AMENDMENTS TO WEALTH-TAX  ACT

FINANCE (NO. 2) ACT, 1971

Increase in the rates of ordinary wealth-tax in the case of individuals and Hindu undivided families

91. Under the provisions of the Wealth-tax Act, before its amendment by the Finance (No. 2) Act, 1971, the rates of ordinary wealth-tax in the case of individuals and Hindu undivided families ranged from 1 per cent in the first slab of taxable net wealth (after an initial exemption of Rs. 1,00,000 in the case of individuals and Rs. 2,00,000 in the case of Hindu undivided families) to a maximum of 5 per cent on net wealth in the slab over Rs. 20,00,000. Section 36 of the Finance (No. 2) Act, 1971 has made certain modifications in these rates with a view to increasing the yield of revenue and to increase the incidence of tax on wealth in higher slabs. Under the rate schedule as modified, wealth-tax will be chargeable on every rupee of the net wealth where the net wealth exceeds the exemption limit of Rs. 1,00,000 in the case of an individual or Rs. 2,00,000 in the case of a Hindu undivided family. Accordingly, wealth-tax will be chargeable on the first slab of Rs. 5,00,000 of the net wealth at the rate of 1 per cent. The rates of wealth-tax in the next two slabs, i.e., from Rs. 5,00,001—Rs. 10,00,000 and Rs. 10,00,001—Rs. 15,00,000 will continue at 2 per cent and 3 per cent, respectively. On net wealth in the slab over Rs. 15,00,000, the revised rate of ordinary wealth-tax is 8 per cent, as against 4 per cent in the slab Rs. 15,00,001 —Rs. 20,00,000 and 5 per cent on net wealth over Rs. 20,00,000 formerly. No wealth-tax will be payable in a case where the net wealth does not exceed Rs. 1,00,000 in the case of an individual or Rs. 2,00,000 in the case of a Hindu undivided family. Further, where the net wealth exceeds the exemption limit of Rs. 1,00,000 or Rs. 2,00,000, as the case may be, by a small margin, the wealth-tax payable will be the lower of (a) tax at the rate of 1 per cent on the amount of the net wealth, or (b) an amount equal to 10 per cent of the amount by which the net wealth exceeds the exemption limit. This is illustrated in the following table :

Individuals:

It will be observed from the above table that up to a net wealth of Rs. 1,11,100, the amount calculated under the marginal provision as explained above (col. 3) is lower than the amount arrived at by applying the rate of one per cent to the whole of the net wealth (col. 2). On the other hand, when the net wealth amounts to Rs. 1,11,200, wealth-tax at the rate of 1 per cent of the entire wealth is lower than the amount calculated by applying the marginal provision. Hence, in the case of an individual, the marginal provision ceases to be applicable from this level upward. In the case of a Hindu undivided family, there will be a similar margin immediately above Rs. 2,00,000, in which the tax calculated at 10 per cent of the excess of the net wealth over Rs. 2,00,000 will be less than that calculated at the rate of 1 per cent on the entire net wealth.

 FINANCE (NO. 2) ACT, 1971

92. The rates of additional wealth-tax on lands and buildings situated in urban areas continue without change. The increases in the rates of ordinary wealth-tax as explained in the preceding paragraph will come into effect from 1-4-1972 and will, accordingly, apply for the assessment year 1972-73 and subsequent years. A consequential amendment has also been made by section 33 of the Finance (No. 2) Act, 1971 to section 18 relating to penalties for failure to furnish wealth-tax returns and for other defaults.

 FINANCE (NO. 2) ACT, 1971

Liberalisation of the exemption in respect of one residential house

93. Section 5(1)(iv ), before its amendment by the Finance (No. 2) Act, 1971, exempted from wealth-tax one house or part of a house belonging to the assessee and exclusively used by him for residential purposes, subject to a maximum value of Rs. 1,00,000 in respect of the exemption. This exemption was not available in respect of a house which is let out on rent even though that may be the only house belonging to the  assessee.

