CA Vidhan Surana & CA Sunil Maloo
Whether wealth tax leviable on the making charges of the jewellery? – A Detailed Analysis
Under the scheme of Wealth Tax in India, Wealth tax is levied on the net wealth of the every individual, Hindu undivided family and company as on the valuation date. “Net Wealth” means the amount by which the aggregate value computed in accordance with the provisions of Wealth Tax Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included 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.
“Assets” has been defined in section 2(ea) of the Act, which inter alia includes jewellery, bullion 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 metals, except held as stock in trade.
Out of the above, the term ‘jewellery’ is further defined in explanation 1 to this section, which reads as under:-
[Explanation 1] : For the purposes of this clause, —
(a) “jewellery” includes —
(i) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stones, and whether or not worked or sewn into any wearing apparel;
(ii) precious or semi-precious stones, whether or not set in any furniture, utensils or other article or worked or sewn into any wearing apparel;
Many times the registered valuers while valuing the jewellery for the purpose of wealth tax and also sometime the Assessing Officer while making the Wealth Tax Assessment, includes the ‘Making Charges’ in the value of the jewellery and levies Wealth Tax on the Same.
Now the question arises as to whether the ‘Making Charges’ incurred by the Assessee in connection with the ‘jewellery’, are also subject to the levy of Wealth Tax? Whether the value of Making Charges also needs to be included in the valuation of ‘jewellery’ for the purpose of the Wealth tax? Let’s examine this issue in detail herein under:-
What ‘Making Charges’ exactly are?
Making Charges are the charges we pay to the Gold Smith to make the Jewel out of raw gold/ any other precious metal. It is nothing but the amount that we pay for the labour involved in making a piece of jewellery. A good design is a culmination of artistic view and effort to create a wonderful design that attracts the eyes of buyer. So for making such designs, Jewelery stores generally charges the customer with making charges. This varies from design to design based on the complexity. It varies based on jeweller. Making charges are usually a percentage of the current price of the metal used in jewellary. This means higher the price of metal, higher would be the making charges. Also the more intricate the design, the higher will be the charges. Making charges normally range between 5% and 25% of the cost of metal.
Provisions relating to Valuation of ‘jewellery’ under the Wealth Tax Act:-
Section 7 of the Wealth tax Act, 1957 provides for ‘Value of assets, how to be determined’, which reads as under:-
7. Value of assets, how to be determined
(1) Subject to the provisions of sub-section (2), the value of any asset, other than cash, for the purposes of this Act shall be its value as on the valuation date determined in the manner laid down in Schedule III.
Accordingly, the Net Wealth is to be valued at the rates as specified in the Schedule III of the Wealth Tax Act. Schedule III of the Act lays down the ‘Rules for Determining the Value of Assets’. Part ‘G’ of the said schedule contains the rules for determination of ‘Valuation of jewellery’, which reads as under:-
18. Valuation of jewellery.
(1) The value of the jewellery shall be estimated to be the price which it would fetch if sold in the open market on the valuation date (hereafter in this rule referred to as fair market value).
(2) The return of net wealth furnished by the assessee shall be supported by, —
(i) a statement in the prescribed form, where the value of the jewellery on the valuation date does not exceed rupees five lakhs;
(ii) a report of a registered valuer in the prescribed form, where the value of the jewellery on the valuation date exceeds rupees five lakhs.
(3) Notwithstanding anything mentioned in sub-rule (2), the Assessing Officer may, if he is of opinion, that the value of the jewellery declared in the return, —
(a) is less than its fair market value by such percentage or such amount as is prescribed under sub-clause (i) of clause (b) of sub-section (1) of section 16A;
(b) is less than its fair market value as referred to in clause (a) of sub-section (1) of section 16A,
he may refer the valuation of such jewellery to a Valuation Officer under sub-section (1) of the said section and the value of such jewellery shall be the fair market value as estimated by the Valuation Officer.]
Thus, the levy of Wealth tax on ‘Making charges’ of the jewellery is unjustified because of the following reasons:-
a) ‘Making Charges’ are not included in the definition of the Assets either individually or also not covered in the definition of the term ‘jewellary’;
b) In the Rules of Valuation of jewellery, it is clearly provided that the value of jewellery shall be estimated to be the price which it would fetch if sold in the open market on the valuation date. It is well settled principle that no one in the open market shall pay for the ‘making charges’ incurred by the seller. The seller will fetch the amount exclusively attributable to the contents of the precious metal at the prevailing rates on that particular date and nothing more than that.
c) There is a difference between the term ‘Cost’ and ‘Value’. In general the ‘Cost’ is the amount that we incur for acquisition of something and ‘Value’ is the amount that we can fetch is that item is sold in open market. Making Charges are without any ambiguity considered as a part of the ‘cost’ of the jewellery but under the scheme of the Wealth Tax, same should not be considered as a part of the ‘Value’ according to the provisions of the Act.
d) In many cases, the Department also argues and levy wealth tax on the making charges of the jewellery on the ground that when a manufacturer of gold jewellery or a person engaged in business of jewellery sell such items into open market, they also realize the making charges. This ground for taxing the making charges under the Wealth Tax Act does not sound to be valid, as such manufacturer / jeweler held the jewellery as stock in trade and which is specifically excluded from the definition of the term ‘jewellery’.
e) Further, the ‘form O-8’ which is the designated form for ‘Valuation of Jewellery’ also does not contain any field which gives even a remote indication regarding inclusion of ‘Making Charges’ into the value of jewellery. Abstracts of Form O-8 is reproduced hereunder for ready reference:-
Point number 12 is for ‘Total Value of Jewellery’, which is succeeded to Point No. 10 and Point No. 11, which are ‘Value of each precious or semi-precious stone and the total value of all such stones’ and ‘Value of the precious metal content in all the items of jewellery’ respectively. Thus, it can also be positively inferred that Point No. 12 is nothing but a sum of Point No. 10 and 11. Inclusion of Making Charges into the value of jewellery does not find any place in the form O-8 of ‘Valuation Report’, which itself implies that same is not to be intended to be included in the taxable ‘Value of Jewellery’.
Conclusion:- Under the background of the above analysis of the provisions of the Wealth Tax Act and ‘Rules for Determining the Value of Assets’, it can safely be concluded that ‘Making Charges’ should not be made subject to levy of Wealth Tax.Though, one may logically argue that the Making charges must, invariably form part of the value of jewellery, but the law ALWAYS does not works on mere logics. However, a clarificatory amendment on this aspect of law will be appreciated for the removal of the ambiguity amongst the department being the exchequer, taxpayers, tax-professional and registered valuers.
Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. The authors do not accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.