Wealth-tax deduction of unpaid income-tax liability is barred when the debt remains outstanding beyond twelve months.

Income-tax liability is treated as a debt for wealth-tax purposes under section 2(m) of the Wealth-tax Act, 1957, but deduction is denied where the liability falls within the statutory exclusions. The text explains that clause (iii)(b) bars deduction if the amount remained outstanding for more than twelve months on the valuation date, and that a later formal order following final adjudication does not restart that period. It also notes that, under clause (iii)(a), the debt remains outside deduction where the amount was outstanding on the valuation date and was disputed in appeal, revision or similar proceedings. The disputed tax liability was therefore not deductible in computing net wealth.

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Issues: (i) Whether the assessee's income-tax liability was deductible as a debt in computing net wealth under section 2(m) of the Wealth-tax Act, 1957, or was excluded by section 2(m)(iii)(a) or section 2(m)(iii)(b). (ii) Whether, on the valuation dates, the liability remained outstanding for more than twelve months so as to attract the statutory bar.

Issue (i): Whether the assessee's income-tax liability was deductible as a debt in computing net wealth under section 2(m) of the Wealth-tax Act, 1957, or was excluded by section 2(m)(iii)(a) or section 2(m)(iii)(b).

Analysis: Income-tax liability is a debt for purposes of section 2(m), but deduction is denied where the liability falls within clause (iii). Under section 2(m)(iii)(a), the Revenue must show both that the amount was outstanding on the valuation date and that it was claimed in appeal, revision or other proceeding as not payable. Although the assessee's challenge to the tax liability had been finally rejected earlier, the Court held that the exclusion under clause (a) was not the real basis for denial because the demand had already become operative and remained unpaid. Under the scheme of the Wealth-tax Act, the debt was deductible only if it did not attract the statutory exceptions.

Conclusion: The liability was a debt, but it was not deductible once the statutory exclusion operated.

Issue (ii): Whether, on the valuation dates, the liability remained outstanding for more than twelve months so as to attract the statutory bar.

Analysis: The Court held that the liability had been quantified and demanded long before the relevant valuation dates, and the assessee had not paid it. The later formal order made in conformity with the earlier final adjudication did not reset the period for section 2(m)(iii)(b). The assessment remained enforceable throughout the pendency of the reference and appeal, and section 66(7) of the Indian Income-tax Act, 1922 required tax to be paid in accordance with the assessment notwithstanding the reference. Accordingly, the unpaid tax had remained outstanding for more than twelve months on the valuation dates.

Conclusion: The statutory bar in section 2(m)(iii)(b) applied, and the amount was not deductible.

Final Conclusion: The assessee was not entitled to deduct the disputed tax liability in computing net wealth for the assessment years in question, and the claim for deduction failed in its entirety.

Ratio Decidendi: A quantified and demanded income-tax liability, if unpaid for more than twelve months on the valuation date, is excluded from deduction under section 2(m) of the Wealth-tax Act, 1957, and a later formal order made in consequence of prior final adjudication does not postpone the commencement of the statutory period.

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