Tax liability raised after valuation date remains deductible debt in net wealth computation under Wealth-tax law.

Income-tax and wealth-tax liabilities for earlier years were deductible as debts in computing net wealth where the tax demand was created only after the valuation date. Section 2(m)(iii)(a) of the Wealth-tax Act, 1957 applies only when a tax demand has become outstanding pursuant to an order under the taxing statute and notice of demand has been served; a liability raised after the valuation date is not outstanding on that date and cannot be excluded from deduction as a debt. The reference was answered in the affirmative, in favour of the assessee and against the Department.

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Issues: Whether income-tax and wealth-tax liabilities for earlier years, in respect of which the demand was created after the valuation date, were deductible as debts in computing net wealth for the relevant assessment year.

Analysis: The reference was governed by section 27(1) of the Wealth-tax Act, 1957. The controlling principle was that section 2(m)(iii)(a) of the Wealth-tax Act, 1957 applies only when a tax demand has become outstanding in consequence of an order under the taxing statute and a notice of demand has been served. If the demand is raised after the valuation date, the amount cannot be treated as outstanding on that date, and the Department cannot invoke the provision to deny deduction of the liability as a debt in the computation of net wealth.

Conclusion: The liabilities were deductible as debts despite the demand having been created after the valuation date, and the answer to the referred question was in the affirmative, in favour of the assessee and against the Department.

Ratio Decidendi: A tax liability is deductible as a debt in computing net wealth if the notice of demand is served only after the valuation date, because such liability is not "outstanding" on that date for the purpose of section 2(m)(iii)(a) of the Wealth-tax Act, 1957.

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