Dr. B.P. Saraf, J.
1. By this reference under section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal has referred the following question of law to this Court for opinion at the instance of the revenue :
'Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the assessee is entitled to the deduction of Municipal taxes of Rs. 28,687/- which pertained to the period prior to the previous year relevant to the assessment year 1976-77 for which relevant notice of demand dated 20-10-1975 in the relevant accounting year?'
2. The controversy in this reference pertains to assessment year 1976-77, the relevant previous year being the year ended on 31st March, 1976. The assessee filed a return of income for the above assessment year on 9th September, 1976, disclosing total income of Rs. 38,970/-. The above total income included net income of Rs. 13,669/- under the head 'income from house property'. On examination of the return, the Income-tax Officer found that in computing her house property income during the assessment year under consideration, the assessee deducted a sum of Rs. 28,687/- being Municipal taxes payable as per demand notice dated 20th October, 1975 received by the assessee during the relevant previous year on 4th December, 1975. Though the demand of Municipal taxes raised by the above demand notice was relaxable to earlier previous years, the assessee claimed deduction of the same (SIC) computation of her income for the above assessment year on the ground these the demand notice for the payment of the same had been issued by the Municipal Corporation and received by the assessee in the previous year relevant to the assessment year under consideration. The Income-tax Officer did not allow the deduction on the ground that the demand did not related the previous year relevant to the assessment year under consideration. Aggrieved by the order of the Income-tax Officer, the assessee appealed to the Appellate Assistant Commissioner of Income-tax. Before the Appellate Assistant Commissioner, it was contended by the assessee that though the Municipal taxes related to earlier years, the liability on account thereof accrued in the relevant previous year on receipt of the demand notice from the Municipality by the assessee which entitled her to claim deduction in computing her house property income of that year. The Appellate Assistant Commissioner accepted the above contention of the assessee. He held that though the liability to pay the Municipal taxes amounting to Rs. 28,687.00/- related to earlier years, it accrued in the relevant previous year on receipt of the demand notice dated 20th October 1975 by the assessee on 4th December 1975 and, therefore, it was an allowable deduction in computation of her house property income for the relevant assessment year. He, therefore, allowed the appeal of the assessee and directed the Income-tax Officer to accept the claim of the assessee for deduction of the above amount of Municipal taxes. The appeal of the revenue against the order of the Appellate Assistant Commissioner was rejected by the Income-tax Appellate Tribunal ('Tribunal'). Hence this reference at the instance of the revenue.
3. We have heard the learned Counsel for the revenue Mr. R.V. Desai. There is no dispute about the fact that in determining the annual value of any property for the purposes of section 22 of the Act, Municipal taxes levied in respect of that property and borne by the owner are deductible. The only controversy is whether deduction can be allowed of Municipal taxes pertaining to earlier assessment years the demand in respect of which has been raised in the relevant previous year.
4. We have perused the provisions of sections 22 and 23 of the Act. Section 23(1) of the Act deals with the manner of determination of the annual value of the property for the purpose of section 22 of the Act. Section 23(1), so far as relevant, as it stood at the material time, reads as follows :
'23. Annual value how determined.---(1) For the purposes of section 22, the annual value of any property shall be deemed to be-
(a) the sum for which the property might reasonably be expected to let from year to year : or
(b) where the property is let and the annual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in Clause (a), the amount so received or receivable :
Property that where the property is in the occupation of a tenant, the taxeslevied by any local authority in respect of the property shall, to theextent such taxes are borne by the owner, be deducted in determiningthe annual value of the property:'
It is clear from a reading of the first proviso to section 23(1) of the Act that in computing the annual value of the property, the assessee is entitled to claim deduction of taxes levied by the Municipal Corporation in respect of the property in the relevant accounting year. What is crucial is the 'levy'. The deduction is available only when such taxes are levied. It was immaterial whether the assessee paid the same or not. This position, however, has been changed now by substitution of the above proviso by the Taxation Laws (Amendment) Act, 1984 with effect from 1st April, 1985. As a result, for and from the assessment year 1985-86, deduction in respect of taxes levied by the local authority is to be allowed in determining the annual value of the property only in the previous year in which such taxes are actually paid by the owner. However, in the present case, we are not concerned with the above amendment because the controversy pertains to the assessment year 1976-77. The real controversy is whether Municipal taxes pertaining to earlier years demanded during the relevant previous year are allowable as a deduction in the computation of the annual value of the house property for the relevant assessment year. As state earlier, the contention of the revenue is that the assessee is entitled to claim deduction only of the amount relating to the relevant previous year and not of taxes relating to earlier years even if the demand on a account thereof was served on the assessee during the relevant previous year. This contention of the revenue, in our opinion, is not tenable in the present case, because under the provisions of the Mumbai Municipal Corporation Act, 1888, Municipal taxes are payable on receipt of the demand notice from the Corporation. The accrual of liability on account of Municipal taxes is dependent on the receipt of the demand notice. There is no obligation on the owner to pay the Municipal taxes voluntarily without the receipt of demand notice. In other words, Municipal taxes can be said to be levied under the Mumbai Municipal Corporation Act only when the demand notice is served on the owner. Till then there is no accrued liability on account of Municipal taxes. In that view of the matter, we are of the clear opinion that Municipal taxes pertaining to earlier years demanded during the relevant previous year would also be deductible in computing the annual value of the house property of the year in which the demand is made.
5. We are supported in our above conclusion by the decision of the Madras High Court in C.I.T. v. L. Kuppuswamy Chettiar, : 132ITR416(Mad) , and the decision of the Karnataka High Court in C.I.T. v. Shankaranarayan Hotels Pvt. Ltd. : 198ITR373(KAR) . We are in full agreement with the above decisions.
6. In view of the above, the question referred to us is answered in the affirmative i.e. in favour of assessee and against the revenue. The reference stands disposed of accordingly with no order as to costs.
7. Reference answered in favour of assessee.