MF0012(Set 1) | Tax Deduction | Indian Black Money

Question01- Tax evasions a menace to the people, economy and the country.

In the wake of recent Swiss bank account scandal give your views on the following: a. How does it affect the Indian economy and the growth prospects? b. Does black money cause Inflation? Answer:
In view of the facts set out so far, it becomes necessary to look at the extent of compliance of tax laws in India. Though many estimates of black money have been coming forth, an attempt was made to determine the extent of tax evasion in the Mumbai Income Tax charge, which collected about 35% of the Income Tax collections of the country and 43% of the corporate tax collections. The study was made on the basis of results of the survey and search cases for all the years covered by such cases. It came to light that none of the taxpayers concerned declared for taxation purposes anything more than 25% of their true incomes after 1999. The figure arrived at was given to the press specifying the basis on which it was so calculated. Not a single protest was received from any of the taxpayer, including companies. The said figure was thereafter cited for some more time, and even thereafter no protest was received. There was, therefore, every reason to believe this estimate. However, there appears 10to be higher tax evasion in the case of companies. Some of the companies have showntheir entire capital as having come from the countries regarded as Tax Havens.Considering the extent of Indian monies stacked in Swiss Bank Accounts, and bank accounts of the developed countries, and comparing the same with the annual income tax collections of the Central Government, it appears that the real income admitted for taxation purposes is less than 25%. The extent of evasion appears to be very much higher in the case of companies as the companies have resorted to evolution of taxevasion devices in the accounts and such methods have not yet been properlyinvestigated by the Inco me Tax Department. There are companies which havecamouflaged their capital investments and shown it in the books as if it is explained capital for income tax purposes. A. The Indian Scenario – Peculiar problems of tax evasion: It will be appropriate at this stage to highlight some of the key problems from the viewpoint of computerization in India: (a) Investments in Real Estate: The one field where black monies have been invested on the largest scale is that of real estate properties. Lands were sold for only 20% of their real values and the balance 80% given in cash out of the tax evaded monies, ever since 1947. But later on when the tax rates were lowered to 30% for individuals’ and 35% for companies, the black portion got reduced to 40%. It may be a difficult task to trace such black transactions through the computer system, suggested for adoption on the U.S. pattern for India. But it is common knowledge that the black monies invested in land have been reinvested in bank accounts, shares and in other properties, apart from real estate property. It is now confirmed knowledge that in regard to buildings constructed, only 40% of the cost is shown to income tax. It is possible to detect such investment by analysis of the data obtained from the trade and industry governingcommodities used for construction of buildings. Further, as all the transactionsrelating to sale of real estate properties are now recorded in computers maintained by the Registration Offices all over the country, and if the same data is brought on the computers of the Income Tax Department, it should be possible to know many owners of property who have not filed their tax returns at all so far. In India, there are only 3corers of tax assesses at present, and thus a large number of people with taxable income have evidently chosen not to file income tax returns. (b) Gold and Jewellery Holdings: India is having the largest private holdings of gold and diamond jewellery among all the countries of the world. In the searches conducted by the Income Tax Department, huge unaccounted cash balances and gold and diamond jewellery have been found in the bank lockers maintained by tax payer’s in bogus names and in their own names. At current market rates, purchases of gold, silver and diamonds may now reach about Rs. 80,000 crores a year. Gold and diamond traders are mostly keeping their transactions outside bank

