.

1
Levy of Wealth Tax
1.1 Levy of Wealth Tax
The Wealth-tax Act came into force on 1st April, 1957. The Act seeks to impose an annual tax
on the net-wealth of the specified classes of persons in respect of every assessment year
commencing on and from 1st April, 1957. The tax is charged at the rate of 1% on the amount
by which the net wealth of the assessee exceeds ` 30 lakh as on a particular date which is
known as the valuation date. The tax is levied in accordance with the rate specified in section
3(2).

1.2 Applicability
The Wealth-tax Act, 1957 is applicable to the whole of India including Jammu & Kashmir. The
Union Home Ministry has issued a notification extending the application of Wealth-tax Act
1957 to Sikkim. The Wealth-tax Act, 1957 will, therefore, apply to the net wealth of the
residents of Sikkim on the valuation date being 31st March, 1990 or thereafter.

1.3 Definitions
Section 2 defines the various terms used in the Act. A thorough knowledge of these definitions
is a sine qua non for a proper understanding of the various other provisions of the Act. Some
of the important definitions are discussed below while some others have been discussed at
appropriate places.
1.3.1 Assessee : The term assessee as defined in section 2(c), means a person by whom
wealth-tax or any other sum of money is payable under this Act and includes (i) every person
in respect of whom proceedings under the Act have been taken for the determination of wealth
tax payable by him or by any other person or the amount of refund due to him or such other
persons (ii) every person who is deemed to be an assessee under the Act and (iii) every
person who is deemed to be an assessee in default under the Act.
1.3.2 Assessment Year and Valuation Date : The definition of these two related expressions
are given in sections 2(d) and 2(q) respectively. As mentioned at the outset, wealth-tax is
chargeable on the net wealth of an assessee as on the valuation date relevant to the
assessment year in question. The expression assessment year means the period of 12
months commencing on the 1st day of April every year falling immediately after the valuation
date. The valuation date means the last day of the previous year in respect of the
assessment year for the purpose of income tax assessment.
It may be noted that as a result of the introduction of the financial year as the uniform

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accounting year under the Income-tax Act, 1961, the valuation date in all cases will be 31st
March.
In the case of assessees who are not liable to pay any income-tax the valuation date is always
the 31st March immediately preceding such assessment year. Where an executor is to be
assessed to wealth-tax under section 19A, in respect of assets left by a deceased person, the
valuation date shall be the same valuation date as would have been adopted in respect of the
deceased if he were alive.
It is to be noted that as the tax is charged on the net wealth of an assessee on the
corresponding valuation date, the existence of assets on the valuation date is a necessary
condition for the levy. Where there is change of ownership of assets on the valuation date, it is
the net wealth at the last moment of that day and not the first moment or during the day which
shall be the subject of the assessment of wealth-tax.
1.3.3 Assets [Section 2(ea)] : The following assets would be chargeable to wealth tax:
Section 2(ea) defines the term assets. Accordingly assets mean:
(i)

Any building or land appurtenant thereto (hereinafter referred to as house), whether

used for residential or commercial purposes or for the purpose of maintaining a guest
house or otherwise including a farm house situated within 25 kilometers from local limits
of any municipality (whether known as Municipality, Municipal Corporation or by any
other name) or a cantonment Board, but does not include:

(1) a house meant exclusively for residential purposes and which is allotted by a company to
an employee or an officer or a director who is in whole time employment, having a gross
annual salary of less than ` 10,00,000.
(2) any house for residential or commercial purposes which forms part of stock-in-trade.
(3) any house which the assessee may occupy for the purpose of any business or profession
carried on by him.
(4) any residential property that has been let out for a minimum period of 300 days in the
previous year.
(ii) Motor cars: All types of motor cars whether Indian or foreign will be treated as assets.

Exclusion: Motor car used by the assessee in the business of running them on hire or as
stock-in-trade will be excluded from the scope of the term assets.
Example: Maruti cars will not be treated as assets in the hands of Maruti Udyog Ltd.
Similarly, in the hands of automobile dealers who purchase and sell cars, such cars will
not be treated as assets.

(iii) Jewellery etc: This head of assets includes jewellery, bullion and furniture, utensils or
any other article made wholly or partly of gold, silver, platinum or any other precious
metal or any alloy containing one or more of such precious metal.

Definition: The Act has given an inclusive definition of the term jewellery to include
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

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or semi-precious stones and whether or not worked or sewn into any wearing apparel. It
also includes precious or semi-precious stones, whether or not set in any furniture,
utensils or other article or worked or sewn into any wearing apparel.

Exclusion: Following shall not be included in jewellery for the purpose of levy of wealth
tax:

(a) Where any of the above assets is used by the assessee as stock-in-trade, it will not be
considered as an asset.
(b) The Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the
Central Government.
(iv) Yachts, boats and aircraft: It is to be noted that ships are not included in the definition.