FINANCE (NO. 2) ACT, 1971

94. One result of the modifications in the rate schedule of wealth-tax as explained in paragraph 91 will be that in the case of an  assessee who owns a house which is let out on rent who has no other investment qualifying for exemption from wealth-tax will be payable on the entire value of such house where it exceeds the exemption limit of Rs. 1,00,000, subject only to the marginal relief provision explained earlier. As this might cause genuine hardship to persons of small means who depend upon house property, often as the sole means of livelihood and may even discourage construction of the house property by such persons, the exemption in section 5(1)(iv ) has been liberalised. Under the provision as amended by section 32(a) of the Finance (No. 2) Act, 1971, one house or part of a house belonging to the assessee will be entitled to exemption from wealth-tax, subject to the ceiling limit of Rs. 1,00,000 over the exemption even where the house is not used by the  assessee for his own residence but is let out on rent. This liberalisation of the exemption in section 5(1)(iv) comes into effect on 1-4-1972 and will, accordingly, apply for the assessment year 1972-73 and subsequent years.

 FINANCE (NO. 2) ACT, 1971

Aggregation of assets belonging to the spouse or minor child of an individual with the net wealth of the individual

95. Under the provisions in section 4, assets held by the spouse or minor child of an individual are required to be included in computing the net wealth of the individual in certain cases. This provision applies to cases where such assets have been transferred by the individual (a ) to the spouse, otherwise than for adequate consideration, or in connection with an agreement to live apart, or (b) to a minor child (not being a married daughter) otherwise than for  adequate consideration, or (c) to any person or association of persons, otherwise than for adequate consideration, for the immediate or deferred benefit of the individual himself, his or her spouse or minor child (not being a married daughter) or both; or (d) to a person or association of persons otherwise than under an irrevocable transfer. Transfers made in these cases prior to  1-4-1956, are outside the scope of this provision. Transfer of assets in regard to which gift-tax is chargeable, or which are specifically exempt from the charge of gift-tax under section 5 of the Gift-tax Act, for the assessment year 1964-65 or any subsequent assessment year, are also outside the scope of this provision. This latter provision was introduced in the Wealth-tax Act in the context of the increases made under the Finance Act, 1964 in the rates of gift-tax. As the rates of gift-tax at present applicable on gifts up to Rs. 20,00,000 are considerably lower than those prevailing under the Finance Act, 1964 and the incidence of wealth-tax has also been substantially increased, section 31(a)(i ) of the Finance (No. 2) Act, 1971 has amended section 4 of the Wealth-tax Act so as to restore the position which obtained prior to the assessment year 1964-65. Accordingly, the value of assets transferred by an individual in the circumstances detailed earlier, after the end of the previous year under the Gift-tax Act relevant to the assessment year 1971-72, will be includible in the net wealth of the individual making the transfer. The provision excluding from aggregation of assets comprised in a transfer in respect of which gift-tax was chargeable under the Gift-tax Act, or which is specifically exempt from charge of gift-tax  under section 5 of that Act, will apply only in relation to transfers in respect of which gift-tax is chargeable or which are specifically exempt from gift-tax for the assessment years 1964-65 to 1971-72 (both inclusive). Assets which are the subject of transfer in respect of which gift-tax is chargeable during the assessment year 1972-73 or in any later year will, nevertheless, be aggregated with the net wealth of the individual making the transfer.

