1. This reference under the I.T. Act, 1961, raises a question about the deduction of urban land tax liability as an admissible allowance in the computation of the profits of a joint family business. The facts and circumstances in which the question arises need some elaboration. The assessee-family in this case was a father and son joint family. They carried on business in film making. They ran a cinema studio in Madras. This business possessed assets of various kinds. Amongst them were lands in Madras city, both built and unbuilt. The assessee-family was liable for urban land tax on these lands. The charge to urban land tax is laid under the Urban Land Tax Act, 1966, (Tamil Nadu Act 12 of 1966), for every fasli year beginning from July 1, 1963. Actually, however, this fiscal Act had a lot of starting trouble. There was a delay of many years in the making of assessments, and in the raising of the tax demand on the owners of urban lands, right from 1963 onwards. This was due to the pendency of court proceedings in which the validity of the Act was being challenged. Amongst the impugned provisions of the Act was an enabling provision under which urban land tax authorities had the power of levy of the tax. The tax was determined at a percentage on the market value as determined by the assessing authority. Our High Court struck down this provision as unconstitutional. The ground on which they did so is not very material. For, on appeal by the State Government the Supreme Court reversed the decision of this court and upheld the validity of this measure. The Supreme Court's decision was rendered in 1969. It is reported as Asst. Commr. of Urban Land Tax v. Buckingham and Carnatic Co. Ltd. . All the while, right from 1963 till the Supreme
Court's decision, urban land tax assessments had not been made against most of the owners of lands. The tax liability for every year from 1963 onwards was thus gathering muster. However, when once the Supreme Court upheld the tax, it became, for the first time, possible for the assessing authorities to enforce on all the taxpayers the liability which had accumulated from 1963, the year which marked the commencement of the Act.
2. The assessee-family was amongst the general run of urban land tax assessees against whom no assessments had been made right from the year 1963. For those who could estimate the market value of the lands either by themselves or with expert guidance, it could not have been very difficult to have had a fair idea as to what their commitment was likely to be if and when urban land tax liability was actually laid on them by the assessing authorities. They might have made appropriate provision in their accounts every year for the probable tax liability. In any case, after the Supreme Court's decision was rendered making the way clear for assessments to be made under the Act, the assessee-family might have bestirred themselves and taken stock of the situation and made appropriate provision for urban land tax liability from 1963 up to date, on some reasonable estimate or other of their own. But the assessee-family had passed through structural changes in its own constitution during this period. The family underwent a process of partition by stages. There was first a division in the status between father and son, without a partition by metes and bounds of the properties. After a time, a partial partition took place of some items of family properties. This was followed, after an interval of time, by another partial partition of some other assests. At this stage, the urban land held as assets of the family's film studio business were partially divided and allotted as between the father and the son. The extent of urban land held by the family before the partition was 154 grounds or so in all. Of these, 127 grounds were subjected to partial partition. The remaining 27 grounds were left intact in the family. These lands were later to be partitioned on July 7, 1969, along with a full and final division of all the other joint family assets. This final disruption of the family happened to take place some time after the Supreme Court gave their decision in the urban land tax case in Asst. Commr. of Urban Land Tax v. Buckingham and Carnatic Co. Ltd. . Soon afterwards, the divided father died. It was
only subsequently that the urban land tax authorities levied their assessments from 1963 onwards, and issued the tax demands on the divided son as the surviving member of the family. Under these assessments urban land tax was demanded in the total sum of Rs. 52,069. This amount covered urban land tax liability on the family holdings for seven years, running from the first assessment year under the Urban Land Tax Act, namely, the year beginning from July 1, 1963, up to the last year commencing from July 1, 1969. The tax so determined was paid on behalf of the family on December 18, 1969.
3. By this time, the assessee-family's return for the purpose of income-tax for the assessment year 1970-71 had already been filed. The assessee had always been following, for its cinema studio business, the financial year as its account year. For the last and concluding assessment year 1970-71, however, the family did not have the full run of the whole account year right up to its normal year-end, namely, March 31, 1970, for, as already mentioned, the family had, in the meantime, gone out of existence even on July 7, 1969. That this date marked the complete disruption of the family and the full and final partition of all its properties was recognised by the I.T. Department in an order passed by the officer under s. 171 of the I.T. Act.