Exclusion: If the assessee uses the above assets for commercial purposes, then they
will not be treated as assets. The term commercial purposes has not been defined in the
Act. Use for the purpose of the business of running on hire or as stock-in-trade can be
treated as use for commercial purposes.
A different view was taken in Garware Wall Ropes Ltd. v. Addl. CIT (2004) 89 ITD 221
(Mum.), where the aircraft used for ones own business is construed as used for
commercial purposes

(v) Urban land:

Inclusions within the definition of urban land
(i)

Land situated in any area which is comprised within the jurisdiction of a

municipality or a cantonment board and which has a population of not less than
10,000.

(ii)

Land situated in any area, within the distance, measured aerially, in relation to
the range of population according to the last preceding census as shown
hereunder
Shortest aerial distance
from the local limits of a
municipality
or
cantonment
board
referred to in item (a)

Population according to the last

preceding census of which the
relevant figures have been published
before the first day of the previous
year.

(1)

2 kilometers

> 10,000 1,00,000

(2)

6 kilometers

> 1,00,000 10,00,000

(3)

8 kilometers

> 10,00,000

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Example
Area

Shortest
aerial
distance from the
local limits of a
municipality
or
cantonment
board
referred to in item (a)

Population according to
the last preceding census
of which the relevant
figures
have
been
published before the first
day of the previous year.

Is the land an
urban
land
subject
to
wealth-tax?

(i)

1 km

9,000

No

(ii)

1.5 kms

12,000

Yes

(iii)

2 kms

11,00,000

Yes

(iv)

3 kms

80,000

No

(v)

4 kms

3,00,000

Yes

(v)

5 kms

12,00,000

Yes

(vi)

6 kms

8,000

No

(vii)

7 kms

4,00,000

No

(viii)

8 kms

10,50,000

Yes

(ix)

9 kms

15,00,000

No

Exclusions from the definition of urban land

(i)

Land classified as agricultural land in the records of the Government and

used for agricultural purposes;

(ii)

Land on which construction of building is not permissible under any law for the
time being in force in the area in which such land is situated;

(iii)

Land occupied by a building which has been constructed with the approval of the
appropriate authority;

(iv)

Any unused land held by the assessee for industrial purposes for a period of two
years from the date of its acquisition by him;

(v)

Any land held by the assessee as stock-in-trade for a period of ten years from
the date of its acquisition by him.

Examples:
1.

A acquires a plot of land measuring 500 square meters in New Delhi for constructing a
house. He proposes lay out and gets the permission of Delhi Development Authority to
build a house on the plot. However, he does not construct the house. The plot of land will
be treated as urban land liable to wealth-tax.

2.

In the above example, once A constructs house, the plot ceases to be an urban land.
However, the house will be considered as an asset.

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1.5

A was allotted an industrial plot in Ambattur industrial estate in Madras. This plot will not
be considered as an urban land in As hands for two years from the date of acquisition
even if he does not start any industrial activity. However, once the period of two years
expires, the plot will be considered as an urban land in As hands unless he makes use of
it for industrial purposes.

(vi) Cash in hand:

(a) In the case of individual and HUF: Cash in hand whether recorded or unrecorded
in excess of ` 50,000 will be considered as asset. Obviously, the limit of ` 50,000
will be considered as on the valuation date. It is clear that cash in bank will not be
treated as asset.
(b) In the case of other person: Any amount not recorded in the books of account will
be considered as an asset. The ceiling limit of ` 50,000 is not applicable in this
case. It follows that if cash is recorded, it will not be considered as an asset.
1.3.4 Net Wealth : The expression net wealth according to the section 2(m) means the
amount by which the aggregate value, computed in accordance with the provisions of this Act,
of all the assets wherever located, belonging to the assessee on the valuation date, [including
assets required to be included under section 4], in his net wealth as on that date under this
Act, is in excess of the aggregate value of all the debts owed by the assessee, on the
valuation date which have been incurred in relation to the said assets.
1.3.5 Company: As noted earlier, under section 3 of the Wealth-tax Act, 1957, wealth-tax is
leviable on three categories of tax-payers namely, individuals, Hindu undivided families and
companies. The definition of the term Company in section 2 (h) provides that it will have the same
meaning assigned to it as in clause (17) of section 2 of the Income-tax Act, 1961.
According to this definition, the term company means any Indian company or (ii) any body
corporate incorporated by or under the laws of a country outside India or (iii) any institution
association or body which is or was assessable or was assessed as a company for any
assessment year under the Income-tax Act, 1922 or for any assessment year commencing
after 1.4.1970, or (iv) any institution, association or body, whether incorporated or not,
whether Indian or non-Indian, which is declared by the Board by general or special order to be
a company provided that such institution, association or body shall be deemed to be a
company only for such assessment year or assessment years as may be specified in the
declaration. The definition has got much importance in view of the fact that no wealth-tax is
chargeable on the entities falling outside the scope, of this definition.
1.3.6 India [Section 2(ka)]
'India' means
(i)

the territory of India as per article 1 of the Constitution,

(ii) its territorial waters, seabed and subsoil underlying such waters,
(iii) continental shelf,
(iv) exclusive economic zone or

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(v) any other specified maritime zone and the air space above its territory and territorial waters.
Specified maritime zone means the maritime zone as referred to in the Territorial Waters,
Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976.