 FINANCE (NO. 2) ACT, 1971

96. Conversion of separate property of an individual into Hindu joint family property - The provision in the Wealth-tax Act for the aggregation of assets transferred by an individual to or for the benefit of the spouse or minor child in certain circumstances as explained in the preceding paragraph, has so far not been applicable in relation to transfer of assets made through the medium of a Hindu undivided family. This is in view of the position that, according to the courts, the conversion of the separate property of an individual into joint Hindu family property, by impressing such separate property with the character of property belonging to the family or throwing it into the common stock of the family, does not amount to a "transfer" of such property, even where the converted property is subsequently partitioned amongst the members of the joint family resulting in passing of the property to the spouse or minor children. With a view to closing this loophole for the avoidance or reduction of tax liability through the device of converting separate property of an individual into joint Hindu family property, section 31(b ) of the Finance (No. 2) Act, 1971 has introduced a new provision in section 4 to cover such cases. Under the new provision, which is contained in new sub-section (1A) of section 4, in a case where an individual converts his separate property into joint family property of a Hindu undivided family of which he is a member, by impressing such property with the character of joint family property or by throwing such property into the common stock of the Hindu undivided family, he will be deemed to have transferred the converted property through the family to the members of the family for being held by them jointly. The share in the converted property in so far as it is attributable to the interest of the individual, his spouse or minor children (other than married daughters) will be included in the net wealth of the individual. Further, in the event of a partial or total partition in the Hindu undivided family, the shares allotted to the spouse or minor children in the converted property will also be similarly included in the net wealth of the individual.

FINANCE (NO. 2) ACT, 1971

97. The amendment explained in the preceding paragraph will take effect from 1-4-1972 and will, accordingly, be applicable for the assessment year 1972-73 and subsequent assessment years. However, the provision will apply in relation to conversions of separate property into joint Hindu family property effected after 31-12-1969 which is the date specified for the purpose in the corresponding provision in section 64 of the Income-tax Act relating to aggregation of income from such converted property with the income of the individual making the conversion in so far as the income is attributable to the individual’s own share in the property of the family or to the shares of his spouse or any minor son in the property of the family.

 FINANCE (NO. 2) ACT, 1971

Tax treatment of members of co-operative housing societies

98. Co-operative housing societies are becoming increasingly popular amongst members of the middle and upper middle classes as these enable them to pool their resources and build houses or flats in multi-storeyed buildings, often with the aid of loans from State Governments, State Housing Boards and other financing bodies. Co-operative house building societies fall broadly into two classes, namely, (a) those in which the houses or flats legally belong to the members themselves, the society being only a means to secure the land, the necessary financial resources by way of loan or otherwise, arranging for the construction and attending to the maintenance of the houses or flats, (b) societies in which the building belongs to the society itself and not to individual members to whom the house or flat is merely allotted or leased for use. While in the former type of societies, the houses or flats are, for wealth-tax purposes, treated as belonging to the members themselves, in the latter type of societies, the members cannot legally be regarded as owning the houses or flats and their right vis-a-vis the society is only to the extent of the value of the shares held by them in the society, which would constitute movable property for purposes of wealth-tax. This places members of the second-mentioned type of co-operative societies at a disadvantage as compared to members of the first-mentioned type of societies inasmuch as they will not be eligible for the exemption in section 5(1)(iv) in respect of their residential house up to a value of Rs. 1,00,000.

FINANCE (NO. 2) ACT, 1971

99. With a view to removing this disparity between members of co-operative housing societies, section 31(c) of the Finance (No. 2) Act, 1971 has introduced a new sub-section (7) in section 4 under which a member of a co-operative housing society to whom a building or part thereof is allotted or leased under a house building scheme of the society will be regarded as the owner of that building or part for purposes of wealth-tax. It has also been provided that in determining the value of such building or part for purposes of inclusion in the net wealth the value of any outstanding instalments of the amount payable by the member of the society to the society towards the cost of such building or part (including the land appurtenant thereto) under the house building scheme of the society will be deducted as a debt owed by him in relation to such building or part. Accordingly, the value of the house or flat for wealth-tax purposes will be taken to be the difference between the market value of the flat if it were free from any encumberance and the discounted value of outstanding instalments of the amount payable by him to the society towards the cost of the building or flat. As the member will be considered as the owner of such house or flat, he will also become entitled to the exemption in respect of one house up to the value of Rs. 1,00,000 in the computation of his net wealth, under section 5(1)(iv ) as amended by the Finance (No. 2) Act, 1971 [vide paragraph 94 of this circular].

