CIRCULAR NO. 4-P[LXXVI-65], DATED 7-6-1968

Amendments at a glance

SECTION/SCHEDULE PARTICULARS
5(1)(xv) Exemption from tax of fixed deposits made under any scheme framed by the Central Government 8(1)
5(1)(xvi) Exemption from tax of deposits in post office savings banks and various small savings certificates 8(2)
5(1)(xviia) Exemption from tax of amount standing to the credit of an individual in any provident fund set up by the Central Government 8(3)
18(1), Expln 1 Penalty for concealment or understatement of wealth 9-18
Sch. Self-servicing tax table and increase in the rates on wealth in higher slabs 21-22

 

Explanatory Notes

FINANCE ACT, 1968-II

Introduction

  1. The Finance Bill, 1968, as passed by Parliament, received the assent of the President on 11-5-1968, and has been enacted as Act 19 of 1968.

FINANCE ACT, 1968-II

  1. Section 32 of the Finance Act, 1968 has amended certain provisions of the Wealth-tax Act, 1957. These amendments relate to the provisions in section 5 for the exemption from wealth-tax in respect of certain assets; provisions in section 18 for the imposition of penalty for concealment or understatement of wealth, and the rate schedule of ordinary wealth-tax in Paragraph A of Part I of the Schedule.

FINANCE ACT, 1968-II

  1. Scope and objects of the amendments – The amendments to section 5 have the object, inter alia, of encouraging personal savings in the form of fixed deposits with Government and contributions to the Public Provident Fund (to be established under the Public Provident Fund Act, 1968), by allowing an exemption from wealth-tax in respect of such deposits and the amounts standing to the credit of the individual accounts in the Public Provident Fund. Another amendment to section 5 has the object of securing that the existing exemption from wealth-tax in respect of deposits in post office savings banks and investments in the small savings securities of the Government will be available even where such deposits or investments, beneficially owned by the taxpayer, are held in the name of any other person. These amendments are effective from 1-4-1968, i.e., for and from the assessment year 1969-70.

FINANCE ACT, 1968-II

  1. The amendments to section 18 have increased the scale of penalties leviable for concealment or understatement of wealth, besides making certain ancillary provisions in the matter, with a view to providing an effective deterrent to evasion of wealth-tax. The new provisions take effect from 1-4-1968.

FINANCE ACT, 1968-II

  1. The changes in the rate schedule of ordinary wealth-tax consist in recasting of the rate schedule in the form of a self-servicing tax table to simplify the calculation of wealth-tax and also increasing the rates of ordinary wealth-tax in the case of individuals and Hindu undivided families on net wealth in the slabs over Rs. 10 lakhs, by 0.5 per cent of the net wealth. The revised rate schedule is effective for and from the assessment year 1969-70.

FINANCE ACT, 1968-II

  1. The substance of the specific provisions made in the Wealth-tax Act through the above-mentioned amendments and guidelines regarding the implementation of some of the provisions are set forth in the following paragraphs.

FINANCE ACT, 1968-II

Exemption from wealth-tax in respect of savings invested in specified media.

  1. Section 5(1) provides for an exemption from wealth-tax, by way of an outright exclusion from the assessable net wealth, of the value of assets of certain categories, including savings invested in specified media, for example, deposits in post office savings banks, investments in various small savings securities of the Government and amounts standing to the credit of salaried persons in provident funds governed by the Provident Fund Act, 1925, or provident funds recognised under the Income-tax Act.

FINANCE ACT, 1968-II

  1. The following new provisions have been made in section 5, with effect from 1-4-1969, i.e., for and from the assessment year 1969-70 :
  2. Any fixed deposit made by the taxpayer under any scheme framed by the Central Government will be wholly exempt from wealth-tax to the extent of the maximum amount permitted to be deposited under the scheme. This exemption will be available where any such scheme has been notified in this behalf by the Central Government in the Official Gazette.

Two schemes for 5-year fixed deposits with Government, one relating to fixed deposits in post offices, and the other to such deposits on Government account in the State Bank of India and its subsidiaries, have been recently instituted by the Government. The deposits bear simple interest at 5 per cent per annum. Under these schemes, an individual can make fixed deposits up to the maximum amount of Rs. 25,000 and two individuals jointly, up to Rs. 50,000. In computing these limits, fixed deposits made by an individual in the post office as well as in the State Bank of India and its subsidiaries have to be aggregated. This scheme has been notified by the Government for the purpose of the above-mentioned exemption from wealth-tax in the notification, dated 4-6-1968, published in the issue, dated 5-6-1968 of the Gazette of India, Extraordinary. Accordingly, fixed deposits under this scheme will be wholly exempt from wealth-tax [New clause (xv) introduced in section 5(1), and consequential amendment to section 5(2), by section 32(9) of the Finance Act, 1968].

