Tilde expansion gets automatically disabled in shell scripts

[raj]

Configuration Information [Automatically generated, do not change]:
Machine: i386
OS: linux-gnu
Compiler: gcc
Compilation CFLAGS:  -DPROGRAM='bash' -DCONF_HOSTTYPE='i386' 
-DCONF_OSTYPE='linux-gnu' -DCONF_MACHTYPE='i386-redhat-linux-gnu' 
-DCONF_VENDOR='redhat' -DSHELL -DHAVE_CONFIG_H  -D_GNU_SOURCE 
-D_FILE_OFFSET_BITS=64  -I.  -I. -I./include -I./lib -I/usr/include -O2 
-march=i386 -mcpu=i686
uname output: Linux powai 2.2.16-22 #1 Tue Aug 22 16:49:06 EDT 2000 i686 unknown
Machine Type: i386-redhat-linux-gnu

Bash Version: 2.04
Patch Level: 11
Release Status: release

Description:
        [Detailed description of the problem, suggestion, or complaint.]

Tilde expansion gets automatically disabled when we assign environment
variables to variables inside a shell script (I think)
Specifically consider the following script where I am attempting to
reproduce some functionality of the "which" command

#!/bin/bash
PATH=~:~/bin
for foo in `echo $PATH | /bin/sed 's/^:/.:/
                                   s/::/:.:/g
                                                       s/:$/:./
                                                                   s/:/ /g'`
do
set -x
    if test -f $foo/bar
        then
            echo $foo/bar found
        exit
    fi
done

Here is the output
+ set -x
+ test -f /home/raj/bar
+ set -x
+ test -f /home/raj/bin/bar

However if I do not assign to PATH inside the script by commenting out the
first line of this script after the shebang line, here is the output:

+ set -x
+ test -f '~/bar'
+ set -x
+ test -f '~/bin/bar'

Notice that the shell is automatically disabling tilde expansion here.

Repeat-By:
        [Describe the sequence of events that causes the problem
        to occur.]

Fix:
        [Description of how to fix the problem.  If you don't know a
        fix for the problem, don't include this section.]