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There is also the data generated in the computers of the organizations in charge of demat of shares. the data on post office savings and other accounts is easy to be brought on the computers of the tax department for verification with the individual returns.. It may be difficult to determine whether the investment found in the computers of the income tax department is benami or not. unaccounted cash holdings etc. though. It has given rise to parallel economy operating in the country. The poor go on becoming poorer while the rich go on becoming richer.accounts. (c) Shares. Black money is used by the rich in various evil activities. Therefore. travelers’ cheques. They use this money for corrupting and demoralizing social and political life. Does black money cause Inflation? Illegally earned money is called black money. The gap between the haves and the have notes is widening every day. B. The data regarding company shares and other investments mentioned can be easily transferred to the computer system of the Income Tax Department. the prices continue to raise in spite of all government efforts to control them. it is necessary to introduce a law requiring them to transact only through bank cheques and issue computerized bills. It has been beyond the control of the Government. Like-wise. The Mumbai Stock Exchange is having a separate computer system with complete data on daily transactions and the Income Tax Department has so far not made use of such data. Several majorcompanies have converted Swiss Account holdings into benami shares and debentures. it would have come from the traders themselves. smuggling. Such practicesenable payment of secret trade commissions in foreign currency and unaccountedfund s in Indian currency to those contesting general elections. and benami shares will have to be traced sometimes by extensive studies to be conducted by teams of revenueofficers. They are also giving vouchers to the effect that raw gold has been given by the customers. Even big companies have indulged in such practices to impart total secrecy to theirundisclosed accounts. to facilitate proper flow of information to the computer system of the tax department. All such practices would varnish once fear is caused among the tax payers about the use of computerized data for taxation purposes. thus. Mutual Funds. which are available with the Government itself. It is the result of hoarding. etc: There are vast investments in shares and debentures. there are additions to the Swiss Bank Account holdings. been utilized and every year. in fact. (f) Swiss Bank and other undisclosed bank accounts held abroad: Swiss Bank Accounts are shrouded in secrecy and hence no information will be available to the computer system of the Income Tax Department. have been utilized by big companies and other taxpayers in India to import huge machineries at vastly under invoiced prices. which are held in foreign currency. they have ability to give extensive bribes to protect business and other interests. This problem requires comprehensive study because it is peculiar to the Indian Taxation System. They display it in ostentatious living and wasteful luxuries. The large amounts of Swiss Bank deposits have. The black money has already created a serious problem in our country. (d) Undisclosed Stock in-trade held by companies and traders: Many firms and individuals have also a tendency to keep undisclosed business assets like cars and private assets. mutual funds and the primary bonds issued by the Reserve Bank of India. The amounts in Swiss Bank Accounts. As a result. tax evasion and dealing in immovable property for which the consideration is paid in black. Page 2 . (e) Benami Investments: Benami investments are typical of the Indian economy. The Indian economy stands badly shattered because of the huge amount of this tainted wealth lying in the coffers of the rich.

It must be clear to all that the nation cannot shut her eyes to this state of affairs. They seek the aid of the best legal brains and get the law twisted in their favour. Some leading economists of the country have suggested stringent measures to the government to unearth black money but successive governments have been rejecting those measures. The Government has. The government of the day appears to be doing its best to unearth black money. Most of the offenders use all their money and influence and go scot free whenever they are caught. termination etc is exempt up to the limit as prescribed by the Board. at times. children ordependants on his death is exempt subject to certain conditions. They are striking at the very roots of our democratic structure. cleverer than the Government. Under the provisions of Section 10(10) of the IT Act.2:-Detail death cum retirement gratuity under Sec 17(1)iii of IT Act. Any death-cum -retirement gratuity received under the revised Pension Rules of the Central Government or. according to some reliable estimates has gone up to Rs. It must be rooted out from public life. in respect of private sector employees gratuity received on retirement or on becoming incapacitated or on termination or any gratuity received by his widow. It is difficult to form an exact idea of the amount of black money in circulation in the country.They bribe Government officers and lead them to corruption and dishonesty. What has come to the surface is believed only to be the tip of the huge iceberg lying hidden underneath. Black money is a curse. The government must come down with a heavy hand on smugglers. Searches and raids by Income Tax authorities are conducted from time to time.1972. or under any similar scheme applicable to the members of the civil services of the Union or holders of posts connected with defence or of civil posts under the Union (such members or holders being persons not governed by the said Rules) or to the members of the allIndia services or to the members of the civil services of a State or holders of civil posts under a State or to the employees of a local authority or any payment of retiring gratuity received under the Pension Code or Regulations applicable to the members of the defence service. Smugglers and blackmarketers can no longer be tolerated. A lot soil remains to be done. Is commutation of pension a viable option in terms of tax planning? Answer: Death-cum-retirement gratuity or any other gratuity which is exempt to the extent specified from inclusion in computing the total income under clause (10) of Section 10. Taxation structure and system have been made easier. It is to a great extent responsible for a great rise in prices because the purchasing power of the people has increased.000 croresin our country. black-marketers and hoarders. People having black money are leading a life of luxury whereas the poor people are leading a miserable life.50. The vested interests always stand in the way of effective measures and get them diluted. Such raids yield crores of rupees. 10. Thus the entire social structure comes to be badly polluted. Question. as the case may be.000. All steps to weed the black money out of circulation must be taken as early as possible. the Central Civil Services (Pension) Rules. 3. The black money.The maximum amount of exemption is Rs. Of course. A number of steps have been taken. the government has brought forward several schemes and asked the people to declare their wealth. any death-cum-retirementgratuity of a government servant is completely exempt from income tax.. At different times. However. They purchase political bosses and control the strings of the Government. But the people are. this is further subject to certain other limits like the Page 3 . announced some voluntary disclosure schemes for unearthing the black money. tax evaders. Gratuity received in cases other than above on retirement. at various times. These schemes have proved successful to a very limited extent. There has been some success. The 1997 Voluntary Disclosure Scheme announced by the Government of India unearthed a big amount of black money as the tax rate in this scheme had been reduced to thirty per cent.