1.4 Deductibility of Tax Liabilities

In the case of Sethu Parvathi Bai vs. CWT (1968) 69 ITR (SC), it was held that the wealth tax
liability of an assessee on the valuation date for the assessment year beginning on the first
day of April next following is debt owed within the meaning of section 2(m) and would be
deducted from the estimated value of the assets as on the valuation date.
However, CBDT Circular No. 663 dated 28-4-1993 observes that consequent to the
amendment of section 2(m), w.e.f. the assessment the year 1993-94, the question has arisen
regarding admissibility of deduction of the wealth tax liability for the purpose of computing the
taxable net wealth. The Board has opined in the circular that the liability under the Wealth-tax
Act, 1957 is not a debt owed by the assessee in relation to the assets taxable under Wealthtax Act, 1957. The liability of wealth tax is the personal liability of the assessee. Moreover, this
liability is not a debt incurred by the assessee but is created by the Statute. Therefore, no
deduction is to be allowed for the wealth tax liability in the computation of the taxable net
wealth of the assessee from the assessment year 1993-94 onwards.
In C.W.T. vs. H.H. Vijayamba Dowagar Maharani Saheb of Bhavnagar (1979) 117 I.T.R. 784,
the Supreme Court held that even a liability resulting from an enforceable, family arrangement
is admissible as a debt owed, under section 2(m). It may be noted that section 2(m) refers to
debts actually and really owed by the assessee as distinguished from notional ones, thus
estimated liability to capital gains on a notional sale would not be deductible as debt. [Bharat
Har Singhania vs. CWT (1979) ITR.258 (All)].
However, it may be noted that the principles emerging from the above rulings would apply now
in relation to debts which have been incurred in relation to the specified assets. Only those
debts incurred in relation to those assets which are included in the wealth of the assessee and
outstanding as on the valuation date are deductible.

1.5 Chargeability
1.5.1 Persons chargeable to tax: Wealth tax is chargeable on the net wealth of every
individual, Hindu undivided family and company at the rate of 1% of the amount by which the
net wealth exceeds ` 30 lakh.
The terms individual and Hindu undivided family have not been defined either in the Incometax Act, 1961, or in the Wealth-tax Act, 1957, and, therefore, they have to be construed in their
general sense. For the purpose of wealth-tax, the word 'individual' has been interpreted in
several cases to include a group or body of individuals like joint heirs, joint donees, joint
purchasers, body of trustees, Mappilla, Marumakkathyam Tarward and a financial corporation
established under the Central, Provincial or State Act.
As regards the Hindu undivided family, the expression is used with reference to all Schools of
Hindu Law and it includes even a Jain undivided family [C.W.T. vs. Shrimati Champa Kumari

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Singhi and others (1972) 83 ITR. 720 (SC)].

It is to be noted that the expression Hindu undivided family is different from the Hindu
coparcenary. The Hindu joint family consists of all persons lineally descended from a common
ancestor and includes their wives and unmarried daughters. A Hindu coparcenary, on the other
hand, is a much narrower body than the joint or coparcenary property, those being sons,
grandsons and great grandsons of the holder of the joint family property for the time being.
Therefore, there may be Hindu undivided family, even when there is a single coparcener along
with the widows of deceased members. If there is property belonging to the Hindu undivided
family, assessment can be made on the single coparcener in the status of Hindu undivided
family. The Supreme Court held in Narendranath vs. C.W.T. (1969) 74 ITR 190, that there is
nothing in the Wealth-tax Act, 1957 to suggest that the Hindu undivided family as an assessable
unit must consist of at least two male members. It was held that when a coparcener of a Hindu
undivided family governed by Mitakashara School of Hindu Law having a wife and two minor
daughters and no son receives his share in the joint family property on partition such property in
the hands of the coparcener belong to the Hindu undivided family of himself, of his wife and
minor daughter and cannot be assessed as his individual property. In view of this decision the
joint family-property acquired by a single coparcener on partition or by survivorship along with
his wife and minor daughter shall be assessed in the hands of the sole coparcener as the
property of the Hindu undivided family and not that of an individual. Similarly any property in the
hands of the sole surviving coparcener on the induction of a lineal descendent or in the presence
of a person who is to be treated as member of the joint family, e.g., mother who is entitled to
maintenance, has to be impressed with the character of the joint family property. However, a
single member by himself, cannot constitute a Hindu undivided family and to constitute joint
family, there must be more than one member. The word family always signifies a group.
Plurality of persons is an essential attribute of a family. A single person, male or female does not
constitute a family [C. Krishna Prasad vs. CIT (1974) 97 ITR 493 (SC)].
In CWT. vs. Gaitri Shanker Bhar (1972) 84 ITR 609, the Supreme Court affirming the view of
the Calcutta High Court held that a joint family consisting of the legal heirs of deceased
person did not come into existence spontaneously on the death of that person where he was
governed by Dayabagha School of Hindu Law. After the death of a father, belonging to the
Dayabagha School, his successors may live as Hindu undivided family or be separate. If they
do not decide to live together as Hindu undivided family, they merely own the inherited
property as joint property as tenants in common but do not form a joint family. A joint family
amongst brothers under the Dayabagha law is not a creation of law but of desire to live jointly.
On the facts of this case, the Court held that heir of the deceased had taken the property of
the deceased in separate shares and that according to law each one of them become liable to
pay wealth tax as an individual.