4. It was in these circumstances that the ITO proceeded with the income-tax assessment of the assessee-family for the year 1970-71. During the pendency of enquiry by the ITO into the return filed by the assessee, notice of demand for the urban land tax of Rs. 52,059 had been issued and the amount had been paid on behalf of the family. Accordingly, before the ITO concluded the assessment proceedings, a claim was made for deduction of this amount of Rs. 52,059 in the computation of the assessable income for 1970-71.
5. The ITO rejected the assess's claim on the principal ground that urban land tax cannot come in at all as a business deduction. His view of the tax was that it was not a business-oriented tax, but a tax on land-ownership, pure and simple. Even otherwise, and this was the second ground for the disallowance, the officer regarded the amount claimed as deduction by the assessee as relating to prior years.
6. On appeal, the AAC took a different view of the urban land tax liability as a business deduction. He noticed that the items of urban land on which the assessee had to pay urban land tax were part of the assets of the assessee's film studio business, and hence the liability was a proper charge against the profits of that business. He, however, took the view that in so far as the assessment in question was concerned, for the assessment year 1970-71, the entire sum of Rs. 52,059 was not deductible. He pointed out that the assessee's accounts were being maintained under the mercantile system of accountancy. Purporting to follow that system, the Asst. Commr. held that the urban land tax referable to the last year alone would be a proper charge against that year's profits. In that view, he remitted the matter to the ITO to find out the precise amount of urban land tax liability for the year so as to restrict the deduction to that amount.
7. Against this decision of the AAC, the Department did not file any appeal to the Tribunal. The acceptance of the AAC's order implied that they did not question, in principle, the view of the AAC that the deductibility of the urban land tax in this case has got to be considered only on the basis of the assessee's mercantile method of accounting. The assessee, however, appealed to the Tribunal on the aspect of the case held against it. It was contended on behalf of the assessee that there was no warrant for the Assistant Commissioner restricting the deduction to the urban land tax liability for the last year alone.
8. The Tribunal agreed, in one sense, with the assessee's contention. They referred to the legislative and judicial history of the Urban Land Tax Act and also to the history of the partition in the assessee's family. They took the view that under the mercantile system of accounting, which the assessee was pursuing and which governed the computation of profits of the assessee's business, the assessee could very well have made a provision for urban land tax, when once it became clear after the Supreme Court ruling that there was nothing in the way of the State Government authorities going ahead with the assessments under the Urban Land Tax Act. The Tribunal said that this might have been done immediately after the Supreme Court decision on the validity of the Act. The Tribunal observed that right at this time, although not earlier, the assessee could have made a provision in its accounts for probable urban land tax liability and asked for a deduction of the provision for such liability even though actual notices of demand had not yet been issued and the tax had not yet been paid. The Tribunal, howeverm further proceeded to hold that the fact that the assessee had not made a provision in its accounts for the urban land tax liability, did not made a provision in its accounts for the urban land tax liability, did not rule out the deduction altogether. Quoting a ruling of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT  82 ITR 363, the Tribunal held that the assessee-family was as much entitled to deduction in this case, as it would have been if it had made actual provision for the liability in the final accounts of the joint family just before the disruption.
9. On the basis of this reasoning, however, the Tribunal did not straight-way allow the assessee's appeal and direct the deduction of the entire urban land tax liability of Rs. 52,059. On the contrary, the Tribunal thought that the assessee was ineligible for the deduction in its entirety. This view of the Tribunal was based on quite a different ground altogether. The Tribunal found that when the urban land tax liability became a certain liability which was soon after the Supreme Court's judgment, dated April 11, 1969, the assessee-family was in existence. However, while the family, as such, existed, it did not possess as its holdings the entire 154 grounds of urban land. The Tribunal noticed that the partial partition which occurred by them had taken out of the family holdings all but 27 grounds. Basing themselves on this fact and the evolution, by stages of the family partition, the Tribunal held that the assessee-family would be entitled for deduction only of the urban land tax liability as respects 27 grounds. They held that this was a limiting factor for the entire period. Having taken this view, the Tribunal remitted the case to the ITO to work out the proportionate part of Rs. 52,059 relating to 27 grounds even so far as the last year of the family was concerned.