to the employees of a local authority or a corporation established by a Central. a partnership firm does not have a separate entity from that of the partners constituting the firm as the partners are the owners of the firm. or civil posts under a State.3: ExplaintheessentialconditionstobesatisfiedbyafirmtobeassessedasfirmunderSection184. Question. While computing the income of the firm under the head “Profits and gains of business or profession”. a firm is treated as a separate tax entity under the Income Tax Act. it is subject to certain limits laid down u/s 40(b). Share of profit which a partner receives from the firm (after deduction of remuneration and interest allowable) shall be fully exempt in the hands of the partner. The entire amount of anypayment in commutation of pension by a government servant or any payment incommutation of pension from LIC [Get Quote] pension fund is exempt from income tax under Section 10(10A) of IT Act. The firm will be taxed at a flat rate of 30% plus education cess @ 3% plus for the financial year 201011. salary. besides the deductions which are allowed u/ss 30 to 37. Answer: Position of Firm under the Income Tax Act: Legally.It may be noted here that the monthly pension receivable by a pensioner is liable to full income tax like any other item of salary or income and no standard deduction is now available in respect of pension received by a tax payer. 2. bonus. or holders of civil posts/posts connected with defence. or. Any payment in Commutation of pension received under the Civil Pension(Commutation) Rules of the Central Government or under any similar chime applicable to the members of the civil services of the Union. Salient features of the assessment of a firm are as under: 1. only the following amount of commuted pension is exempt. 3. or to the members of the All India Services/Defence Services. commission or remuneration. the commuted value of half of s uch pension. However. 5. The firm will be assessed as a firm provided conditions mentioned under Section 184are satisfied. and (b) In any other case. exemption will be governed by the provisions of sub-clause (ii) of clause (10A) of section 10. A firm is treated as a separate tax entity. calculated on the basis of average salary for the 10 months immediately preceding the year in which the gratuity is paid or 20 months' salary as calculated. namely: (a) Where the employee received any gratuity. In case these conditions are not satisfied in a particular assessment year. only that part of the interest and remuneration which was allowed as a deduction to the firm shall be taxable in the hands of the partners in their individual assessment under the head ‘profits and gains of business or profession. the commuted value of one-third of the pension which he is normally entitled toreceive. shall be allowed in computing the income chargeable Page 4 . However. State or Provincial Act. made to the partner. but no deduction by way of payment of interest. any payment in commutation of pension received from a Regimental Fund or Non-Public Fund established by the Armed Forces of the Union referred to in Section 10(23AAB) is exempt under sub-clause (iii) of clause (10A) of Section 10. in respect of private sector employees. However. by whatever name called. special deduction is allowed to the firm on account of remuneration to working partners and interest paid to the partners. Thus. under the Union. the firm will be assessed as affirm. However. the least of these items is exempt from income tax under Section 10(10). is exempt under sub-clause (i) of clause (10A) of Section 10.one half-month's salary for each year of completed service. Also.’ 4. As regards payments in commutation of pension received under any scheme of any other employer.