1.5.2
Nature of property inherited by a Hindu under section 8 of Hindu
Succession Act: There was a judicial controversy regarding the issue as to whether the
property which devolved on a Hindu, on the death of his father intestate, after the coming into
force of the Hindu Succession Act, under section 8 of that Act, would constitute HUF property
consisting of his own branch including his sons or his own individual property. The High
Courts of Allahabad, Madras (Full Bench), M.P. and A.P. on the one side, held the view that

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such property would be individual property in the hands of the son while the Gujarat High
Court on the other hand took the view that such property would be in the nature of joint family
property in the hands of the son and not his separate property.
The Supreme Court has resolved this controversy in the case of CWT vs. Chander Sen (1986)
161 ITR 370 (SC) by overruling the Gujarat High Courts decision and approving the view of
the other courts. The Supreme Court pointed out that the Hindu Succession Act was enacted
to amend and codify the law relating to intestate succession among Hindus. Section 8 of the
Act lays down the scheme of devolution of the property of a Hindu dying intestate and the
express words of this provision cannot be ignored and must prevail.
Certain heirs have been classified in the Schedule under section 8 on whom such property
should devolve. Those specified in Class 1 take the property simultaneously to the exclusion
of all other heirs. Class 1 heirs, include son, daughter, etc., including the son of a
predeceased son but does not include specifically the grand son, being a son of son living.
The Supreme Court emphasized that he (grand son) could not get any right in the property of
his grandfather. In the view of the matter, the Supreme Court held that when son inherits the
property in the situation contemplated by section 8 he does not take it as Karta of his own
undivided family. The property which devolved on a Hindu on the death of his father intestate
after the coming into force of the Hindu Succession Act, 1956 did not constitute HUF property
consisting of his own branch including his sons.
In the case before the Supreme Court, R and his son C constituted a HUF. On 10-10-1961,
there was a partial partition in the family by which the business was divided between the father
and the son and thereafter it was carried on by a partnership consisting of the two. On 17-71965 R died leaving behind his son C and his grandsons i.e. the sons of C. His wife and
mother predeceased him and he had no other issue except C. On his death, there was a credit
balance of ` 1,83,043 in his account in the books of the firm. For the assessment year 196667 the sum of ` 1,83,043 standing to the credit of R was not included in the net wealth of the
family of C. (the assessee family) on the ground that this amount devolved on C to his
individual capacity and was not the property of the assessee family. A sum of ` 23,330 was
credited to the account of late R on account of interest accruing on his credit balance. In the
proceedings under the Income-tax Act, 1961 for the assessment year 1967-68 the sum of
` 23,330 was claimed as deduction.
The Assessing Officer disallowed the claim relating to interest on the ground that it was a
payment made by C to himself. Likewise, in the Wealth-tax assessment, the amount standing
to the credit of R was included by Assessing Officer in the wealth of assessee family.
The Supreme Court based on the reasoning explained earlier, held on the facts of the case,
that the sums standing to the credit of R belonged to C in his individual capacity and not the
Hindu family and the interest of ` 23,330 was an allowable deduction in respect of the income
of the family from the business.
It is to be noted that the holder of an impartible estate is to be assessed to wealth-tax as an
individual owner of the properties comprised in the estate. It may also be noted that firm or an
association of persons is not chargeable to wealth tax as such. However, the value of the
interest of the partner or the member in the assets of the firm or association determined in the

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manner laid down in Schedule III is to be included in the assessment of the net wealth of the
individual concerned. These points will be considered later in the context of the discussion on
section 4.

Exemption Limit : Wealth tax shall be charged on the net wealth of every individual,
Hindu undivided family and company at the rate of 1% of the amount by which the net
wealth exceeds ` 30 lakh.

1.5.3 Entities not liable to tax: According to section 45, no tax shall be levied under this Act
in respect of the net wealth of:
(i)

any company registered under section 25 of the Companies Act, 19561;

(ii)

any co-operative society;

(iii) any social club

(iv) any political party.
(v) a Mutual Fund specified under section 10(23D).
(vi) the Reserve Bank of India incorporated under the Reserve Bank of India Act, 1934.
It may be noted that the expression political party for the purposes of (iv) above will have the
meaning assigned to it in the Explanation to section 13A of the Income-tax Act, 1961. The
expression would cover an association or body of individual citizens of India registered with
the Election Commission of India as a political party and would also include a political party
deemed to be registered with that Commission under the Election Symbols (Registration and
Allotment) order, 1968.
1.5.4 Gamut of taxation: In computing the net wealth of an individual who is not a citizen
of India or an individual or a HUF not resident in India or resident but not ordinarily resident in
India or a non-resident company during the year on the valuation date, the following assets
will not be taken into account:(i)

The value of the assets and debts located outside India.

