Balasubrahmanyan, J.:— The assessee in this income-tax reference is a film distribution company. The assessee owns certain lands and owns certain buildings within the limits of Madras City. As for the lands, the assessee was liable to urban land tax. As for the buildings, the assessee was liable to pay municipal property tax.
2. In so far as urban land tax was concerned, although the relevant statute was passed in 1966 and it imposed urban land tax retrospectively with effect from July 1, 1963, there were court proceedings in which the validity of that Act was in question. The Act was held to be valid ultimately by the decision of the Supreme Court in Asst. Commr. of Urban Land Tax v. Buckingham and Carnatic Co. Ltd., [1970] 75 ITR 603. When once the Supreme Court declared the Act to be valid, the assessee as owner of urban land was clearly chargeable to urban land tax. The liability-started from July 1, 1963, onwards. For a period of 7 years or so it amounted to Rs. 64,222. In the account year ended March 31, 1971, relevant to the assessment year 1971-72, the assessee-company claimed to deduct the entire amount of Rs. 64,222 as an admissible deduction in the computation of its business profit. The deduction claimed was, however, refused by the ITO on the ground that the claim related to earlier years. The assessee went in appeal before the AAC and reiterated its claim for deduction. At that stage, however, the assessee limited its claim to the total sum of Rs. 48,762. The AAC took the view that the assessee was entitled to a deduction only in respect of urban land tax pertaining to the year ended March 31, 1971. He disallowed the rest of the liability claimed, which amounted to Rs. 41,330. The assessee filed a further appeal to the Tribunal claiming the balance of the amount. The Tribunal followed an earlier decision of theirs and allowed the claim of the assessee in full. They held that the method of accounting followed by the assessee was the mercantile method and, therefore, the assessee was entitled to make a provision for the entire urban land tax liability of Rs. 41,330.
3. The Commissioner has now challenged this determination of the Tribunal in the following question of law:
“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee is entitled to deduction of the entire urban land tax paid during the account year even though a part of it related to the earlier years?”
4. The answer to this question is concluded by a judgment which we have rendered earlier today in T.C Nos. 1517 and 1518 of 1977 (CIT v. Srinivasa Iyer (T.S)—see p. 526 supra). We took the view that having regard to the nature of the tax imposed under the Urban Land Tax Act and having further regard to the circumstance that till the Supreme Court rendered their decision the liability for payment of this tax was as good as non-existent, it must be held that the liability had accrued only thereafter. We further held that any assessee following the mercantile method of accounting is entitled to make a provision for urban land tax liability in the year in which it was known as a definite liability, even without waiting for an actual assessment to be made and a demand to be raised by the authorities concerned. Following that decision, we hold that the Tribunal was right in this case in allowing the entire liability claimed by the assessee during this year. Our answer to this question is, therefore, in the affirmative and against the Department.
5. Another question which we are asked to consider in this reference is about the claim of the assessee for deduction of municipal property tax in the same assessment year 1971-72. The question of law which has been-sent by the Tribunal on this aspect of the case reads as follows:
“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the entire municipal tax paid during the year for audiographic theatre and Gemini Studios is an admissible deduction even though part of it related to the earlier years?”
6. The facts relating to this claim for deduction are not in dispute. The assessee paid during the relevant year ended March 31, 1971 a total sum of Rs. 16,78980 as and towards municipal property tax levied by the Corporation of Madras. This amount represented municipal property tax due on two buildings owned by the assessee. The tax related to as many as five half years, spanning the period October 1, 1968, to March 31, 1971. The ITO took the view that property tax for the two half years alone included in the account year ended March 31, 1971, was eligible for deduction in this assessment. The two half years in question were April 1, 1970, to September 30, 1970, and October 1, 1970, to March 31, 1971. The tax for the two half-years amounted to Rs. 6,715.89. Allowing this sum as a deduction, the ITO disallowed the balance of Rs. 10,074. The disallowance covered the earlier three half years, October 1, 1968, to March 31, 1969, which related to the year ended March 31, 1969, relevant to the income-tax assessment year 1969-70, and two other half years relevant to the income-tax assessment year 1970-71, namely, April 1, 1969, to September 30, 1969, and October 1, 1969, to March 31, 1970. The assessee appealed against the disallowance of Rs. 10,074. The Tribunal, before whom the matter was ultimately taken up in appeal, accepted the contentions of the assessee and held that irrespective of the period to which the municipal property tax related, the assessee was entitled to a deduction during the account year in which the property tax was actually paid by the assessee. The correctness of the Tribunal's decision in this regard is challenged before us by the Commissioner in the question of law which we have earlier set out.
7. It seems to us that the answer to the question is clearly against the assessee. The relevant taxing provisions of the Madras City Municipal Corporation Act, 1919, make it quite clear as to when the liability for municipal property tax can be regarded as accruing in any given case. Section 104 of the Act lays down that property tax shall be levied every half year, and shall, save as otherwise expressly provided in Sch. IV to the Act, be paid by the owner of the assessed premises within 15 days after the commencement of the half year. Schedule IV to the Act provides for the administration of the municipal property tax under several rules, detailed and grouped under VI-A of that Schedule. Part 6 of the Schedule lays down general provisions relating to collection of all taxes and rates including municipal property tax. Rule 20(3) in Part 4 lays down that where a notice has not been served either in the half year in which the municipal property tax became due or in the succeeding half year, then the tax for the relevant half year shall not be demanded.