and the firm shall be eligible for deduction on account of interest. In the first assessment year: The firm will be assessed as a firm. Page 5 . salary. bonus. bonus etc. the firm shall furnish a certified copy of the revised instrument of partnership along with the return of income for the assessment year relevant to such previous year. Assessment of firm: From point (5) stated above. Essential conditions to be satisfied by a firm to be assessed as firm (Section 184) 1. (b) The individual share of the partners is specified in that instrument. salary and bonus etc if there is failure on the part of the firm as is mentioned in Section 144 (relating to Best Judgment Assessment) and where the firm does not comply with the three conditions mentioned under Section 184. salary. there is a written document giving the terms of partnership.e.under the head “profits and gains of business or profession” and such interest. [Section 184(5)] The firm will be assessed as a firm but shall not be eligible for any deduction on account of interest. no deduction shall be allowed to the firm on account of such interest. Further Delhi ITAT in the case of Ishar Dass Sahini & Sons v CIT held that where uncertified Photostat copy of the instrument of partnership is submitted along with the return of income and the certified copy is produced at the time of assessment. However. bonus. 2. salary. However where the return itself is filed late then there is no problem if the certified copy is filed along with such return as the condition that it shall accompany the return of income is satisfied. In the subsequent assessment years: If the above three conditions are satisfied the firm will be assessed as such (FAAS) in the first assessment year. it can be concluded that for taxation purposes. commission or remuneration shall not be chargeable to income tax in the hands of the partner. Where any such change had taken place in the previous year. a firm can be of two types: Firm assessed as firm (provided conditions mentioned u/s 184 are satisfied). Where certified copy is not filed with the return there is no provision for condo nation of delay. also known as ‘Firm Assessed as Such’ (FAAS) if the following conditions are satisfied: (a) Partnership is evidenced by an instrument i. it will be subject to the maximum of the limit specified under Section 40(b) If the prescribed conditions are not satisfied. it shall be assessed in the same capacity for every subsequent year if there is no change in the constitution of the firm or the share of the partners. salary etc while computing its income under the head business and profession). Read the box for some important points to be considered in this regard. Once the firm isassessed as firm for any assessment year. it will satisfy this condition. (c) Certified copy of partnership deed must be filed: A certified copy of the saidinstrument of partners hip shall accompany the return of income in respect of the assessment year for which the assessment as a firm is first sought. etc. Circumstance where the firm will be assessed as a firm but shall not be eligible for deduction on account of interest.

e. minor child etc. but not falling under the first four heads.List out the steps to compute total income. Profit from sale of a capital asset (like land) is taxable under the head “Capital Gains”. The balance income over and above the prescribed exemption limits would enter computation of total income and have to be classified under the relevant head of income. the duration for which he is present in India determines his residential status. minor child etc. Answer: Step1 – Determination of residential status The residential status of a person has to be determined to ascertain which income is to be included in computing the total income.. minor child etc. Step2 – Classification of income under different heads The Act prescribes five heads of income. as the income increases. some incomes are partially exempt from income-tax e. Education Allowance. (b) resident but not ordinarily resident. under which income arising to certain persons (like spouse. to minimize their tax burden. municipal taxes and interest on loan are allowed as deduction. In order to prevent such tax avoidance. while calculating income from house property. Under each head of income.g.Similarly. Income derived from carrying on any business or profession is taxable under the head “Profits and gains from business or profession”. Also. House Rent Allowance. have to be considered before arriving at the net incomechargeable under each head Step5 – Clubbing of income of spouse. clubbing provisions have been incorporated in the Act. income-tax is levied on a slab system on the total income. he may be (a) resident and ordinarily resident. Rental income is taxable under the head “Income from house property”. These are shown below – HEADS OFINCOME SALARIES INCOME FROM PROFITS AND GAINS CAPITAL INCOME HOUSE PROPERTY OF BUSINESS OR GAINS FROM OTHER PROFESSIONSOURCES These heads of income exhaust all possible types of income that can accrue to or be received by the tax payer.) have to be included in the income of the person who has diverted his income for the purpose of computing tax liability. Step4 – Computation of income under each head Income is to be computed in accordance with the provisions governing a particularhead of income. will be taxed.Question. For example. Some taxpayers in the higher income bracket have a tendency to divert some portion of their income to their spouse. The fifth head of income is the residuary head under which income taxable under the Act. Based on the time spent by him. the applicable rate of taxincreases. The tax system is progressive i. or (c) non-resident. There are deductions and allowances prescribed under each head of income. Salary. Page 6 . agricultural income.g. For e. The residential status of a person determines the taxability of the income. These incomes are excluded only to the extent of the limits specified in the Act. income earned outside India will not be taxable in the hands of a non-resident but will be taxable in case of a resident and ordinarily resident. These incomes have to be excluded and will not form part of Gross TotalIncome. Step3 – Exclusion of income not chargeable to tax There are certain incomes which are wholly exempt from income-tax e.4:. there is a charging section which defines the scope of income chargeable under that head. pension earned is taxable under the head “Salaries”. The residential statuses as per the Income-tax Act are shown below – In the case of an individual. deductions and allowances are prescribed under other heads of income.g. The tax payer has to classify the income earned under the relevant head of income. In case of individuals.These deduc tions etc.