(ii)

The value of the assets in India represented by any loans or debts owing to the assessee.

However, in order to claim exemption, in respect of such assets, the interest payable on such
loans or debts should not be includible in the total income of the assessee under section 10 of
the Income-tax Act, 1961.
It is clear, therefore that the citizenship and the residential status affect both the chargeability
and the liability under the Act. The residential status of the assessee is to be judged by the
same principles as laid down in section 6 of the Income-tax Act, 1961

Location: The above discussion will also make it clear that for the purpose of computing
the net wealth it is essential to ascertain location of assets and debts whether they are in
India or outside India. The question as to where the asset is located is essentially one of
fact and will have to be decided in the light of the available evidence. The following
instructions have been issued by the CBDT for general guidance in this regard:

Section 8 of the Companies Act, 2013

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(a) Tangible immovable property is situated in India if the property lies in India.
(b) Rights or interest in or over immovable property (otherwise than by way of security) or
benefits arising out of immovable property are located in India in the immovable property
to which the rights are attached, or on of which the benefits arise, lies in India.
(c) Rights or interest (otherwise than by way of security in/over tangible movable property
are located in India, if such property is located in India or if it is in transit to India.
(d) Debts: The general principle of law is that the debts are situate where the debtor resides
and a stipulation that the payment should be made in a country where the debtor is not
residing does not affect the general rule and therefore Debts secured or unsecured
(other than those dealt separately) are located in India if they are contracted to be repaid
in India or if the debtor is residing in India.
(e) Moneys kept in a bank account in the form of deposits or otherwise are located in India if
the branch of the bank at which the account is kept is situated in India.
(f)

Security issued by the Central Government or a State Government or a Municipality or

other local authority in India are located in India unless they are inscribed for payment
outside India.

(g) Shares, stocks, debentures or debenture stock in a company are located at the place
where the company is incorporated.
(h) Ships or aircraft are located in India if they are registered in India.
(i)

Copyright or licence to use any copyright material, a patent, a trade mark or design is
located in India if the right arising, therefrom is exercisable in India.

(j)

Patents trade marks and designs are located in India if they are registered in India.

(k) Rights or causes of action ex-delicto (i.e., arising out of wrongs) not included in any of
the items mentioned above, are situated in India if they are enforceable in India.
It is not possible to give an exhaustive list of assets and the principle to be applied in
determining the location of all assets. For assets which are not covered under the above
items, the location has to be fixed, having regard to the nature of the assets.

1.6 DEEMED ASSETS

Assets belonging to others but includible in the net wealth of an individual [Section 4]

1.6.1 Assets transferred to certain persons: Section 4 extends the gamut of taxation

of net wealth of an individual. It provides that net wealth of an individual will include, in certain
circumstances, certain assets belonging to others. This section applies only to individuals and
the term individual for this purpose includes both male and a female.
Section 4(1) (a) provides that in computing the net wealth of an individual, the value of assets
which, on the valuation date, are held by the following persons should be included as if they
belong to the individual:
(1) Assets held by his/her spouse to whom such assets have been transferred directly or
indirectly without adequate consideration or otherwise than in connection with an
agreement to live apart.

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(2) Assets held by his/her minor child. It is significant to note that it is not necessary that
such assets must have been transferred directly or indirectly by the individual to the
minor. Consequently, all assets held by a minor child will be included in the net wealth of
the individual. However, if such a minor child is (a) suffering from any disability of the
nature specified in section 80U of the Income-tax Act, 1961 or (b) a married daughter of
such individual, there will be no such clubbing of wealth. The clubbing provisions will not
apply in respect of such assets as have been acquired by the minor child out of his
income earned from any manual work done by him or activity involving application of his
skill, talent or specialised knowledge and experience. In all other cases of assets held by
a minor child, the value of such assets will be clubbed with the value of assets held by
the individual as per the procedure laid down in the provision.
Where the clubbing provisions operate, the assets will be clubbed as follows:(a) Where the marriage of his parents subsists, the assets will be clubbed in the net wealth of
that parent whose net wealth (excluding assets of the minor child so includible) is greater.
(b) Where the marriage of his parents does not subsist, they will be clubbed in the net wealth
of that parent who maintained the minor child in the previous year as defined by the
Income-tax Act, 1961.
Where any such assets are once included in the net wealth of either parent, such assets
shall not be included in the net wealth of either parent in any succeeding year unless the
Assessing Officer is satisfied after giving that parent an opportunity of being heard that it
is necessary to do so.
(3) Any other person or AOPs to whom such assets have been transferred by the individual
directly or indirectly otherwise than for adequate consideration for the immediate or
deferred benefit of the individual or his/her spouse.
(4) Any person or AOPs to whom such assets have been transferred by the individual
otherwise than under an irrevocable transfer.
It is significant to note that the term transfer has not been defined by the Wealth tax
Act, 1957.
(i)

For the purposes of section 4, the expression transfer includes any disposition, settlement, trust, covenant, agreement or arrangement.