10. Against this order of the Tribunal, the Department demanded a reference to this court. The assessee too applied for a cross-reference considering that the Tribunal had limited the deduction of the liability for urban land tax on 27 grounds alone. The Tribunal has now referred to us a consolidated question of law bringing out the respective cases of both the parties as follows :
"Whether, on the facts and in the circumstances of the case, the sum of Rs. 52,059 or any lesser sum was allowable as deduction being urban land tax paid during the year ?"
11. The question of law as drafted by the Tribunal speaks of urban land tax paid during the year. This is to misunderstand the facts as well as the nature of issue to be decided in this case, For, as earlier mentioned, the assessee-family was having the financial year as it accounting year. The present reference relates to the assessment year 1970-71. Normally, the assessee's account year would be the period of twelve months from April 1, 1969, to March 31, 1970. That would be the account year for the assessment year 1970-71. The urban land tax demand for Rs. 52,059 was made on the assessee on December 18, 1969, and was paid subsequently. If the relevant accounting year is regarded as ending on March 31, 1970, then the demand of tax might be regarded as having been paid during the year. But, as earlier mentioned, the assessee-family had become dissolved even on July 7, 1969, long before the normal end of the account year. Therefore, there could be no question of the urban land tax having been "paid during the year" as suggested in the question of law framed by the Tribunal. Besides, the pointed issue in this reference is, whether irrespective of actual payment of urban land tax, the liability as such warrants a deduction in the year of account. This important aspect of the question on a vital controversy between the parties has not been brought out in the Tribunal's draft of the question of law.
12. Before us, Mr. Jayaraman, the learned counsel for the Department, did not argue that urban land tax cannot come in as a business deduction at all for any assessee, for, the position that it can be claimed as a business outgoing was all but conceded by the Department in an earlier case before this court in CIT v. Woodlands Hotel  128 ITR 603 (Mad). Mr. Jayaraman did not also dispute the position in the present case that the method of accounting regularly employed by the assessee-family was the mercantile method, and that normally that method will have to be followed in the income-tax assessment for ascertaining the business profits in any given year. The point which Mr. Jayaraman urged, however, was that even with a mercantile system of accounting on hand, the assessee could only claim a deduction for urban land tax in the year in which it was actually paid on the basis of a demand notice issued by the urban land tax urban land tax authorities. Accourding to him, there was no question of the accrual of the urban land tax at any time earlier. than it is actual payment. In support of this argument, the learned counsel relied on the decision which we have just now referred, namely, CIT v. Woodlands Hotel  128 ITR 603 (Mad).
13. Mr. Srinivasamoorthy, learned counsel for the assessee, however, urged that in the case relied on by Mr. Jayaraman, the claim for deduction of urban land tax for more years than one was made, but the claim for a number of years was, however, made in the year in which the assessee had actually paid the amount. Learned counsel said that it was on those facts that this court had tp decided the issue in the Woodlands Hotel's case  128 ITR 603 (Mad). He further pointed out that while deciding the case, the court had not to go into any aspect of the deductibility of any amount of urban land tax under one or other of different methods of accounting, least of all, under the mercantile system of accountancy. Mr. Srinivasamoorthy submitted that the question in the present case must rather be decided on the basis of the method of accounting, and in accordance with the ruling rendered by the Supreme Court Kedarnath Jute Mfg. Co. Ltd. v. CIT  82 ITR 363. In that event, according to learned counsel, there could not be any objection on principle to the assessee-family seeking to claim a deduction for urban land tax in the year in which the urban land tax liability was known for certain as an accrued liability, although it did not happen to be paid in that year. Learned counsel drew our attention particularly to the exigencies of the situation under which the claim had to be made by the assessee-family in the course of assessment proceedings concerning the accounting year relevant to the assessment year 1970-71. He pointed out that if the year of actual payment of tax were regarded as a criterion, there was no way by which the assessee-family could claim the deduction, for, the payment happened to be made after the family ceased to exist.