  1. Taxpayers are wholly exempt from wealth-tax under section 5(1)(xvi) in respect of deposits in post office savings banks and various small savings securities of the Government, such as 10-Year Defence Deposits Certificates, 12-Year National Defence Certificates, etc. This exemption is limited, in each case, to the maximum amount permitted to be deposited in post office savings banks or invested in those small savings securities, under the rules relating to such deposits or investments. Under this provision, as it stood before its amendment by the Finance Act, 1968, exemption from wealth-tax in respect of such deposits and investments was available only where these were �held by the assessee�, i.e., where the deposits were in his own name or the investments were registered in his name. This view was taken by the Gujarat High Court in the case of Harshad Rambhai Patel v. CWT  [1964] 54 ITR 740. The words �held by the assessee� have been omitted by the Finance Act, 1968 with effect from 1-4-1969. The effect of this amendment will be that in respect of the assessment year 1969-70 and subsequent years, exemption from wealth-tax in respect of such deposits and investments beneficially owned by the taxpayer or otherwise includible in his net wealth, will be available even if the investments are held in the name of any other person. The exemption will, of course, continue to be subject, in each case, to the limit of the maximum amount permitted to be deposited or invested in these media, as stated above.
  2. An individual will be wholly exempt from wealth-tax in respect of the amount standing to his credit in any provident fund set up by the Central Government and notified by it in this behalf in the Official Gazette.

The Government is establishing a Public Provident Fund for the general public under the Public Provident Fund Act, 1968 (23 of 1968) enacted on 16-5-1968. Every individual will be eligible to subscribe to this fund, on his own behalf or on behalf of a minor of whom he is a guardian, in the manner and subject to the minimum and maximum limits as may be specified in the Public Provident Fund Scheme to be framed and notified by the Central Government under section 3 of the Public Provident Fund Act, 1968. The fund will be notified in the Official Gazette under the above-mentioned provision of the Wealth-tax Act and thereupon amounts standing to the credit of the individual accounts in the Public Provident Fund will be wholly exempt from wealth-tax for the assessment year 1969-70 and later years [New clause (xviia), introduced in section 5(1) of the Wealth-tax Act by section 32(a) of the Finance Act, 1968.]

 FINANCE ACT, 1968-II

Penalty for concealment or understatement of wealth

  1. A person who has concealed the particulars of any asset or has furnished inaccurate particulars of any asset or debt is liable under section 18(1), to the imposition of a penalty. These provisions have been amended by the Finance Act, 1968, with effect from 1-4-1968, in order to make them more effective in countering evasion of wealth-tax.

FINANCE ACT, 1968-II

  1. Under these provisions, as they stood before their amendment by the Finance Act, 1968, the scale of penalty imposable for concealment of wealth was a minimum amount of 20 per cent of the wealth-tax sought to be evaded and a maximum of 150 per cent of the amount of such wealth-tax. It was also provided, in substance, in the Explanation to section 18(1), prior to its amendment, that where the net wealth declared by a person in his return of net wealth fell short of the wealth as assessed (either in original assessment proceedings or in proceedings for assessing or reassessing wealth escaping assessment) by more than 20 per cent of the assessed wealth, such person would be deemed to have concealed the particulars of assets or furnished inaccurate particulars of assets or debts, unless he proved that the shortfall did not arise from any fraud or any gross or wilful neglect on his part. Thus, the onus of proof in penalty proceedings for concealment or understatement of wealth shifted from the Revenue to the taxpayer where the net wealth returned by him fell short of the net wealth assessed by more than 20 per cent of the assessed wealth. Under this provision, the onus of proof shifted from the Revenue to the taxpayer only where the net wealth, in the aggregate, as declared in the return, fell short of the net wealth assessed by more than 20 per cent of the assessed amount, and not otherwise, even though the value of any individual asset comprised in the net wealth might have been understated in the return by more than 20 per cent of the value of that asset determined on assessment.

FINANCE ACT, 1968-II

  1. The Finance Act, 1968 has made the following changes in the above-mentioned provisions :
  2. The scale of penalty leviable for concealment or understatement of wealth (through concealment of assets or understatement of the value thereof or over-statement of the value of a debt) has been increased to a minimum of an amount equal to the concealed wealth or the amount by which the wealth has been found to be understated, and a maximum of twice that amount.