FINANCE (NO. 2) ACT, 1971

100. As a corollary to the provision explained in the preceding paragraph, it has also been provided, in a new clause (xxx) inserted in section 5(1) by section 32(a)( v) of the Finance (No. 2) Act, 1971, that the amount paid by the member to the society as his share in the cost of construction of the building, which is generally held in the books of the society as a deposit by such member, will not again be included in his net wealth as this is already covered by the net value of the house or flat.

FINANCE (NO. 2) ACT, 1971

101. The amendments explained in paragraphs 99 and 100 will come into effect from 1-4-1972 and will, accordingly, apply for the assessment year 1972-73 and subsequent years.

JUDICIAL ANALYSIS

EXPLAINED IN - Paras 98 to 101 were relied on in ACWT v. Sudeep Chitlangia [1996] 59 ITD 145 (Cal.), with the following observations :

"On going through the above provisions, we find that the wordings used in both the provisions are similar inasmuch as for the purpose of exemption under section 5(1)(xxx ), the assessee should deposit with a co-operative housing society as a member of the said society and a building or part thereof should be allotted to the said assessee under a house building scheme. Similarly under section 4(7) of the Act, all the three conditions aforementioned were repeated with the only additional words "member of an asso­ciation of persons", i.e., in addition to the requirement under section 5(1)(xxx). To invoke the provisions of section 4(7) of the Act, the assessee should be found to be a member of an asso­ciation of persons being a co-operative housing society. Having given careful consideration on the issue, we are afraid as to whether this can be considered as an additional requirement. In both the provisions, the main pre-condition is that the assessee should have been allotted the property. There is no further condition such as, occupation/possession of the property before the valuation date, so as to come within the purview of section 4(7) of the Act. We are, therefore, of the opinion that in all those cases where the assessee is entitled to exemption under section 5(1)(xxx) of the Act, the provisions of section 4(7) would automatically come into play and the assessee would be considered as deemed owner of the said property. In fact, the Assessing Officer has rightly considered the matter under two separate heads by granting exemption under section 5(1)(xxx) against the deposit, under the head ‘Movable property’ and also considered separately, the value of the flat under the head ‘Immovable property’. ..." (p. 149)

 FINANCE (NO. 2) ACT, 1971

Withdrawal of exemption from wealth-tax in respect of jewellery, etc., and limiting of exemption in respect of motor cars, etc.

102. Section 5(1) provides exemptions from wealth-tax in respect of certain assets by excluding these in the computation of the net wealth. One of these exemptions which is contained in clause (viii) of section 5(1), is in respect of— "furniture, household utensils, wearing apparel, provisions and other articles intended for the personal or household use of the  assessee".

Another item of exemption [which was provided in section 5(1)(xv ) prior to 1-4-1963] was in respect of— "jewellery belonging to the assessee, subject to a maximum of Rs. 25,000 in value".

In the case of CWT v. Mrs. Arundhati Balkrishna [1970] 77  ITR  505, the Supreme Court held that the expression "other articles intended for the personal or household use of the assessee" in section 5(1)(viii) included jewellery which was held by the  assessee for her personal or household use. The Court further held that the exemption of jewellery up to Rs. 25,000 in value  under section  5(1)(xv), as it existed prior to 1-4-1963, operated in respect of jewellery other than that held for personal or household use of the  assessee. The interpretation placed by the Supreme Court on the provisions in clauses (viii) and (xv) of section 5(1) revealed that these clauses did not bring out correctly the intention underlying them, namely, that up to the assessment year 1962-63, jewellery should be exempted from wealth-tax only up to a value of Rs. 25,000 and from the assessment year 1963-64 onwards, when the specific exemption in section 5(1)(xv) was omitted from the Act, jewellery should not at all qualify for exemption from wealth-tax.

