1. In this reference under Section 256(1) of the Income-tax Act, 1961, hereinafter referred to as 'the Act', the following question has been referred :
'Whether, on the facts and in the circumstances of the case, Rs. 33,394 being the urban land tax for Faslis 1373 to 1376, both inclusive, paid by the assessee during the relevant previous year in respect of the urban land on which it was carrying on the business is to be deducted in the assessment for the assessment year 1971-72 ?'
2. The assessee is a firm carrying on the business of boarding and lodging under the name and style of M/s. Woodlands Hotel, Royapettah, Madras. The claim for deduction relates to the urban land tax. Certain provisions of the Madras Urban Land Tax Act of 1963 were struck down as unconstitutional. There was no assessment made by the authorities concerned on account of the provisions having been struck down. A subsequent Act came to be passed as Tamil Nadu Urban Land Tax Act 12 of 1966. This Act had retrospective effect from 1st July, 1963. After the passing of this Act assessments in the case of the assessee came to be made during the relevant previous year and the demands were also made during that year. The assessee made two payments of Rs. 16,697each on 29th June, 1970, and 16th November, 1970, respectively, both payments falling during relevant previous year. The first of the payments was in respect of the Faslis 1373 and 1374 and the second in respect of Faslis 1375 and 1376. The assessee claimed the total sum of Rs. 33,394 as deduction allowable in the year under consideration. The ITO held that there was no provision for allowing as deduction, the urban land tax, paid in the case of business premises. The AAC, however, on appeal accepted the assessee's claim and the Tribunal, on further appeal by the department, confirmed the order of the AAC. It is this order of the Tribunal that is now the subject of reference.
3. There is no dispute about the fact that the land in respect of which urban land tax has been paid is a business asset. Though before the Tribunal there was some dispute as to whether the provisions of Section 30 of the Act would alone be applicable, it is not in dispute now that the assessee could claim deduction under Section 37 of these amounts in the computation of business income. But the question is whether the liability to urban land tax in respect of some earlier years could be allowed as deduction of this year. The nature of the tax and the date on which it accrues have been the subject of notice in our decision in T.C. No. 102 of 1975 (CIT v. M. CT. Muthiah) dated January 17, 1979 : 118ITR104(Mad) . After briefly considering the provisions of that Act we pointed out in our judgment as under (p. 107):
'Section 15 provides that in respect of the urban land tax payable for every Fasli year or part thereof there shall be a separate notice of demand containing the particulars mentioned in Section 14 and it shall be served on the assessee. It is only after the service of such notice that the assessee can be proceeded against for the arrears of land revenue. Thus, having regard to the scheme of the relevant Act which levies urban land tax, it is clear that there is no question of any accrual of the liability every year by itself. The amount becomes payable only as and when it is demanded.'
4. In the light of this decision it would follow that the amounts accrued as liability only in the year under consideration. The Tribunal is wrong in proceeding as if the amounts could have been claimed as deduction even earlier if provision had been made. Such a provision could not have been made because there would be no liability as such. The provision, if any, would only be in respect of a contingent liability. If no notice was issued then there would be no liability as such. Hence, in the light of this decision, the question referred has to be answered in the affirmative and in favour of the assessee. The assessee will be entitled to its costs. Counsel's fee Rs. 500.