(ii)

The expression irrevocable transfer includes a transfer of assets which, by the term of
the instrument effecting it, is not revocable for a period exceeding 6 years or during the
life time of the transferee and under which the transferor derives no direct or indirect
benefit, but does not include a transfer of assets if such instrument

(a) contains any provision for the retransfer directly or indirectly of the whole or any part of
the assets or income therefrom to the transferor; or
(b) in any way gives the transferor a right to reassume power directly or indirectly over the
whole or any part of the assets or income therefrom.
It will be interesting here to note the definition of transfer and revocable transfer under
section 63 of the Income-tax Act, 1961.

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Wealth tax

Accordingly, for the purposes of section 60, 61, 62 and 63, a transfer shall be deemed to be
revocable if(a) it contains any provision for the retransfer directly or indirectly of the whole or any part of
the income or assets to the transferor or
(b) it in any way gives the transferor a right to reassume power directly or indirectly over the
whole or any part of the income or assets.
Transfer includes any settlement, trust, covenant, agreement or arrangement.
As noted earlier, section 4 applies only to individuals and consequently transfer by HUF
or transfer of HUFs property made by a Karta to coparceners wife or minor child or even
to his own wife as Karta will not fall under the purview of this section. The relationship of
spouse must exist on the date of transfer and subsist on the valuation date. If the
husband buys his property in the name of his wife or child out of his own funds, it would
amount to transfer within the meaning of this section.
(5) Assets held by sons wife of such individual to whom such assets have been transferred
by the individual directly or indirectly on or after 1st June, 1973 otherwise than for
adequate consideration.
(6) Assets held by a person or association of persons to whom such assets have been
transferred by the individual directly or indirectly on or after 1st June 1973 otherwise than
for adequate consideration for the immediate or deferred benefit of the sons wife of such
individual or both.

Transferred asset converted into another form value of which asset is to be

included: Section 4(1)(a) specifically provides that the clubbing envisaged under the
provision would operate whether the assets referred to above are held in the form in
which they were transferred or otherwise.
There was a judicial controversy regarding the question as to where a transferred asset
is converted into another form, whether the value of the originally transferred asset or the
converted asset as on the valuation date is to be included in the net wealth. Recently, the
Supreme Court resolved this controversy in CWT vs. Kishanlal Bubna (1993) 204 ITR
600 by holding that it is the value of the converted asset as on the valuation date that is
to be included. The words, such assets in sub-clause (iii) of section 4(1)(a) do, no doubt
refer to the assets described in clause (a) in the sense that they mean those assets.
However, the use of the words such assets does not imply that it is only the value on
the valuation date of the assets that were actually transferred which is to be taken into
account and not of any assets to which those transferred assets may have been
converted. The words whether the assets referred to in any of the sub clauses aforesaid
are held in the form in which they were transferred or otherwise put the matter beyond
doubt. Where, what is transferred by the assessee is money and the transferee utilises
that money to acquire an asset, it is the value of that asset on the valuation date which is
relevant for the purpose of inclusion in the net wealth of the assessee. Where, what is
transferred by the assessee is an asset and the transferee disposes of that asset and
acquires with the consideration received another asset it is the value of that acquired
asset on the valuation date which is relevant for the purposes of computing the net

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Levy of Wealth Tax

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wealth of the assessee.

Example Mr. A made a cash gift of ` 1,00,000 to Mrs. A in 2002. Mrs. A purchased a flat in
Delhi with that money. The value of the flat on 31st March 2014 i.e. valuation date of Mr. As
wealth-tax assessment was ` 5,75,000. The value of the flat that is to be included in the net
wealth of Mr. A as per section 4(1)(a) is ` 5,75,000 and not ` 1,00,000. It is assumed that
Mr. A owns another house in respect of which he claims exemption under section 5(i).

1.6.2 Share in partnership firms or an Association of Persons: Section 4(1)

provides that where the assessee is a 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 association determined in the
manner laid down in Schedule III is to be included in his net wealth.
The manner in which such value is to be computed has been prescribed in Rule 16 of
Schedule III of the Wealth-tax Act, 1957. Valuation of assets under Schedule III to the Act has
been discussed in detail later in this chapter.

1.6.3 Conversion of separate property of an individual into HUF property or gift

of individual property into HUF property: Section 4(1A) prevents the avoidance or
reduction of tax liability through the device of converting separate property of an individual into
joint property. The relevant provisions are explained below:
(i)

Where an individual converts his separate property into a joint family property of the
Hindu undivided family of which he is a member, by impressing such property with the
character of the joint family property or by throwing such property into common stock of
the Hindu undivided family or by transferring such individual property to the family
otherwise than for adequate consideration 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.

(ii)

In such a case the entire value of the property so converted or transferred would be
included in the net wealth of the individual who made the conversion.

