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Issues involved: Interpretation of Wealth-tax Act, 1957 regarding deduction of loan liability towards purchase of shares exempt from tax under section 5(1)(xxiii).
Summary: The High Court of Rajasthan addressed a reference under section 27(1) of the Wealth-tax Act, 1957, regarding the deduction of loan liability for the purchase of shares of a company. The case involved whether the entire loan amount should be allowed as a deduction when purchasing shares exempt from tax under section 5(1)(xxiii) of the Act. The facts of the case revealed that the assessee, a Hindu undivided family, initially held shares fully covered by exemption under section 5(1)(xxiii) of the Act. Subsequently, the assessee acquired additional shares using borrowed funds. The Wealth-tax Officer disallowed the deduction of the borrowed money for the purchased shares based on section 2(m)(ii) of the Act. The Appellate Assistant Commissioner allowed a pro rata adjustment of the loan liability towards both taxable and exempted shares. The Tribunal dismissed the Department's appeal, holding that the entire loan liability should be deducted from the value of taxable shares. The Department argued that only a proportionate amount of debt could be deducted as per section 2(m)(ii) of the Act, citing relevant case law. In response, the assessee referred to a circular issued by the Department in 1977, stating that the entire debt should be deducted, which was beneficial to the assessee. The Court noted the circular's binding nature on the Department as per legal precedents. Relying on authoritative observations and previous judgments, including the Full Bench of the Gujarat High Court, the Court upheld the Tribunal's decision that the entire loan liability should be deducted from the value of taxable shares. The Court found in favor of the assessee, emphasizing that the circular's guidance should be followed, and the Department was bound by it. The question was answered in the affirmative against the Department and in favor of the assessee.
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