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Issues:
1. Interpretation of provisions of Explanation II of the Wealth-tax Rules, 1957 regarding the deductibility of advance tax paid from the liabilities side of the balance-sheet for valuation of shares. 2. Correct treatment of advance tax paid in relation to tax liability for computing the market value of unquoted equity shares. Analysis: The judgment by the High Court of GAUHATI dealt with the interpretation of Explanation II of the Wealth-tax Rules, 1957 concerning the deductibility of advance tax paid from the liabilities side of the balance-sheet for the valuation of shares. The case involved two questions referred by the Income-tax Appellate Tribunal at the instance of the Revenue. The primary issue was whether the provision for taxation appearing on the liabilities side should be reduced by the advance tax paid appearing on the assets side for the purpose of valuing shares under rule ID of the Wealth-tax Rules. The Tribunal had directed that the provision for taxation should not be reduced by advance tax paid, leading to a dispute on the correct method of computing the value of shares. The Court analyzed the relevant provisions of Explanation II of the Rules, specifically focusing on II(i)(a) and II(ii)(e). Explanation II(i)(a) states that advance tax paid under the Income-tax Act shall not be treated as an asset, while II(ii)(e) deals with the provision for taxation in the balance-sheet not to be treated as a liability to the extent of the excess over the tax payable with reference to the book profits. The Court emphasized that the purpose of these provisions is to ensure that the valuation of shares is not affected by an inflated tax liability. The Court held that the advance tax paid should be deducted from the total tax liability for arriving at the correct tax liability under Explanation II(ii)(e). It stated that ignoring the advance tax paid would result in an incorrect valuation of equity shares. The judgment emphasized that the net tax liability after deducting the advance tax paid should be considered for computing the value of shares, as reflected in the balance-sheet. The Court's interpretation aimed to prevent an artificial increase or reduction in the value of shares due to incorrect treatment of tax liabilities. In conclusion, the Court answered the reference in favor of the Revenue and against the assessee, highlighting the importance of correctly accounting for advance tax paid in determining the tax liability for the valuation of shares. The judgment clarified the application of Explanation II of the Wealth-tax Rules to ensure a fair and accurate assessment of the market value of unquoted equity shares.
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