This article has been written by Chandan Kumar Pradhan from KIIT School of Law, Odisha. This article talks about the overview of The Wealth Tax Act, 1957, how the tax imposed on an individual, HUF or Company.
The Wealth Tax Act, 1957 was provided by the Parliament of India for collecting the Wealth Tax from an individual, Hindu Undivided Family or Company. Wealth Tax is also called the Capital Tax or Equity Tax. It is collected on a person’s present financial position. The assets which are included in the collection are cash, bank deposits, shares, fixed assets, personal cars, pensions and owner-occupied house etc. The valuation date of the wealth tax is 31 March of every year.
GDP(Gross Domestic Product)- It is the most common way to find out the wealth of the country. In this way, we can determine the wealth of the individual through their net worth.
What are Assets and deemed assets?
According to Section 2(a) of the Wealth Tax Act, 1957 there are only six assets. The assessee must be the owner of the assets on the last day of the financial year(1st April to 31 March). In other words, it can also be possible that, if the assessee holds the assets upto 364 days in the financial year and if he holds the assets on the last day of the financial year, then it can be called as assets. The type of assets which are explained in Section 5.
The types of assets are given below:
- Urban land
- Motor cars
- Cash in hand
- Yachts, boats and aircrafts
According to Section 4 of the Wealth Tax Act, it is defined that the assessee of the assets should not be the owner of such assets on the valuation date(31 March), he should transfer that assets to others.
There are 10 such deemed assets in this Act and these 10 deemed assets are classified into two categories in the following:
Assessee wise deemed assets
- Interest infirm
- Transfer to spouse
- Conversion by a member of HUF
- Assets transferred under a revocable transfer
- Gift by book
- Impartible Estate
- Minor’s wealth
Asset wise deemed assets
- Building allotted by Housing;
- Rights assume in the building by way of any agreement or settlement;
- Possession of building by a contract under Section 53A of Transfer of Property Act, 1882.
The assets which are exempted from Wealth Tax
Section 5 of The Wealth Tax Act, 1957 contributes some immunity in respect of some specific assets. The valuation date of the wealth tax is 31 March of every year. Wealth tax shall not be payable by an assessee in these types of following assets and these assets shall not be included in the net wealth of the assessee:
- Property controlled under any trust or charity
- Residential building of the previous ruler
- Previous ruler’s jewellery
- A house of an individual or HUF
- A person in a joint-heirship
- Assets belonging to the Indian repatriates
- Exemption for debt
Property controlled under any trust or charity
- When the trust or the charity works on a business with reference to Section 10 and occupies any property, they will get the immunity under the Wealth Tax Act, 1957.
- Condition is that the business which they work for the trust should be for charitable and religious purposes.
- The work may be notified by the central government or publication of books or printing of books etc.
Residential building of the previous ruler
- If the building was made by the previous ruler and now, it is the residential house of the present ruler then he will get the immunity for that one house only.
- And if the present ruler made any building then he has to pay the tax for that second house.
Previous ruler’s jewellery
- Jewellery owned by the previous ruler which has been recognized by the central government can get the immunity and no need of paying the wealth tax.
A house of an individual or HUF
- The exemption is available for one house and for the area not above 500 sq. meters owned by an individual or HUF.
A person in a joint-heirship
- If a person has an interest in HUF and he is also a member then he will get immunity from The Wealth Tax Act, 1957.
Assets belonging to the Indian repatriates
- When an Indian origin person returns to India after many years, the assets which he brought from outside, to India are exempted from the Wealth Tax and the exemption is only available for 7 assessment years.
Exemption for debt
- A person who has one house and has taken it from a bank loan and the loan instalments are also pending. He is actually the owning part of the house. Thus, the person can claim the immunity for debt owned by him for a particular asset and for the valuation date.
What are the charges of the Wealth Tax?
Earlier the Wealth Tax was only for the collection of six non-productive assets instead of taxing all the assets with some exemptions. The concept of charging Wealth Tax on assets had a change in the year 1992. By these changes, it was expected that the assessee would be forced to either make the assets productive or dispose of the assets. The Wealth Tax is calculated on the market value of the assets.
Some of the basics rules in the following:
- Wealth Tax is collected from an individual, HUFs and Companies.
- If the net wealth is up to 30 lacs then no tax is payable. Where the net wealth exceeds 30 lacs, the wealth tax collection will be 1%.
- There are no surcharges and an education cess in Wealth Tax.