(iii) In the event of a partial or total partition in the Hindu undivided family the shares allotted
to the spouse of such individual in the converted or transferred property will be included
in the net wealth of the individual on the footing that they represent assets transferred by
the individual indirectly.
The term property has been given an extended meaning for the purposes of this provision. It
includes any interest in property movable or immovable the proceeds or sale thereof and
money or investment for the time being representing the proceeds of sale thereof and where
the property is converted into any other property by any method such other property.
Thus this provision covers not only conversion of individual property into H.U.F. property but
also gift of individual property into H.U.F. property.

1.6.4 Gift by book entries: Sub-section (5A) provides that in cases where a gift of money
from one person to another is made by means of entries in the books of account maintained
by the person making the gift or by an individual or H.U.F. or a partnership firm or an
association of persons or body of individual with whom or with which the individual has any
business or other relationship the value of such gift shall be included in the computation of the

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Wealth tax

net wealth of the person who makes the gift, unless the person proves to the satisfaction of
the Assessing Officer that the money has actually been delivered to the other person at the
time the entries were made.

1.6.5 Impartible estate: Section 4(6) provides that the holder of an impartible estate is
deemed to be individual owner of all properties, comprised in the estate. Some properties,
although partible by nature, can be impartible by custom or by the terms of a grant by
Government in the sense that such properties always devolved on a single member of the
family to the exclusion of other members. Impartible estate are estates which by special law or
customs descend to one member and which are impartible, though they are joint property, in
the eyes of law, belonging equally to other members. Ancient Zamindaries descending to a
single member by special family custom, jagirs, palayams in Tamil Nadu can be cited as
examples of impartible estates.
As a result of the various legislations that have been and are being made by the various State
Governments as well as Central Governments liquidating all Zamindari estates, big and small,
whether partible or impartible and the abolition of the privileges of the former rulers of Indian
States, the topic of ownership of impartible estates has got only academic importance now.

1.6.6 Tax treatment of members of co-operative housing societies, etc.:

Sub-section (7) deals with tax treatment of members of co-operative society, company or other
association of persons. Where the assessee is a member of a co-operative society, company
or other association of persons and a building or part thereof is allotted or leased to him
under a house building scheme of the society, company or association, as the case may
be, the assessee shall, notwithstanding anything contained in this Act or any other law for the
time being in force, be deemed to be the owner of such building or part and the value of such
building or part, shall be included in computing the net wealth of the assessee; and, in
determining the value of such building or part, the value of any outstanding installments of the
amount payable under such scheme by the assessee to the society, company or association
towards the cost of such building or part and the land appurtenant thereto shall, whether the
amount so payable is described as such or in any other manner in such scheme, be deducted
as a debt owed by him in relation to such building or part.
1.6.7 Tax treatment in the case of part performance etc. : As per sub-section (8), a
person
(a) who is allowed to take or retain possession of any building or part thereof in part
performance of a contract of the nature referred to in section 53A of the Transfer of
Property Act, 1882;
(b) who acquires any rights (excluding any rights by way of a lease from month to month or for a
period not exceeding one year) in or with respect to any building or part thereof by virtue of
any such transaction as is referred to in clause (f) of section 269UA of the Income-tax Act,
1961, shall be deemed to be the owner of that building or part thereof and the value of such
building or part shall be included in computing the net wealth of such person.
Section 269UA(f) defines transfer for the purposes of purchase of immovable properties by
the Central Government. Accordingly, transfer
(i)

in relation to any immovable property means transfer of such property by way of sale or

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1.15

exchange or lease for a term of not less than twelve years, and includes allowing the
possession of such property to be taken or retained in part performance of a contract of
the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882).
Explanation : For the purposes of this sub-clause, a lease which provides for the extension
of the term thereof by a further term or terms shall be deemed to be a lease for a term of not
less than twelve years, if the aggregate of the term for which such lease is to be granted and
the further term or terms for which it can be so extended is not less than twelve years.
(ii)

in relation to any immovable property of the nature referred to in sub-clause (ii) of clause
(d) means the doing of anything (whether by way of admitting as a member of or by way
of transfer of shares in a co-operative society or company or other association of persons
or by way of any agreement or arrangement or in any other manner whatsoever) which
has the effect of transferring, or enabling the enjoyment of, such property.

Certain definitions for the purposes of section 4

(i)

the expression transfer includes any disposition, settlement, trust, covenant, agreement
or arrangement;

(ii)

the expression child includes a step-child and an adopted child;

(iii) the expression irrevocable transfer includes a transfer of assets which, by the terms of
the instrument effecting it, is not revocable for a period exceeding six years or during the
lifetime of the transferee, and under which the transferor derives no direct or indirect
benefit, but does not include a transfer of assets if such instrument(a) contains any provision for the retransfer, directly or indirectly, of the whole or any part of
the assets or income therefrom to the transferor; or
(b) in any way gives the transferor a right to reassume power, directly or indirectly, over the
whole or any part of the assets or income therefrom;
(iv) the expression property includes any interest in any property movable or immovable,
the proceeds of sale thereof and any money or investment for the time being
representing the proceeds of sale thereof and where the property is converted into any
other property by any method, such other property.