[Clause (iii) of section 18(1) as amended by section 32(b) of the Finance Act, 1968, w.e.f. 1-4-1968]

  1. The provision in the Explanation to section 18(1) prior to its amendment under which the onus of proof in penalty proceedings for concealment or understatement of wealth shifted from the Revenue to the taxpayer where the net wealth declared in the return fell short of the net wealth assessed by more than 20 per cent of the assessed wealth, has been substituted by a new provision. Under the new provision, the onus of proof in penalty proceedings for concealment or understatement of wealth lies on the taxpayer where�
  2. a. the value of any asset as declared by him in the return falls short of the value determined on assessment by more than 25 per cent of the assessed amount; or
  3. the value of any debt declared in the return exceeds the value of the debt as determined on assessment by more than 25 per cent of the assessed amount; or
  4. the amount of the net wealth declared in the return falls short of the net wealth determined on assessment by more than 25 per cent of the assessed amount (as against more than 20 per cent of the assessed amount under the provision prior to its amendment).

In the above-mentioned cases, the taxpayer will be  liable to imposition of penalty unless he proves that the understatement of the value of his assets or over-statement of the value of his debts or understatement of the amount of his wealth, as the case may be, did not arise from any fraud or any gross or wilful neglect on his part.

[New Explanation 1 to section 18(1) in substitution of the Explanation existing in section 18(1) prior to its amendment by the Finance Act, 1968].

FINANCE ACT, 1968-II

  1. It has also been clarified, in substance, in a new Explanation to section 18(1) that, for the purpose of levy of penalty in a case of understatement of the value of the asset, the amount by which the value of an asset as declared in the return falls short from that determined on assessment will be taken to be the amount representing the value of the asset in respect of which particulars have been concealed or inaccurate particulars have been furnished. Likewise, in a case of overstatement of the value of a debt in the return, the amount by which such value exceeds the value as determined on assessment will be taken to be the amount representing the value of the debt in respect of which inaccurate particulars have been furnished. Thus, in a case where the value of an asset has been understated in the return, and a penalty is leviable, the quantum of the minimum penalty imposable will be the amount by which the value of the asset declared in the return falls short of the value assessed, and in a case of overstatement of the value of a debt in the return, it will be the amount by which the value declared in the return exceeds the value determined in the assessment. The maximum penalty imposable will be twice the above-mentioned amounts.

[New Explanation 2,  introduced in section 18(1) by section 32(b) of the Finance Act, 1968]

FINANCE ACT, 1968-II

  1. Date of commencement of the new penalty provisions – As stated before, the new provisions made by the Finance Act, 1968, relating to the imposition of penalty for concealment or understatement of wealth are effective from 1-4-1968. Accordingly, these provisions will be applicable in cases where there is a concealment or understatement of wealth through returns of net wealth which are furnished on or after 1-4-1968. In such cases, the new provisions relating to imposition of penalty will be applicable whether the return relates to the assessment year 1968-69 or a prior assessment year and whether the return has been furnished in original assessment proceedings under section 16 or in proceedings under section 17 for assessing or reassessing wealth escaping assessment. Where any proceedings for imposition of penalty are taken for any assessment year in respect of concealment or understatement of wealth through a return furnished prior to 1-4-1968, the relevant provisions of Wealth-tax Act, prior to its amendment by the Finance Act, 1968, will be applicable.

FINANCE ACT, 1968-II

  1. Where the minimum penalty imposable for concealment or understatement of wealth is more than Rs. 1,000, the Wealth-tax Officer is required, under section 18(3), to refer the matter to the Inspecting Assistant Commissioner concerned and a penalty can be imposed in such a case only by the latter and not by the Wealth-tax Officer. This provision has not been changed by the Finance Act, 1968, and will continue to apply in cases where penalties for concealment or understatement of wealth are imposed under the new provision. At the minimum penalty in such cases under the new provision is equivalent to the amount of the concealed wealth or the amount by which the wealth has been understated, all cases where the amount by which the value of an asset or the net wealth has been understated is more than Rs. 1,000 will be referred to the Inspecting Assistant Commissioner and the penalty leviable, if any, will be imposed by him.