there is a slab rate and basic exemption limit. 1.50.. At present.000 @ 10% and so on.50. 10.000. an assesses can have loss under one head of income. Page 7 .000. For individuals. the rate is 30% on the whole of their total income. The tax rates have to be applied on the total income to arrive at the income-tax liability.000 for individuals. The Education cess on income -tax is for the purpose of providing universalized quality basic education. For instance. the rate of surcharge for firms and domestic companies is 10% and for foreign companies is 2. are then aggregated. It is also called the Taxable Income. 2. to arrive at the gross total income. Step12 – Education cess The income tax. Similarly. is to be further increased by an additional surcharge called education cess@2%. say. Taxation For individuals. Step8 – Deductions from Gross Total Income There are deductions prescribed from Gross Total Income. 1. 10 lakhs. which is attracted in respect of income in excess of Rs. He might have profit from one source and loss from the other. The highest rate is30%. Profits and gains of business or profession. It should be rounded off to the nearest Rs. This is payable by all assesses who are liable to pay income-tax irrespective of their level of total income.5%.000 have to pay tax on their total income in excess of Rs. the basic exemption limit is Rs. 1. Further. losses which cannot be set-off in the current year due toinadequacy of eligible profits can be carried forward for set-off in the subsequent years as per the provisions contained in the Act. The process of computation of total income is shown here under– Step10 – Application of the rates of tax on the total income The rates of tax for the different classes of assesses are prescribed by the Annual Finance Act. Step7 – Computation of Gross Total Income The final figures of income or loss under each head of income. Step11 – Surcharge Surcharge is an additional tax payable over and above the income -tax. At present. Income from house property and profits under another head of income. 1. after claiming the above deductions from the Gross TotalIncome is known as the Total Income.00. after giving effect to the provisions for Clubbing of income and set-off and carry forward of losses. At present. For firms and companies. 1. a flat rate of tax is prescribed . allowances and other adjustments. Those individuals whose total income is more than Rs.00. There are provisions in the Income-tax Act for allowing inter-head adjustment incertain cases. HUFs etc.00. Step9 – Total income The income arrived at. surcharge would be levied @10% only if their total income exceeds Rs.000 but less than Rs.00. an assesses may have profit from his textile business and loss from his printing business.Step6 – Set-off or carry forward and set-off of losses An assessed may have different sources of income under the same head of income. This means that no tax is payable by individuals with total income of up to Rs. as increased by the surcharge. after allowing the deductions. These deductions are of three types. This losscan be set-off against the profits of textile business to arrive at the net income chargeable under the head “Profits and gains of business or profession”. Surcharge is levied as a percentage of income-tax. say.