FINANCE (NO. 2) ACT, 1971

103. With a view to bringing out this intention clearly and implementing the purpose underlying the withdrawal of exemption from jewellery altogether from wealth-tax from the assessment year 1963-64, clause (viii) of section 5(1) has been amended by section 32 of the Finance (No. 2) Act, 1971, retrospectively, from 1-4-1963, so as to exclude jewellery altogether from the purview of that clause. Further, the term "jewellery" has been given an extended meaning prospectively so as to include:

   a.  ornaments made of gold, silver, platinum, or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone and whether or not worked or sewn into any wearing apparel; and

   b.  precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel.

FINANCE (NO. 2) ACT, 1971

104. Further, under the amendment, the operation of the exemption in clause (viii) has been restricted prospectively in the following respects :

1. Furniture, utensils and other articles, which, though held for personal or household use of the  assessee, are made of, or contain (whether by way of embedding, covering or otherwise), gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, have been excluded altogether from the purview of the exemption.

2. Motor cars and other mechanically propelled vehicles, aircraft and boats will hereafter be exempt up to an aggregate value of Rs. 25,000 only.

FINANCE (NO. 2) ACT, 1971

105. During the course of the debate on the Budget for the year 1971-72 in the Lok Sabha, it was suggested that the inclusion of furniture, utensils or other articles which are made wholly or partly of, or contain (whether by way of embedding, covering or otherwise) gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals in the net wealth would result in unintended hardship inasmuch as taxpayers would be required to disclose the value of petty items like silver plated cutlery, blades containing coating of platinum or other precious metals, etc. It was, accordingly, suggested that such furniture, utensils and other articles should continue to enjoy exemption from wealth-tax. In his reply to the debate, the Finance Minister has observed as follows :

‘In giving an extended meaning to the term "jewellery" and excluding  furniture, utensils and other articles falling under the categories described above from the scope of the exemption, it is not the intention to enter into pettifogging enquiries into the details of such articles so as to cause embarrassment or harassment to taxpayers. This will be secured through suitable administrative instructions. Without the extended meaning of the term "jewellery" and special provisions excluding furniture, etc., which incorporate precious metals in their construction, it will leave a big loophole for tax evasion as healthy persons could then convert their wealth into such assets which, in the ultimate analysis, do not add to the productive potential of the country.’

The above observations of the Finance Minister will be carefully borne in mind by assessing officers while dealing with such cases.

FINANCE (NO. 2) ACT, 1971

106. The exclusion of jewellery from the purview of the exemption is operative retrospectively from the assessment year 1963-64. The extended meaning of the term "jewellery" as stated in paragraph 103, as also the exclusion of furniture, utensils and other articles referred to in item ( a) and the limitation of the exemption in respect of conveyances to Rs. 25,000, as stated in item ( b) of paragraph 104, will become effective from 1-4-1972, i.e., for the assessment year 1972-73 and subsequent assessment years.

 FINANCE (NO. 2) ACT, 1971

Shares in new industrial companies

107. Clause (xx ) of section 5(1), before its amendment by the Finance (No. 2) Act, 1971, exempted from wealth-tax the value of shares held by the  assessee in any company established with the object of carrying on an industrial undertaking in India, where such shares formed part of the initial issue of equity share capital made by the company after 31-3-1964. The exemption is available for a period of 5 years commencing with the assessment year next following the date on which such company commences the operations for which it has been established. In the context of the improved climate for new equity issues of industrial companies, this exemption has been withdrawn in respect of shares forming part of an initial issue of equity share capital made after 31-5-1971, under an amendment to section 5(1)(xx) by section 32 of the Finance (No. 2) Act, 1971. Such shares will, however, be included in the categories of investments which are exempt from wealth-tax up to the aggregate value of Rs. 1,50,000 under the provision introduced last year. In a case where subscription list in respect of an initial issue of share capital opened before 1-6-1971, shares forming part of such issue will continue to qualify for exemption without any ceiling limit irrespective of whether such  shares are actually subscribed for before or after that date.