- Any charitable or religious trusts would be exempt from collecting the Wealth Tax.
- For a member of HUF, the ancestor’s property of the HUF is also exempt under Section 5 of The Wealth Tax Act, 1957.
Under Section 45 of the Wealth Tax Act, 1957, it is mentioned specifically that the following individuals would get immunity from collecting the tax namely:
- Mutual fund
- Political party
- Social club
- A company having a licence under Section 25 of The Companies Act,1956
- Reserve Bank of India
Wealth tax authorities
The jurisdiction and authorities are defined under Section 8 of the Wealth Tax Act, 1957 that, Section 16 of the Income Tax Act, 1961 provides the jurisdiction to the authorities of the Wealth Tax for the exercise of the powers and execute the functions towards any individual, HUF, or company and the jurisdiction will be the same as per the Income Tax Act by the directions released under Section 120 of The Income Tax Act and also by any other provision of that Act.
For the execution of Section 8 of The Wealth Tax Act, 1957, the authority having jurisdiction in relation to a person who is not an assessee according to the Income Tax Act. Income Tax Act will be the Wealth Tax authority having jurisdiction in regard to the area in which the person lives.
Offence and penalties
Penalty for late payment of Wealth Tax
If a person gets late for the payment of Wealth Tax, then the penalty of 1% interest for every month of delay will be charged.
Non-payment of Wealth Tax
It will lead to a tax recovery process that the due which was the actual amount is pending, that will be increased up to five times and in extreme cases, the defaulter may also be imprisoned.
Case laws under The Wealth Tax Act, 1957
Case law– 1
Apollo Tyres limited Vs. The Assistant Commissioner of Kochi WTA.No.197 of 2009
Here, the High Court of Kerala held that the assessee constantly completed the construction of the four-storey building with basement and started adopting within 2 years from the valuation date. The assessee never thought that the construction of a four-storied building will complete within 2 years, which is given in the explanation under the Wealth Tax Act. Keeping in mind the immunity available to productive assets we feel, there is no particular scope for collecting the tax during the period of construction of the productive asset, namely, commercial buildings, by utilising the urban land.
In other words, once the non-productive assets like urban land are converted to a productive asset like a building, which will qualify for the exemption, then the assessee can start getting immunity even during the period of changing the non-productive asset to productive asset.
Case law– 2
Hon’ble Punjab and Haryana High Court in the case of Siddhartha Enterprises 322 ITR 82 referred to the judgement of the Supreme Court’s case in the following
Union of India Vs. Dharmendra Textile Processors & Ors. (2008) 219 CTR (SC) 617 : (2008) 306 ITR 277 (SC)
SC cannot be read as lying down that in every case when a detail of income is wrong, the penalty must follow. What has been laid down is that the main difference between criminal liability under Section 276C of the Income Tax Act and the penalty under Section 271(1)(C) of the Income Tax Act had to be kept in sense and arrive at the trial of a criminal case but need not be adopted while going for the case of levying of penalty.
Even so, the concept of penalty has not undergone change by the quality of the said judgement. The penalty is imposed only when there is some element of intentional default and not a small mistake. This being the position, the conclusion having been recorded on facts that the provision of wrong particulars was simply a mistake and not a deliberate attempt to evade the tax, the view taken by the Tribunal cannot be held to be difficult.
Difference between Income Tax and Wealth Tax
These are some important difference key points in the following:
1. The amount of money which is received on a periodic basis like month-wise or any periodic system and by any capital investment from where the person can get some money.
1. Wealth is defined as the assets or property which are controlled by a person during his course of life.
2. It is the flow of money, obtained from any type of production.
2. Wealth is the market price of the stock of assets controlled by a household.
3. Income is earned or received during a limited time period.
3. Wealth is collected over time, i.e. the creation of wealth takes some time.
4. It is charged on the income of an individual from various sources.
E.g- salary, capital gains etc.
4. It is levied on an individual or household’s wealth.
Many people are confused with the Income-tax and the Wealth Tax. Some are thinking that both the laws are the same and many of them think that they have to pay one of them by their own choice. Because of this situation in our country, the development is very slow in progress compared to the other countries.
Basically, income is something that a person gets it to return for the work he has done or money invested by him somewhere. On the other hand, the wealth of a person is something that helps him to survive for some days without working. And income is the only source that can help to improve the status of wealth.
Therefore, if a person wants good wealth then he must be sure that he has to make his income better.