Municipal tax deduction turns on levy during the accounting year, not the first demand date or actual payment.

Under the unamended proviso to section 23(1) of the Income-tax Act, municipal tax deduction depends on the tax being levied in respect of the property during the relevant accounting year, because the controlling factor is the liability arising from levy rather than the date of first demand or actual payment. The later amendment was treated as declaratory of that existing position, confirming that deduction is linked to the accrual of municipal tax liability in the year concerned. Accordingly, municipal taxes levied during the relevant accounting year are deductible in computing income from property.

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Issues: Whether, for the assessment years in question, deduction of municipal taxes under the proviso to section 23(1) of the Income-tax Act, 1961, depended on the first demand in the accounting period or on the levy of tax during that year.

Analysis: The proviso to section 23(1), as it stood prior to the 1985 amendment, was construed to permit deduction of municipal taxes levied in respect of the property during the relevant accounting year. The controlling factor was the levy of tax and the resulting liability, not the actual payment of the amount or the timing of the first demand notice. The subsequent amendment was treated as declaratory of the existing legal position, reinforcing that the emphasis lay on incurring the liability rather than on actual payment.

Conclusion: The deduction is allowable for municipal taxes levied during the relevant accounting year, and not only for amounts demanded for the first time in that period.

Final Conclusion: The reference was answered in favour of the assessee by holding that municipal taxes levied during the relevant accounting year are deductible in computing income from property.

Ratio Decidendi: Under the unamended proviso to section 23(1), municipal tax deduction turns on the tax liability arising from levy during the relevant accounting year, and actual payment or the date of first demand is not the governing criterion.

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