 FINANCE (NO. 2) ACT, 1971

Financial assets qualifying for exemption from wealth-tax

108. Under a provision introduced by the Finance Act, 1970, exemption from wealth-tax is available in respect of the investments in specified financial assets up to an aggregate value of Rs. 1,50,000. The categories of investments qualifying for this exemption comprise—

   a.  Government securities, including small savings securities of the Central Government.

   b.  Fixed deposits with the Central Government, as also in Post Offices on Government account, and Recurring and Time Deposits in Post Offices.

    c.  Shares in Indian companies.

   d.  Notified debentures.

    e.  Units in the Unit Trust of India.

    f.  Deposits with banking companies, including co-operative banks, land mortgage banks and land development banks.

   g.  Deposits with approved financial corporations engaged in providing long-term finance for industrial development in India.

By certain amendments to section 5  under section  32 of the Finance (No. 2) Act, 1971, this list has been enlarged so as to include (i) shares in a co-operative society [new clause (xxviii) of section 5(1)], and (ii)  deposits made by a member of a co-operative society with the society [new clause (xxix) of section 5(1)]. Accordingly, in computing the exemption from wealth-tax up to Rs. 1,50,000, these assets will also be taken into account.

[Deposits made with a co-operative housing society by a member of the society to whom a building or part thereof is allotted or leased under a house building scheme of the society, are exempted from wealth-tax without any limit, to the extent such deposits have been made under the house building scheme of the society, vide clause (xxx) of section 5(1), as explained in paragraph 100.]

FINANCE (NO. 2) ACT, 1971

109. The exemption in respect of investments in specified financial assets as explained in the preceding paragraph has been available also to a discretionary trust which is chargeable to tax on its net wealth at the flat rate of 1½ per cent or at the rates applicable in the case of an individual, whichever is higher. As this is not in consonance with the intention underlying the provision made last year for the taxation of discretionary trusts in this manner, section 21(4) has been amended by section 34 of the Finance (No. 2) Act, 1971 so as to withdraw the exemption in respect of these items of financial assets in computing the net wealth of a discretionary trust. However, it has been specifically provided that the exemption in respect of these assets will continue to be available in the case of discretionary trusts referred to in the proviso to section 21(4), that is to say—

   a.  a testamentary trust;

   b.  a non-testamentary trust created before 1-3-1970 bona fide for the benefit of the relatives of the settlor or members of the Hindu undivided family which created the trust, where such relatives or members were mainly dependent on the settlor for their support and maintenance;

    c.  provident funds, superannuation funds, gratuity funds, pension funds and other funds created bona fide  by a person carrying on a business or profession exclusively for the benefit of persons employed in such business or profession.

FINANCE (NO. 2) ACT, 1971

110. The enlargement of the scope of financial assets qualifying for exemption from wealth-tax so as to include shares in co-operative societies and deposits by members with a co-operative society, as also the withdrawal of the exemption in respect of these assets in the case of discretionary trusts which are chargeable to tax at the flat rate of 1½ per cent or at the rates applicable in the case of an individual, whichever is higher, will all become effective from 1-4-1972, i.e., for the assessment year 1972-73 and subsequent assessment years.

 FINANCE (NO. 2) ACT, 1971

Recovery of wealth-tax arrears

111. Under section 32, the provisions of the Income-tax Act relating to recovery of arrears of income-tax are made applicable also for the purposes of recovery of arrears of wealth-tax and sums imposed by way of a penalty, fine and interest. In the context of the amendments made in the Income-tax Act so as to vest in Tax Recovery  Commissioners jurisdiction over orders of Tax Recovery Officers, a consequential amendment has been made in section 32 by section 35 of the Finance (No. 2) Act, 1971 so as to confer on Tax Recovery  Commissioners jurisdiction over appeals against orders of Tax Recovery Officers in proceedings for recovery of wealth-tax also. This amendment will take effect from 1-1-1972 from which date the relevant amendments to the Income-tax Act will become effective.