (SC). For example, a loan is taken on 15 June 2008, repayable after 3 years. On valuationdate 31 March 2009, it is debt because an obligation to pay has been incurred onor before valuationdate though the debt is payable after the valuation date.

Debt to be owed by the assessee.

It should be debt owed by the assessee, that is, it should be enforceable against the assessee. If the

debt is not enforceable against the assessee, no deduction can be allowed in respect of such debts.Take an example. Mr J owns a residential house. Mrs J borrows Rs 50,000 from herrelatives torenovate/repair the house. Mr J cannot claim the deduction of Rs 50,000 becausethe debts is notenforceable against him. Similarly, where Mrs J purchases a motor car out of borrowed money in thename of her husband, J cannot claim the deducti. 'ii of such debt in computing his net wealth.

Debt to be outstanding on valuation date.

The debt, owed by the assessee, should be outstanding on valuation date. If it has been paid on orbefore valuation date, no deduction is allowed for such debts.

Purpose ot the debt.

The debt, owed by the assessee and outstanding on valuation date, should be incui red in relation tothe chargeable assets which have been included in the net wealth of the assessee. Thus, each andevery kind of debt, not relating to chargeable assets, is not deductible. For example, a loan taken topurchase shares or loan taken to acquire plant or machinery is not to be deducted, as the shares andplant and machinery are not "assets" under Sec. 2(ea). Similarly where a loan istaken to acquire anexempted asset under Sec. 5, it is not deductible. For example, loan is taken onthe security ofjewellery. The loan is applied to acquire residential house which is exempt under Sec. 5(vi). Suchloan is not to be deducted in computing net wealth because it is applied to acquire an exempted asset.It cannot be deducted on the ground that it has been taken on the security of jewellery which is anasset under Sec. 2(ea). Where a loan is taken to purchase a motor car or jewelle

ry or a residentialhouse, such debt is deductible as the said properties are "assets". Where a loanis taken on the


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security of the residential house to meet the marriage expenses or to meet the medical expenses ofthe assessee, such debt cannot be deducted because the purpose of the borrowingis not to acquireany chargeable asset.

If a loan is taken on the security of jewellery to purchase a motor car for pers

onal use, such loan is tobe deducted as it is incurred in relation to chargeable assets.

Deduction of debt vs. Value of assets.

Where a debt is incurred in relation to the chargeable asset and the debt is outstanding on thevaluation date, such debt is deductible in computing the net wealth. There is nonexus between thevalue of the assets and the amount of the debt to be deducted. The value of theasset is to bedetermined under Schedule III which at times may be less than the amount of debt

incurred in



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relation to be said chargeable asset. Such debt has to be deducted in full. Takean example: Mr Jborrows Rs 2,00,000 to purchase a motor car. The motor car is valued under Rule20/21 at the

market value on the valuation date. The market value is Rs 1,50,000. In computing net wealth thededuction of outstanding debt together with accrued interest, on valuation dateis deducted. Thus, ifthe amount of outstanding debt plus accrued interest is Rs 2,50,000 deduction isallowed for suchdebt though the value of asset to be included in net wealth is Rs 1,50,000.

Location of debt.

Debt is to be deducted if it is owed by the assessee on valuation date and it isincurred to acquire

chargeable asset. For example, loan is taken outside India to acquire taxable asset in India; such loanis deductible in computing net wealth in India.

Time-barred debt.

A time-barred debt is not enforceable against the debtor, Therefore, the debtorcannot claim it as adeduction even if the debt has been incurred in relation to the chargeable asset. However, if thedebtor does not take shelter under the law of limitation and agrees to pay a time-barred debt, he canclaim deduction in respect of such debt. The rule of "no consideration, no contr

act" under Sec. 25 forthe Indian Contract Act, does not apply to such a case.

Debt payable by instalments.