FINANCE ACT, 1968-II

  1. The scale of penalty under the new provisions is very steep as it is intended to provide an effective deterrent to evasion of wealth-tax through concealment of assets, overstatement of the value of debts or the understatement of the value of assets. These provisions are, however, not attracted in a case where the understatement of the value of assets or overstatement of the value of debts does not arise due to any fraud or any gross or wilful neglect on the part of the taxpayer, even though the amount by which the value of assets has been understated or, as the case may be, the value of debts has been overstated, is more than 25 per cent of the amount determined on assessment. Thus, where a taxpayer has given relevant particulars of his assets correctly and the value thereof declared by him in the return is in accordance with the valuation made by an approved valuer, the taxpayer will not be subjected to penalty for understatement of the value of any asset merely on the ground that its value has been determined in the assessment at a higher amount. Approved valuers referred to above or those notified, from time to time, by the Central Government in the Official Gazette under section 4(3) of the Estate Duty Act. These valuers are competent to act as valuers also for the purposes of the Wealth-tax Act. [The term �valuer� has been defined in section 2(r) of the Wealth-tax Act to mean a valuer appointed under section 4 of the Estate Duty Act. In cases where a dispute regarding the valuation of any property is to be settled at the stage of appeal to the Appellate Tribunal by the arbitration of two valuers (one nominated by the appellant and the other by the respondent) in accordance with the procedure specified in section 24(6) of the Wealth-tax Act, these valuers are to be selected out of the panel of valuers notified by the Government under section 4(3) of the Estate Duty Act.]. The valuers notified by the Government under section 4(3) of the Estate Duty Act include a sufficient number of surveyors, engineers and architects for valuation of immovable property, chartered accountants for valuation of company shares and business assets including goodwill, specialists in valuation of jewellery, precious stones, ornaments and works of art, and actuaries (for valuation of life interest, reversions, etc.), in various important cities and towns. Their services can be engaged by a taxpayer on payment of fees at the prescribed scale.

FINANCE ACT, 1968-II

  1. Need for proper valuation of assets, general extension of time for furnishing returns to facilitate valuation – The increase in the scale of penalty, leviable for concealment or understatement of wealth makes it necessary for taxpayers to ascertain and declare in their returns of net wealth the proper value of their assets as on the relevant valuation date. The circumstance that the value of an asset as declared by the taxpayer in a return of net wealth furnished during the current financial year is the same as had been adopted by the tax authorities in an assessment for an earlier year will not, by itself, absolve the taxpayer from the onus of proof in penalty proceedings where the value declared by him is found to fall short of the value determined in the assessment by more than 25 per cent of the assessed amount.

FINANCE ACT, 1968-II

  1. In order to provide adequate opportunities to taxpayers to have their assets valued or revalued by approved valuers, it has been decided by the Board that taxpayers should be granted a general extension of time for furnishing voluntary returns of net wealth for the assessment year 1968-69 by two months beyond the due date of 30-6-1968, i.e., up to 31-8-1968. Extension of time up to 31-8-1968, will also be allowed in cases where notices under section 14(2) or section 17(1) of the Wealth-tax Act calling for returns of wealth for any assessment year have already been issued to taxpayers or are issued hereafter up to July 1968. Such extension of time will be allowed automatically, i.e., without a specific request from a taxpayer. Where a taxpayer needs further extension of time beyond 31-8-1968, for having his assets valued or revalued properly by valuers in order to furnish the return of wealth, he may approach the Wealth-tax Officer who will consider his request on merits and grant him extension of time, as appropriate.

FINANCE ACT, 1968-II

  1. Stay of recovery of penalty levied for understatement of value of an asset till settlement of the disputed valuation in appeal before Appellate Tribunal – There can be wide differences of opinion even amongst expert valuers on the proper valuation of assets. It has, therefore, been decided that where a penalty has been levied on a person under the new provisions for understatement of the value of his assets and the valuation adopted by the Department is disputed by such person in appeal, the recovery of the penalty should be stayed till the disposal of the appeal by the Appellate Tribunal.

FINANCE ACT, 1968-II

  1. While it is necessary for taxpayers to exercise due care in declaring the proper value of their assets as on the relevant valuation date in their returns of net wealth, it is equally necessary for the Department to ensure that assets are valued in wealth-tax proceedings on an objective basis, in a fair and reasonable manner, in accordance with the relevant provisions in the Wealth-tax Act and Rules and in conformity with recognised principles of valuation. Where, there is a difference of opinion between the Wealth-tax Officer and the taxpayer in regard to the valuation of an asset, the valuation adopted in the assessment should be adequately supported by relevant facts and data.