8. Sri Srinivasamoorthy, learned counsel for the assessee, relied on rule 20(3) of the Schedule and submitted that this rule occurring, as it does in Sch. IV, must not only be read with s. 104, but must be read as controlling the provision relating to the timing of the liability of municipal property tax under that section. We agree with the learned counsel's submission that s. 104 must be read subject to the provisions of rule 20(3) of Sch. IV. But even so, we must hold that the liability of a property owner to municipal property tax arises as an accrued liability not later than 15 days after the commencement of each half year to which the tax relates. Rule 20(3) only speaks of the disability attached in the matter of recovery of property tax in a case where the notice of demand has not been served on the property owner either in the half year to which the tax relates or in the immediately succeeding half year. That rule has nothing whatsoever to do with the precise date of accrual of liability. In the case of taxes, as in the case of any other obligation, accrual of liability is one thing, and the actual date when it becomes due or when it is recoverable, is quite another, let alone the actual date of payment. In the present case, the contention of the assessee, which the Tribunal accepted, was that notwithstanding that the municipal property tax accrued every half year in terms of s. 104 of the Act, yet the assessee would be justified in claiming a deduction for that tax as an outgoing or as a charge against profits, without any regard for its time of accrual. We cannot accept this submission as well-founded in view of the clear terms of s. 104 of the Act. This section fixes the liability not only for the purpose of that Act, but by the same token, it does so also for purposes of determining the time of accrual in a mercantile system of accounting. It is easy to see that s. 104 of the Act has been couched in terms in which it might be said that, at the end of the half year concerned, the accrual of liability becomes automatic, as it were. According to the scheme of the municipal property tax, once the annual value of the property is determined, until it is next revised, either under a general revaluation or under any special revaluation, the property tax bearing on that valuation also stands quantified without alteration. This means that with every half year, the tax as originally determined automatically attaches. In the present case, there is no suggestion that the municipal property tax was anything other than that which was payable for the earlier half years, without a change. We are, therefore, satisfied that the property tax for the three half years beginning from October 1, 1968, and ending with March 31, 1970, cannot be claimed as a deduction for the account year concerned in this case, relevant to the assessment year 1971-72. The assessee ought properly to have claimed a deduction in the appropriate years to which the half years relate.
9. Mr. Srinivasamoorthy submitted that this court cannot apply a principle of deductibility of municipal property tax which is different from the principle laid down by this court in regard to the allowance of urban land tax. We do not accept that our decision in this case involves any difference or double standard in applying the rules of deduction of tax liabilities. We hold that the moment the liability to tax in its very nature and character accrues, then that would enable the assessee liable for such tax to claim a deduction in the year of accrual irrespective of when precisely the tax is demanded of him and is paid by him. The claim for deduction may be made either on the basis of a provision made by the assessee in the accounts or even where he fails to make such a provision if the nature of the tax is such that a provision could have been made by him in any given year, the ITO would be bound to grant a deduction in the year in which the liability can be said to properly accrue. It is this principle which we have applied in this very case for considering the precise year in which the urban land tax liability can be said to have accrued. It so happened that the accumulated urban land tax became an accrued liability for the account year with which we are concerned because of the fortuitous circumstance that till the Supreme Court delivered its judgment declaring the validity of the Act, it could not be said that there was any urban land tax liability at all. We may observe in passing that apart from the initial accumulation of liability to urban land tax from the very inception of the Act till the date of the Supreme Court judgment, for the subsequent years any assessee following the mercantile system must necessarily make a provision for urban land tax as and when it accrues due. If the Urban Land Tax Act relates the tax to a particular year, the assessee cannot have a choice of not making a provision for that liability, but allow it to accumulate and then claim a deduction in some future year.
10. Mr. Srinivasamoorthy submitted that in case of any fiscal liability, there may be more than one stage at which it might be said to accrue. Learned counsel said, there is, firstly, a charge or levy, then comes the assessment, and last comes the process of recovery. According to learned counsel, it is entirely within the choice of the assessee to make a provision for tax liability at any of these successive stages, and whether he does make a provision or not, it has got to be allowed without question at any of these stages. Learned counsel referred to the views expressed on these lines by Kanga and Palkhivala, 7th Edn., at p. 870 of vol. I of their work on income-tax. The learned authors express the view that, under the mercantile system of accounting, liability under a fiscal statute should be allowed in the year in which the relevant taxable event takes place. For this proposition, the authors cite the decision of the Supreme Court in Kedamath Jute Mfg. Co. Ltd. v. CIT, [1971] 82 ITR 363. But the authors proceed to state that, alternatively, an assessee may claim a deduction in a subsequent year in which the tax is assessed and the payment is made, although the transaction may pertain to the earlier years. Or, he may even postpone his claim for deduction to the year in which he might lose in appellate proceedings and the levy becomes final.
11. It seems to us that the views last expressed by the authors of the work do not flow from the principles laid down by the Supreme Court in Kedamath Jute Mfg. Co. Ltd. v. CIT having regard to their following observations (p. 367):
“Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter.”
12. In an earlier passage in the same judgment, the Supreme Court observed (p. 366):
“The moment a dealer makes either purchases or sales which are subject to taxation, the obligation to pay the tax arises and taxability is attracted. Although that liability cannot be enforced till the quantification is effected by assessment proceedings, the liability for payment of tax is independent of the assessment…An assessee who follows the mercantile system of accounting is entitled to deduct from the profits and gains of the business such liability which had accrued during the period for which the profits and gains were being computed.”
13. The above passage reflects the general legal position, the particular application of which we have laid down in the foregoing paragraphs as the proper basis for claiming deduction for municipal property tax under the mercantile system of accounting. In the circumstances, our answer to the second question is that the deduction must be limited to the amount actually allowed by the ITO.
14. In the circumstances of the case, however, there will be no order as to costs.