14. Having heard the arguments addressed in the manner aforesaid by both the parties, it seems to us that the question has to be decided wholly in favour of the assessee both on facts and on principle. Here is a case where the liability for urban land tax was as good as non-existent till the Supreme Court expressed themselves on the validity of the Act. The High Court's decision, which was under appeal, had struck down the machinery provision relating to the determination of the market value. This had the effect of emasculating the entire provisions of the Act. So, the owners of the urban land like the assessee might well be pardoned for not giving any thought to the urban land tax liability at all till so long as the High Court's judgment ruled as the ruling decision on the validity of the statute, and had not been actually reversed, for, there was still a just chance for it to be affirmed by the Supreme Court. But the situation changed after the Supreme Court rendered their decision. Once the Supreme Court declared that the Act was valid, the assessee and other owners of urban land had to reckon with the provisions of the Act. By that time, however, 7 years had passed. Not only did the urban land tax authorities levy tax with retrospective effect from July 1, 1963, but with the passage of time in between the commencement of the Act and the date of the judgment of the Supreme Court, the tax liability had accumulated without assessments being made for nearly 7 years. In other words, there was no liability before the Supreme Court's judgment came, but the moment the judgment was delivered the entire liability had to be reckoned with, it comprehended not merely the tax liability for the particular year concerned, but also all the accumulated tax liability right from July 1, 1963. We are, therefore, satisfied that the assessee could have made provision for liability only after the Supreme Court's decision. If the assessee had made such a provision in its accounts either immediately following the Supreme Court's judgment or on the final closing of the family accounts on July 7, 1969, the assessee would have been entitled to the deduction on the basis of the mercantile method of accounting followed by the assessee regularly for its business. However, the assessee did not, in point of fact make any such provision in its accounts. This book-keeping omission, however, is not material for the claim of deduction. The fact that the assessee had not made any provision in its accounts would not militate against the allowance being granted. The principle would seem to be that it was enough if the system of accounts usually followed by the assessee was such as to allow a provision being made in this regard. The Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT  82 ITR 363, had clearly held that even if an actual provision had not been made, the deduction has to be given as if the accounts contained such a provision. All that is required is a mercantile system of account which allows for accrued liabilities of a kind which accrues before actual payment. It is sometimes said by eminent judges torn by a spiritual conflict within themselves that equity and income-tax are strangers. But the principle decided by the Supreme Court in this case belies the saying. Just like equity, income-tax treats as having done, what ought to have been done. Under the mercantile accounting system, provision must be made foe accrued liability. If provision is, in fact, made, that is sufficient, and the amount provided for will be allowed as deduction. Even if provision is not made, still the claim for allowance will be granted on the principle decided by the Supreme Court, which accordingly to us, is that income-tax law will treat as having been done what ought to be done.
15. Mr. Jayaraman, however, urged that there can be no roomf or introduction of this principle on the facts of this case and for the grant of deduction of urban land tax liability even before a notice of demand had been served on the assessee. The learned counsel's point was that in so far as urban land tax liability was concerned, the date od payment at once marks the accrual of the liability, not a day before. He distinguished the Supreme Court's decision in Kedarnath Jute Mfg. Co. Ltd. v. CIT  82 ITR 363, on the ground that in that case the Supreme Court could very well apply the principle to sales tax liability, on the view that the court took, of the nature of the sales tax as one which attaches the moment a sale takes place. Not so, the liability for urban land tax, accourding to Mr. Jayaraman. He said that the scheme of urban land tax was that liability does not arise till the liability is processed and a demand is raised against the land owner. He relied for this position on the decision of this court in CIT v. Woodlands Hotel  128 ITR 603.
16. We, however, must reject this last argument addressed for the Department. Mr. Srinivasamoorthy for the assessee pointed out that this decision does nor actually conclude the matter against the assessee in this case. We agree with him. In the case decided in CIT v. Woodlands Hotel  128 ITR 603 (Mad), a business deduction was claimed as respect urban land tax for a number of years, but the only position which was argued before the court in that case was whether all that was paid during that year could be deducted in the computation of business profits or only that part of the payment which related to the urban land tax liability for the current year. In considering the question, the Bench adopted an earlier decision rendered by them in CIT v. M. Ct. Muthiah  118 ITR 104 (Mad). That decision had been rendered in the context of s. 24(3)(vii) of the I.T. Act, 1961. This provision relates to the computation of income under the head "Property". It is a peculiar scheme of computation of income under the head "Property". It is based mainly on the annual letting value as reduced by certain express statutory deductions. In CIT v. M. Ct. Muthiah, the question was whether urban land tax, which was actually paid in a given year, can qualify for deduction under s. 24(1)(vii) irrespective of to which year the urban land tax relates. A Bench of this court held that the section would apply, irrespective of the year to which the urban land tax relates, and would render eligible for deduction any amount of urban land tax actually paid during the year.