Wealth tax is a socialistic tax. In case of non-residents and foreign national. Guest house.000 is chargeable to wealth-tax @ 1 per cent (on surcharge and education cess). SBI or any authorized bank. It is payable by every individual. assets outside India (less corresponding debts) are also liable to wealth tax. any political party. Debt should have been incurred in relation to the assets which are included in n e t wealth of assesses. No surcharge or education cess is payable. as prescribed by the Act. 1. less debt owed [as defined in section 2(m)]. tax is required to be deducted at source from the income by the payer at the rates prescribed in the Act. and a Mutual fund specified under section 10(23D) of the Income-tax Act [section 45] Net wealth = Value of assets [as defined in section 2(ea] plus deemed assets (as defined in section 4) less exempted assets (as defined in section 5). If any tax is still due on the basis of return of income. Assessment year – Assessment year means a period of 12 months commencing from the first day of April every year falling immediately after the valuation date [Section2 (d)] All. As per Section 2(q). Such deduction should be made either at the time of accrual or at the time of payment.00.(Till 31-3-2009. Wealth tax is payable on net wealth on ‘valuation date’. the obligation of the employer to deduct tax at source arises only at the time of payment of salar y to the employees. in the case of salar y income. 30.Step13 – Advance tax and tax deducted at source Although the tax liability of an assesses is determined only at the end of the year. In case of residents of India. For example. Assets:Assets are defined in Section 2(ea) as follows. or by any other name) or a cantonment board[Section 2(ea)(i)] Page 8 . Tax rate is 1% on amount by which ‘net wealth’ exceeds Rs 30 lakhs from AY 2010-11. 1956. Such tax deducted at source has to be remitted to the credit of the Central Government through any branch of the RBI. any social club. No wealth-tax is chargeable in respect of net wealth of any company registered under section 25 of the Companies Act. tax i s required to be paid in advance in certain installments on the basis of estimated income.05:-Detail the important provisions under Wealth tax Act. HUF and company. Answer: Wealth tax is not a very important or high revenue tax in view of various exemptions. Net wealth in excess of Rs. only assets located in India including deemed assets less corresponding debts are liable to wealth tax[section 6]. any co-operative society. after adjusting advance t ax and tax deducted at source. residential house or commercial building – The following are treated as “assets” (a) Any building or land appurtenant thereto whether used for commercial or residential purposes or for the purpose of guest house (b) A farm house situated within 25 kilometers from the local limits of any municipality (whether known as amunicipality. the assesses has to pay such tax (called self-assessment tax) at the time of filing of the return Taxation Question. Only debt owed on date of valuation is deductible.). municipal corporation. valuation date is 31st March every year. It is not on income but payable only because a person is wealthy. In certain cases. the limit was Rs 15 lakhs).

Yachts. but not the following . bullion. bullion. silver.Any house which the assessee may occupy for the purposes of any business orprofession carried on by him is not treated as “asset”. and also precious or semi-precious stones.A residential house is not asset. etc. cash in hand on the last moment of the valuation date in excess of Rs. Any unused land held by the assesses for industrial purposes for a period of 2 years from the date of its acquisition by him is not an asset. directly or indirectly. In the case of a leasing company. Deemed assets:Often. Land occupied by any building which has been constructed with the approval of the appropriate authority is not ‘asset’. 5. silver. utensils of gold. platinum or any other precious metal or any alloy containing one or more of such precious metals. the provisions of section 4(1)(a)(i) are not applicable. a person transfers his assets in name of others to reduce his liability of wealthtax. year is not Any property in the nature of commercial establishments or complex is not treated as an “asset”. A residential property which is let out for a minimum period of 300 days in theprevious treated as an “asset”.utensils or other article or worked or sewn into any wearing apparel. whether or not set in any furniture. without adequate consideration or not in connection with an agreement to live apart will be ‘deemed asset’ [Section 4(1)(a)(i)]If an asset is transferred by an individual to his/her spouse. if it is meant exclusively for residential purposes of employee who is in whole-time employment and the gross annual salary of such employee.e. Where any of the above assets (i. 1956 to his or her spouse. Assets transferred by one spouse to another – The asset is transferred by an individual after March 31. boats and aircrafts (other than those used by the assesses for commercial purposes) are treated as “assets” [Section 2(ea)(iv)] Urban land – Urban land is an “asset” [Section 2(ea)(v)]Urban land means land situated in the area which is comprised within the jurisdiction of a municipality and which has a population of not less than 10. bullion. officer or director is less than Rs.000 according to the last preceding census. 50. Any house (may be residential house or used for commercial purposes) which forms part of stock-in-trade of the assesses is not treated as “asset” . then such asset is not treated as “assets” under section2(ea)(iii). To stop such tax avoidance. Cash in hand – In case of individual and HUF.Jewellery.00. Motorcars – Motor car is an “asset”.) is used by an assesses as stock-in-trade. furniture. platinum or any other precious metal or any alloy containing one or more of such precious metals are treated as “assets” [Section 2(ea)(ii)]For this purpose. In case of companies. silver. boats and aircrafts – Yachts. utensils and any other article made wholly or partly of gold.000 is an ‘asset’. Page 9 .(a) motor cars used by the assesses in the business of running them on hire (b) motor cars treated as stock-in-trade [Section 2(ea)(ii)]. any amount not recorded in books of account is ‘asset’ [Section 2(ea)(vi)] 2. Any land held by the assesses as stock-in-trade for a period of 10 years from the date of its acquisition by him is also not an asset. etc. The expression “to live apart” is of wider connotation and even the voluntary agreements to live apart will fall within the exceptions of this sub-clause. “jewellery” includes ornaments made of gold. under an agreement to live apart. utensils of gold.– [Section 2(ea)(iii)] . Incomputing the net wealth of an assesses. the following assets will be included as deemed assets u/s 4. jewellery.000.. provision of ‘deemed asset’ has been made. Jewellery. motor car is an asset.