FINANCE ACT, 1968-II

  1. Certain aspects of the implementation of the new provisions for levy of penalty for concealment or understatement of wealth were dealt with by the Deputy Prime Minister in his speech in Lok Sabha on 29-4-1968 at the time of moving the Finance Bill, 1968, for consideration by Lok Sabha. His observations in the matter, which are cited below, have to be carefully kept in view :

�Among the proposals relating to direct taxes, the one which has revoked the maximum comments is the increase in penalties leviable under the Wealth-tax Act for concealment of wealth. The purpose underlying the proposals is too obvious to be disputed. The real cause of concern seems to be that honest assessees may have to suffer hardship in the course of implementation. I would straightaway agree that there can be differences in opinion even among experts on the proper value of an asset, and that, therefore, concealment should not be too readily presumed when the assessed value of an asset is greater than the value return. It will, therefore, be necessary to ensure that the taxpayer, who has made an honest effort to value his assets properly, is not penalised and that in any event penalty is collected only after the correct value has been determined by an independent authority. I propose, therefore, to increase from 20 per cent to 25 per cent the permissible margin of difference between wealth assessed and wealth returned before the onus of proof in penalty proceedings is shifted from the Revenue to the taxpayer, while extending this principle to concealment of wealth through understatement of the value of any asset and overstatement of the value of any debt. Further there should ordinarily be no occasion for the levy of penalty for understatement of the value of an asset in cases in which the assessee supports his valuation by the report of an approved valuer and the taxpayer can thus readily protect himself from the possibility of penalty proceedings. In due course a departmental valuation organisation will be set up, and when this is done, the service of the official valuers – whose valuation will be naturally binding on the  tax authorities – will be available to taxpayers also. I propose to have administrative instructions issued that penalty for concealment of wealth through undervaluation of assets should be recovered only after the valuation has been adjudicated upon by the Appellate Tribunal. I am sure that Hon�ble Members will agree with me that, given these safeguards, the honest will have no difficulties. If those who have hitherto not taken the trouble to value their assets carefully as is their obligation, now do so, a useful purpose will have been served by the proposed provision. I hope it will be appreciated that people having assets should not be above knowing within  reasonable variation as to what their assets are really worth. But those who dislike this mundane drudgery can hand over the task to approved valuers and the official valuation machinery.�

JUDICIAL ANALYSIS

EXPLAINED IN – Paragraph 15 was quoted in WTO v. Smt. Sudha Chopra [1987] 23 ITD 552 (Delhi). The Tribunal observed.

�13. Though there is no change in the circular, paragraph 15 of which we have reproduced in this order, neither the same has been withdrawn the question would arise whether it would be applicable in relation to Explanation 4, which is referred to by the AAC, when the relevant provisions of 1968 were contained in Explana�tion I(1) of clause (c) of sub-section (1) of section 18 of the Act.

**                                               **                                                         **

  1. The answer would be that though the provisions seem differ�ent, the purport is the same, i.e., once there is difference in the returned and the assessed wealth of over 25 or 30 per cent, then the onus to prove innocence shifts on the assessee and the revenue is absolved of the responsibility of establishing any guilt.

**                                               **                                                         **

  1. Therefore, after giving our thoughtful moments and holding that the present case came within the ambit of the exceptions as stated in para 15 of the circular (supra), we hold that the ultimate decision of the learned Commissioner (Appeals) to cancel the penalty has been correct, though reasons stated are differ�ent.� (pp. 558-559).

 FINANCE ACT, 1968-II

Rate schedule in the case of individuals and HUFs

  1. Self-servicing tax table – The rate schedule or ordinary wealth-tax in the case of individuals and Hindu undivided families has been expressed in the form of a self-servicing tax table in order to facilitate calculation of the wealth-tax payable. This tax table specifies for each range of net wealth, the percentage rate of ordinary wealth-tax leviable on the uppermost slab of wealth and also the amount of wealth-tax chargeable on the net wealth in the preceding slab, or slabs, if any. The amount of wealth-tax payable is arrived at by adding to this amount, the wealth-tax calculated at the specified percentage rate on the net wealth in theuppermost slab.

FINANCE ACT, 1968-II

  1. Increase in the rates of ordinary wealth-tax on wealth in higher slabs – Further, the Finance Act, 1968 has increased the rates of ordinary wealth-tax in the case of individuals and Hindu undivided families on net wealth in the slabs over Rs. 10 lakhs by � per cent of the net wealth in such slabs, i.e., from 2 per cent to 2.5 per cent on wealth in the slab of Rs. 10,00,001�Rs. 20,00,000 and from 2.5 per cent to 3 per cent on wealth in the slab over Rs. 20,00,000. This increase in the rates of ordinary wealth-tax has been made in the context of the discontinuance by the Finance Act, 1968, in the case of non-corporate taxpayers, of the separate levy of unearned and earned income surcharges on current incomes on which advance tax is payable or tax is deductible at source during the financial year 1968-69. The revised rates of ordinary wealth-tax are effective from 1-4-1969, i.e.,for and from the assessment year 1969-70.

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