17. It may be observed that no question arose either in CIT v. M. Ct. Muthiah  118 ITR 104 (Mad) or, for that matter, in the subsequent decision in CIT v. Woodlands Hotel  128 ITR 603 (Mad), about the method of accounting regularly employed by the assessee and the right of the assessee to claim deduction by the simple expedient of making a provision in the accounts for urban land tax liability as a known liability irrespective of a notice of demand being raised by the taxing authorities.
18. Even otherwise, we feel that on the basis of the Supreme Court's decision in Asst. Commr. of Urban Land Tax v. Buckingham and Carnatic Co. Ltd.  75 ITR 603, the assessee would be entitled to deduct the urban land tax liability if he were to make a provision for it in the yeat in which the liability became known to him and became certain, even without having to wait for the actual notice of demand from the urban land tax authorities. In that decision, the Supreme Court had to decide the question as to what the real nature of the impost of the Urban Land Tax Act, 1966, was. Two passages from the judgment of the Supreme Court would render the position clear. They observed (p. 612-613) :
"Tax on lands and buildings is directly imposed on lands and buildings, and bears a definite relation to it For the purpose of levying tax under entry 49, List II, the State Legislature may adopt for determining the incidence of tax the annual or the capital value of the lands and buildings."
19. At the end of the discussion, the Supreme Court concluded as under (p. 614) :
"For the reasons already expressed we hold that in pith and substance the new Act in imposing a tax on urban land at a percentage of the market value is entirely within the ambit of entry 49 of List II and within the competence of the State Legislature"
20. The Supreme Court also had occasion to observe, in the course of their judgment, that the concept of market value on which the tax was based was not for the subjective determination of the assessing authorities. The court referred to the scheme of the Act as well as the particular provision including s. 7 to support their conclusion. Section 7 which provides for filing of return by the owners of land lays down, inter alia :
"the amount which in the opinion of the owner is the market value of the urban land."
21. The Supreme Court also referred to other provisions relating to the procedure for assessment and observed that the market value of the land should be based on evidence produced by the assessee in support of its return as well as other evidence gathered by the assessing authority. These features of the Act, as noticed by the Supreme Court, show that the tax is not based on the subjective determination of the assessing authority of what is considered to be the market value of the lands, but it is a tax on the land itself, but on a measure of value represented by the market value. Having regard to the nature of the Urban Land Tax Act as laid down in the Supreme Court's judgment above quoted, we are satisfied that the assessee, who is maintaining accounts under the mercantile system, would be well within its right in making a claim for deduction for the urban land tax liability even prior to the actual demand being made on it by the concerned taxing authority, and if it should make such a claim, whatever provision it has made would be eligible for deduction as a charge against profits for the purpose of computation of their business income. It is but a very small next step to further hold that even in the absence of any actual provision being made in the assessee's accounts, a deduction would be permissible on the basis of the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT  82 ITR 363.
22. We accordingly reject the contention of the learned counsel for the Department that the decision of this court in CIT v. Woodlands Hotel  128 ITR 603, would stand in the way of the assessee claiming a deduction for urban land tax liability as on July 7, 1969, even before the actual demand for that amount was made by the urban land tax authorities.