1956. the converted or transferred property or any part thereof. or a firm or an association of persons. it will be treated as ‘deemed asset’ of the transferor [Section 4(1)(a)(vi)]. the value of his interest in the firm shall be included in the net wealth of parent of minor in accordance with the provisions of section4(1)(a)(ii)[See Para 546. under a revocable transfer is ‘deemed asset’ of transferor [Section 4(1)(a)(iv)] Assets transferred to son’s wife – [Section 4(1)(a)(v)] . or if he transfers his separate property to his Hindu undivided family.Assets held by minor child – In computing the net wealth of an individual. is ‘deemed asset’ of transferor [Section 4(1)(a)(iii)] Assets transferred under revocable transfers – The asset is transferred by an individual to a person or an association of person after March 31. Conversion by an individual of his self-acquired Property in to joint family property – If an individual is a member of a Hindu undivided family and he converts his separate property into property belonging to his Hindu undivided family. unless he proves to the satisfaction of the Wealth-tax Officer that the money had actually been delivered to the other person at the time the entries were made [Section 4(5A)] . Interest of partner – Where the assesses (may or may not be an individual) is a partner in a firm or a member of an association of persons. which is received by the spouse of the transferor. 1973.The asset transferred by an individual after May 31. the converted or transferred property shall be deemed to be the property of the individual and the value of such property is includible in his net wealth [Section 4(1A)]If there was such transfer and if the converted or transferred property becomes the subject-matter of a total or a partial partition among the members of the family. there shall be included the value of assets which on the valuation date are held by a minor child (including step child/adopted child but not being a married daughter) of suchindividual [Section 4(1)(a)(ii)]The net wealth of minor child will be included in the net wealth of that parent whose net wealth [excluding the assets of minor child so includible under section 4(1)] is greater. 1973. without adequate consideration. or a Hindu undivided family. interest of part ner/member in the firm orassociation of persons should be determined in the manner laid down in Schedule III to the Wealth-tax Act [Section 4(1)(b)]. directly or indirectly.If a minor is admitted to the benefits of partnership in a firm. for the benefit of the transferor. 10 Gifts by book entries – 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. directly or indirectly. without adequate consideration. For this purpose. the value of his interest in the assets of the firm or an association shall be included in the net wealth of thepartner/member. Admission of minor to benefits of the partnership firm .2]. to son’s wife. otherwise than for adequate consideration. Assets transferred to a person or an association of persons – An asset transferred by an individual after March 31. 1956 to a person or an association of person. his or her spouse. It will be determined in the manner specified in Schedule III. or a body of individuals with whom he has business connection. whether directly or indirectly. to a person or an association of the immediate or deferred benefit of son’s wife. or by an individual. his interest in the family property is totally exempt from tax[Section 5(ii)]. the value of such gift will be included in the net wealth of the person making the gifts. Page Coparcenaries interest in a Hindu undivided family – If the assesses is a member of a Hindu undivided family. is deemed to be the asset of the transferor and is includible in his net wealth. without adequate consideration will be ‘deemed asset’ of transferor [Section 4(1)(a)(iv)] Assets transferred for the benefit of son’s wife – If the asset is transferred by an individual after May 31. directly or indirectly.