Where a debt relating to chargeable asset, is payable by instalments, the discounted net value of theoutstanding instalments, falling due after valuation date, is to be deducted. Thus, the deduction is notto be allowed for gross amount of future instalments but present values of future instalment.

Accrued interest.

Where a debt is incurred relating to chargeable assets, the outstanding intereston the debt tillvaluation date is also to be deducted even if the assessee follows cash system of accounting.

Current year wealth-tax liability.

Current year wealth-tax liability is a debt relating to chargeable asset. It isalso owed by the assesseeon valuation date but it is not a debt "incurred" by him. The word 'incurred' means voluntarily

incurred. Wealth tax is a tax imposed on the assessee by the statute. Hence, current year wealth-taxliability is not to be deducted in computing net wealth (Circular No. 663 Dt. 28


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.09.1993).

Transferee's debt [Sec. 4(3)(a)].

Any debt incurred by the transferee relating to deemed assets under Sec. 4 neither can be allowed tothe transferor nor to the transferee. The transferor cannot be allowed the deduc

tion because the debtis not owed by him. The debt is owed by the transferee but no deduction can be allowed to himbecause the deemed asset is not taxable in the hands of transferee. Deemed assetis included in thenet wealth of the transferor.

Advance for sale of property is a debt.

Where an assessee agrees to sell a property, receives part consideration and gives possession of theproperty, the property is still owned by the assessee, since he continues to hav

e title over the sameand has to be included in the wealth of the assessee notwithstanding the deemingprovision of



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presuming sale for purposes of computation of income from property and capital gains. The questionthat arose in CWT v. Bajoria Properties Pvt. Ltd. [2002] 258 ITR 29 (Cal) was whether the amount

received as part consideration for the agreement of sale could be treated as debt in relation toproperty, so as to require deduction of the same as a liability incurred in relation to the includedwealth in computation of taxable wealth. The High Court pointed out that the payment receivedwould be a charge on the property within the meaning of section 55 of the Transfer of Property Act,so that it has necessarily to be treated as debt incurred in relation to that asset and allowed as adeduction.






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SOME ILLUSTRATIVE CASES OF ASSETParticulars of assets Whether asset onvaluation date

1. Farm house situated within 25 km from Delhi Cantonment Board. Yes2. Farm house situated within 25.01 km from Delhi Municipal YesCorporation but within 1 km from Gurgaon Municipality.3. Farm house under construction on land situated within 8.01 km from Farm housenot anKolkata Municipal Corporation. asset as it is underconstruction. Land isnot an asset as it isnot urban land.

4. A residential house allotted by a foreign company in India to its Noresident manager, whose annual gross salary is Rs 4,99,999.

5. A residential house allotted by a firm in India to its accountant whose Yesannual gross salary is Rs 4,99,999.However, firmis not an assessee.

6. A residential house allotted by a private company in India to its part-Yestime permanent accountant whose annual gross salary is Rs 2,00,000.7. A residential house allotted by a public company in India to its Nowhole-time director, whose net annual salary after deductingcontributions to provident fund (Rs 75,000) is Rs 4,24,999.8. Motor car used for transporting employees.Yes9. Motor truck owned by an Indian company, used for transporting its No

raw material and finished products.10. A residential house under construction on a land purchased in SuratUrban land is anon 15 July 2006 but completed on 25 August 2007.asset but incompletehouse is not an asset.

11. Guest house held as stock-in-trade for the last 5 years.No12. Factory building/godown and office building occupied by the Noassessee for his business purpose.13. Godown building let out on rent.No14. Residential house held as stock-in-trade.No15. Urban land held as stock-in-trade since 31 March 1997.Yes16. Commercial complex let out on rent.No17. Residential house let out on rent for 299 days.Yes18. Aircraft used by the company for its senior executive.No19. 10 kg of gold, held bv an individual.Yes



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20. 10 kg of gold held bv Krishna Jewellers.21. Gold/silver utensil, held by an HUF.22Gold, silver utensil held by a jeweller.

