The entire loan liability incurred for the purchase of shares can be deducted from the value of the taxed shares and not on pro rata basis.

1. - This is a reference under section 27(1) of the Wealth-tax Act, 1957 (hereinafter to be called as "the Act"), made by the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, at the instance of the Commissioner of Wealth-tax, Jodhpur, for answering the following question of law, namely :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the entire amount of loan liability of the assessee, towards purchase of 1,150 shares of the Bank of Rajasthan Ltd., should be allowed as a deduction while computing the net value of the shares of the said company held by the assessee ignoring any deduction of the said loan liability which is attributable to any part of the value of the said shares that is otherwise exempt from tax under section 5(1)(xxiii) of the Wealth-tax Act, 1957 ?"

2. The facts of the case giving rise to this reference may be summarised thus. The case relates to the assessment year 1974-75. The assessee is a Hindu undivided family. It was originally having 500 shares of the Bank of Rajasthan Ltd., the value of which was fully covered by the exemption under section 5(1)(xxiii) of the Act. Subsequently, the assessee purchased 1,150 shares out of borrowed money. The Wealth-tax Officer held that the borrowed money invested for the purchase of 1,150 shares cannot be allowed as a deduction in view of the provisions of section 2(m)(ii) of the Act. On appeal, the Appellate Assistant Commissioner of Wealth-tax held that the amount of loan liability should be adjusted pro rata towards both the taxable value and the exempted value of the shares. The Department preferred a second appeal before the Tribunal. The appeal was dismissed and the cross-objections were allowed by the learned Tribunal by its order dated February 29, 1980, holding that the loan liability should be allowed in to to from the value of the taxed shares and not on proportionate basis as has been held by the Appellate Assistant Commissioner of Wealth-tax. Hence this reference.

3. It has been contended by learned standing counsel for the Department that it is clear from the provisions of section 2(m)(ii) of the Act that the entire amount of debt could not be deducted while computing the net wealth and only the proportionate amount of the debt could be deducted. He relied upon the decision in CIT v. Vaidyanathan [1985] 153 ITR 11 (Mad) [FB] and Srinivasan v. CWT [1980] 123 ITR 464 (Mad) in support of his contention.

4. In reply, it has been contended by learned counsel for the assessee that the Department has issued a circular on this matter in the year 1977, it has not been referred to in the rulings relied upon by the Department, it is printed at Serial No. 725 page 1426 in "Direct Taxes Circulars (1985 edition)" published by Taxmann and, according to it, the entire amount of debt was to be deducted from the aggregate amount of wealth of the assessee and the Department is bound by it. He also relied upon CIT v. M.N. Rajam [1982] 133 ITR 75 (Mad) and CIT v. Ch. Satish [1982] 133 ITR 834 (Mad).

5. It is not disputed that the question referred to is a pure question of law. The relevant portion of section 2(m) of the Act runs as under :

"(m) 'net wealth' means the amount by which the aggregate value computed in accordance with the provisions of this 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 other than-...

(ii) debts which are secured on, or which have been incurred in relation to, any property in respect of which wealth-tax is not chargeable under this Act ; and..."

6. The said Circular No. 1070 dated June 28, 1977, runs as follows :

"The Board have also examined the question as to how the deduction in respect of debts which are secured on, or have been incurred in rel