Municipal tax deduction under property income rules allowed when demand and payment occur in the same year.

The proviso to section 23(1) permits deduction of local authority taxes in the previous year in which they are actually paid by the owner. For property tax, the levy is treated as arising when the demand is raised, and the demand notice operates as the relevant levy for this purpose. Where earlier-year municipal taxes were demanded and paid during the relevant accounting year, the deduction is allowable in that year. The stated outcome is that the deduction was correctly allowed and the issue was answered in favour of the taxpayer.

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Issues: Whether municipal tax relating to earlier years, demanded and paid during the relevant previous year, was deductible in computing the annual value under the proviso to section 23(1) of the Income-tax Act, 1961.

Analysis: The proviso to section 23(1) allows deduction of taxes levied by a local authority in the previous year in which such taxes are actually paid by the owner. In the case of property tax, levy occurs when the demand is raised, and a demand notice is to be treated as the levy for the purpose of the provision. Since the taxes in question were demanded and paid during the relevant accounting year, the deduction was allowable in that year.

Conclusion: The deduction was rightly allowed. The question was answered in the affirmative and against the Revenue.

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