23. Urban land on which building is constructed without the approval ofthe competent authority.24. Agriculture land in Delhi on which construction is not permissible.25. Urban land purchased on 1 March 2005 for constructing factory,lying vacant on 31 March 2007.26. Building sitepurchased in 1996 within the jurisdiction of amunicipality having a population of 9,999. Construction on land ispermissible. However, it is lying vacant.27. Opening cash book balance of J on 31 March 2007 is Rs 5,25,000.However, he has deposited Rs 4,75,000 into bank before close of

banking hours.28. Closing cash book balanceof J Ltd. on 31 March 2007 is Rs15,00,000. A customer has paid Rs 35,000 cash on 31 March 2007after the closing balance and it is recorded in cash book on 1 April2007.No

Yes

No

Yes

No

Yes

No

NoCash balance notexceeding Rs 50,000Unrecorded cashof Rs 35,000is an asset.



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VALUATION OF ASSETS(Part B schedule III)Valuation of immovable property being Building or LA

Actual Rent Received (6 months, say) XActual Rent Receivable (12 months) XAdd: Where taxes levied in respect of the property are borne wholly or partly bythetenant-by the amount of the taxes so borne by tenant;XAdd: Where expenditure on repairs is borne by the tenant by one-ninth of the actualrentXAdd: Where the owner has accepted any amount as deposit (not being advance rentfor

three months or less)- by 15 percent of the deposit minus the interest actuallypaid:(if deposit was outstanding for only part of the previous year 15% p.a. must becalculated for the number of complete months for which deposit was outstanding)XAdd: Where the owner has received any amount by way of premium-by the amountobtained by dividing the premium by the number of years of the leaseXAdd: Where the owner derives any benefit or perquisite as consideration for leasing ofthe property or any modification of the terms of the lease, by the value of suchbenefit or perquisite

XActual annual rent (a) XMunicipal valuation (b) XWhere the property is let actual annual rent or annual ratable value assessed bylocal authority whichever is higher.Where the property is not let : Annual ratable value assessed by local authorityorif there is no such assessment the amount which the owner can reasonably beexpected to receive as annual rent had such property been let.Gross maintainable rent XLess Municipal Taxes levies XLess 15% of GMR XNet Maintainable Rent X



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CAPITALISE NMR (NMR * 12.5/10/8) (See note no. 1) XIf the property is acquired or constructed on or before 31.3.1974 than theCapitalised NMRIf the property is acquired or constructed after 31.3.1974 value thereof will be

higher of Capitalised NMR or Actual Cost (i.e. actual cost ofacquisition/construction (plus cost of improvement, if any)However even for a property acquired/constructed after 31.3.74 the value may betaken as Capitalised NMR (Instead of higher of Capitalised NMR & ActualCost) if the property satisfies BOTH the following requirements(i) The property is a residential house exclusively used by the assesses for hisone residential purpose throughout the period of 12 months ending on thevaluation date.(ii) Actual cost thereof does not exceed Rs.25 lacs.(Rs.50 lacs for Bombay, Calcutta, Delhi & Madras)

It may be noted however that this benefit is available for only ONE suchresidential house. Thus an assessee having more than one such house may chooseany one for this purpose.Add: PREMIUM FOR EXCESS UNBUILT AREA(Note No. 2,4)XLess: REDUCTION FOR UNEARNED INCREASE IN VALUE OF LAND(Note No. 3)XSec.7 (2) valuation of self occupiedhouse:The value of S.O. House may be taken at the Option of theassessee as the value determined in the manner laid down in

Schedule III as on the valuation date next following the date onwhich he become owner of the house or the valuation daterelevant to the A.Y. 1971-72 whichever is later. Thus the assessee is given anoption to take the old value if he so chooses. However he gets this option onlyifthe house is self occupied (S.O.) in the sense that is it exclusively used by him for

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