(a) moneys brought by him into India (b) value of asset brought by him into India (c) moneys standing to the credit of such person in a Non-resident(External) Account in any bank in India on the date of his return to India and (d)value of assets acquired by him out of money referred to in (a) and (c) above within one year prior to the date of his return and at any time thereafter [Section 5(v)]. Reasonable steps shall be taken for keeping that jewellery substantially in its original shape. Assets belonging to the Indian repatriates – Assets (as given below) belonging to assesses who is a person of Indian origin or a citizen of India. regardless of the fact whether the house is self-occupied or let out. One house or part of a house – In the case of an individual or a Hindu undivided family.What is meant by Full value of consideration? How short term capital gains and long term capital gains are computed using full value of consideration? Answer: Full value of consideration means & includes the whole/complete sale price or exchange value or compensation including enhanced compensation received in respect of capital asset in transfer. is exempt. Indexed Cost of Acquisition = COA x CII of Year of transfer_ CII of Year of acquisition Page 11 . to examine the jewellery as and when necessary.e.  The consideration received in kind is valued at its fair market value. Reasonablefacilities shall be allowed to any officer of the Government. In case a house is owned by more than one person. following shall not be chargeable to tax for seven successive assessment years .Residential building of a former ruler – The value of any one building used for the residence by a former ruler of a princely State is totally exempt from tax [Section 5(iii)] Former ruler’s jewellery – Jewellery in possession of a former ruler of a princely State. or either of his parents or any of his grand-parents. to include the purchase price. After his return to India.. In other words. or authorized by the Board. exemption is available to each co-owner of the house [Section 5(vi)] Question06:. who was ordinarily residing in a foreign country and who has returned to India with intention to permanently reside in India.  It may be received or receivable. A house is qualified for exemption. i. a house or a part of house or a plot of land not exceeding 500 sq. A person shall be deemed to be of Indian origin if he. Expenses of capital nature for completing or acquiring the title are included in the cost of acquisition. storage etc. expenses incurred on completing transfer. COST OF ACQUISITION – Cost of Acquisition (COA) means any capital expense at the time of acquiring capitalasset under transfer. meters in area is exempt. cost of acquisition of an asset is the value for which it was acquired by the assesses. not being his personal property which has been recognized as a heirloom is totally exempt from tax [Section 5(iv)] The jewellery shall be permanently kept in India and shall not be removed outside India except for a purpose and period approved by the Board.  The consideration must be actual irrespective of its adequacy. expenses incurred up toacquiring date in the form of registration.  The consideration may be in cash or kind. The following points are important to note in relation to full value of consideration. was born in undivided India.

Provisions for computation of Capital Gain Provisions under section 48 The income under the head “Capital Gains” shall be computed by deducting thefollowing from value of the consideration received or accrued as a result of thetransfer of the capital asset :  Expenditure incurred wholly and exclusively in connection with such transfer.4. cost of improvement includes all those expenditures. Year 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 Cost Inflation Tax 100 109 116 125 133 140 150 161 172 182 199 223 244 259 S. Year 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 Cost Inflation Tax 281 305 331 351 389 406 426 447 463 480 497 519 551 If capital assets were acquired before 1. The fair market value of asset on 1st April 1981 will certainly include the improvement made in the asset.4. which are incurred to increase the value of the capital asset. The reason behind it is that for carrying any improvement in asset before 1st April 1981. the full Page 12 . If asset is purchased before 1st April we consider the fair market value.81 as the cost of acquisition. 15 16 17 18 19 20 21 22 23 24 25 26 27 Fin. COST OF IMPROVEMENT – Cost of improvement is the capital expenditure incurred by an assesses for making any addition or improvement in the capital asset.The indices for the various previous years are given below: S.4. It also includes any expenditure incurred in protecting or curing the title.81 then the indexation will also be done as per the CII of 1981 and not as per the year of acquisition. Indexed Cost of improvement = COA x CII of Year of transfer____ CII of Year of improvement Any cost of improvement incurred before 1st April 1981 is not considered or it is ignored.  The cost of acquisition of the asset and the cost of any improvement thereto. the assesses has the option to have either actual cost of acquisition or fair market value as on 1.No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Fin.81. If assesses chooses the value as on 1. In other words.No. asset should have been purchased before 1st April 1981.

Computation of Short Term Capital Gains From full value of consideration. deduct  Expenditure incurred wholly and in exclusively connection with the transfer  Indexed cost of acquisition of asset  Indexed cost of any improvement of asset ************************************************************************************************************************ Page 13 . deduct  Expenditure incurred wholly and in exclusively  Cost of acquisition  Cost of any improvement of asset Computation of Long Term Capital Gains From full value of consideration.

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