23. This takes us on the the other part of the decision of the Tribunal in this case which was to restrict the allowance of urban land tax proportionate to the extent of 27 grounds held by the family as on the date when the urban land tax liability may be held to have become certain on the basis of the decision of the Supreme Court in Asst. Commr, of Urban Land Tax v. Buckingham and Carnatic Co. Ltd.  75 ITR 603. This part of the Tribunal's order and reasoning does not seem to us to be following any single direction or line of reasoning. Under the general law, a joint family governed by the Mitakshare may be regarded as ceasing to exist the moment there is a division in status, partition by metes and bounds being merely a matter of working out the details of the division. Under the I.T. Act, however, mere separation in status is not regarded as putting an end to the integrity of the family as an assessable unit. Under the special provisions of the I.T. Act, unless the property is divided in definite portions, or, as pure Hindu lawyers may phrase it, unless there is a metes and bounds division of the joint family properties, the family will be deemed to continue undivided for all purposes of the I.T. Act. Provision is made under s. 171 of the Act to recognise both a partial partition and a full partition but in either event, the essential requisite under the section is a division of the property, as such, and not merely a separation in status. In their order, the Tribunal had referred to the fact that in the assessee-family the process of division began with a separation in status, followed by partial partition on two successive stages concluded by a full and final partition on July 7, 1969. The records show that the assessee-family claimed the partition of the family as full and complete only with the division on July 7, 1969. It was on this basis also that the ITO passed an order under s. 171 of the Act. It is, therfore, quite clear from these proceedings that for purposes of income-tax, at any rate, the assessee-family must be deemed to have remained undivided till July 7, 1969. This is what s. 171(1) also clearly lays down. The provision is to the effect that a Hindu family being assessed as undivided shall be deemed for the purposes of the Act to continue to be an HUF excepting where and in so far as a finding of partition has been given under s. 171. If so much is granted, then it must follow that the family must be treated as being joint up to July 7, 1969. It may be that preceding the final partition on this date, the family had passed through two earlier stages of partial partition. But then, neither of the partial partitions had been the subject-matter of any proceedings under s. 171 of the Act. It. follows, therefore, that for the purposes of the proceedings under the I.T. Act, relating to this assessee-family's tax assessments. On the basis that the assessee-famil y had remained joint, and not taking into account the partial partitions of a portion of the urban land held by the family, it must be held that the family was in possession of the entirety of the lands of an extent of 154 grounds, in which event, the whole of the urban land tax liability in the sum Rs. 52,059 must properly be regarded as the liability of the family and allowable as such.
24. The same conclusion can be arrived at by pursuing another line of approach. The Supreme Court had characterised the urban land tax as a tax on land on the basis of market value. The charging provision in s.
5. of the Act, however, lays down that the tax shall be levied and collected from the owner of the urban land within the urban area. This only stands to reason because there must be some one to pay the tax although the tax can be characterised as a tax on land. Furthermore, the owner of an urban land, for the purpose of the Act, is defined in the Act as any person who is for the time being actually receiving or is entitled to receive the rents and profits of the urban land. Section 17 of that Act lays down that urban land tax shall be a first charge on urban land, subject to certain priorities. Nowhere in the Act is it stated that the recovery of the urban land tax must be made distributively as a charge on each and every item of land from the assessee to the extent of the market value of each land. The fact that at any given moment of time, he is not possessed of all the items of land which had come into the reckoning of the assessment would not mean that the liability to the entire extent cannot be realised from him. In this view, therefore, even accepting the fact that, as on July 7, 1969, the assessee-family had only 27 grounds left with it out of the total extent of urban land of an area of 154 grounds, would not render the entire liability any the less the liability of the assessee-family. The actual assets from out of which the assessee family can pay the urban land tax may be more or may be less than the urban land which had gone into the reckoning for the purpose of assessment. But this would not matter for the quantification of the liability or the recoverability of the tax from the assessee.
25. For all the above reasons, our opinion is that the Tribunal was in error in holding that the assessee would be entitled to deduction only proportionate to 27 grounds out of 154 grounds. The question of law is answered in the following terms :
"The entire sum of Rs. 52,059 is allowable as deduction in the computation of the assessee's profits under the head 'Business' for the assessment year 1970-71."
26. The assessee will have the costs from the Department. Counsel's fee Rs. 500, one set.
27. By the time we concluded the judgment, the learned standing counsel for the I.T. Department made an oral application for leave to appeal to the Supreme Court. He submitted that there was an apparent conflict in the reasoning which found favour with an earlier Bench of this court in CIT v. Woodlands Hotel  128 ITR 603, and the conclusion to which we have arrived at in the present case. He also submitted that it is a moot question as to how far Kedarnath Jute Mfg. Co. Ltd. v. CIT , can be pressed into service to the question in this case.
28. The learned counsel submitted that these questions raise substantial questions of law for decision by the Supreme Court. On consideration, we think that the learned standing counsel was right in asking for a certificate of fitness. We accordingly grant leave to appeal to the Supreme Court.