Liability of transferee: It may be noted that section 33 of the Wealth-tax Act, 1957 fastens a
liability on the transferees to pay the ratable part of tax on the assets held by them and which
are included in the transferors wealth under the provisions of section 4, under certain
circumstances.

1.7 Exemptions
Section 5 enumerates assets that are not to be included in the net wealth of an assessee and
on which the assessee is not required to pay any wealth tax. A thorough knowledge of this
provision is important not only from the point of view of examination but also from the point of
view of claiming ones rights under the Act. The properties which enjoy the exemption under
various clauses of section 5 are listed below.
(1) Any property held by the assessee under trust or other legal obligation for any public
purpose of a charitable or religious nature in India [Clause (i)].

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Wealth tax
However, as under the Income-tax Act, 1961, the exemption under this provision will not
be available in respect of business assets of public charitable or religious trusts and
institutions except in the following cases:

(a) Where the business is carried on by a trust wholly for public or religious purposes and
the business consists of printing and publication of books or the business is of a kind
notified by the Central Government in this behalf in the Official Gazette.
(b) The business is carried on by an institution wholly for charitable purposes and the work in
connection with the business is mainly carried on by the beneficiaries of the Institution.
The exemption which is available to the trustees of a public trust, is subject to the
provisions of section 21A discussed later. It is to be noted that in the case of a trustee of
a private trust, there is no exemption and the value of the trust property becomes
includible in the net wealth of the trustee in his capacity as trustee.
The Bombay High Court held in Trustees of Bhiwandiwalla Trust vs. C. W.T. (1976) I.T.R.
709 that under section 5(i) all the objects need not fall within the expression public
purpose of a charitable or religious nature in India. It would be sufficient if the objects of
the trust considered as a whole could be regarded to be within the expression. But the
A.P. High Court held in C.W.T. vs. Hyderabad Race Club (1978) 119 ITR 453, that where
assets are held for a public purpose which was both charitable and non-charitable in
nature the assets held by assessee were liable to tax irrespective of whether they are
applied solely for charitable purpose or for non- charitable purpose. The Andhra Pradesh
High Court held in C.W.T. vs. Trustes of H.E.H. The Nizams Religious Endowment Trust
(1977) 108 ITR 229 that in order to be entitled to exemption under section 5(i) of the
Wealth-tax Act, 1957, the property must be held under trust for religious and charitable
purpose and such purpose must be confined in its scope to the taxable territories. The
area or purpose of the trust is the decisive factor for claiming exemption.
However, exemption in respect of property forming part of business of the aforesaid
institutions would now be available only if such institution satisfies the conditions of
section 11(4A) of the Income-tax Act, 1961.
(2) The interest of the assessee in the coparcenary property of the Hindu undivided family of
which he is a member [Clause (ii)].
(3) Any one building in the occupation of a Ruler, being a building which immediately before
the commencement of the Constitution (26th Amendment) Act, 1971, was his official
residence by virtue of a declaration by the Central Government [Clause (iii)].
(4) Jewellery in the possession of a Ruler which is not his personal property and which is
recognised by the Central Government as his heirloom [Clause (iv)].
This recognition of the jewellery in the possession of a Ruler as his heirloom is also
subject to certain conditions and if any of the specified conditions is not fulfilled the
Board has the power to withdraw the recognition. In such a case of withdrawal of the
recognition, wealth-tax shall be payable by the Ruler for the assessment years for which
the jewellery was exempted on account of the recognition. The fair market value of the
jewellery on the date of the withdrawal of the recognition shall be deemed to be the fair

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market value of such jewellery on each successive valuation date relevant to the
assessment years. However, in such a case, the aggregate amount of wealth tax payable
in respect of the jewellery for all the assessment years (in respect of which tax becomes
payable consequent on withdrawal of the recognition) shall not exceed 50% of its fair
market value on the valuation date relevant for the assessment year in which recognition
was withdrawn.
(5) Clause (v) provides wealth tax exemption in respect of
(a) money
(b) value of assets brought into India and
(c) value of assets acquired by him out of such moneys to an assessee, who must be person
of Indian origin or Indian citizen and who must have returned to India from a foreign
country for settling down permanently.
This exemption will be available only for a period of seven assessment years
commencing with the assessment year next following the date on which such persons
returned to India.
In the case of a person covered by the provisions the moneys and the value of assets
brought by him into India and the value of the assets acquired by him out of such moneys
within one year immediately preceding the date of his return and at any time thereafter
will qualify for exemption.
The Explanation to this clause clarifies that the moneys standing to the credit of a
person (to whom this clause is applicable in a non-resident external) account in any
Bank in accordance with the Foreign Exchange Management Act, 1999 and rules
made thereunder on the date of his return shall be deemed to be moneys brought
by him into India on that date.
(6) The following are exempt under clause (vi) in the case of an individual/HUF
-

a house or part of house, or

a plot of land not exceeding 500 sq. meters in area.

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