1981 (11) TMI 6 - HC - Income Tax

Deduction of Urban Land Tax as Business Expense Allowed for Assessment Year 1970-71

The High Court allowed the deduction of the entire urban land tax liability of Rs. 52,059 as a business expense for the assessment year 1970-71. The court ... Deductibility of urban land tax as a business outgoing under the mercantile system (accrual basis) - Treatment of unprovided but ascertainable accrued liabilities as deemed provisions for deduction (principle in Kedarnath Jute) - Characterisation of urban land tax as a tax on land measured by market value - Deeming of a Hindu undivided family to continue undivided for income-tax purposes until partition is recognised under section 171 - Recoverability of urban land tax as a charge on the owner notwithstanding partial partition of assetsDeductibility of urban land tax as a business outgoing under the mercantile system (accrual basis) - Treatment of unprovided but ascertainable accrued liabilities as deemed provisions for deduction (principle in Kedarnath Jute) - Whether the urban land tax liability that became certain after the Supreme Court's decision was allowable as a deduction against business profits for the assessment year 1970-71 although the tax was paid only after the family ceased to exist - HELD THAT: - The Court held that where an assessee follows the mercantile system of accounting, a liability which becomes known and certain in the accounting year may be treated as an accrued liability and allowed as a deduction even before formal demand or actual payment. The unusual factual background - the Urban Land Tax Act's assessments being stayed until the Supreme Court upheld the Act and thus a cumulative liability arising retrospectively - did not preclude the assessee from making a provision, and, under the principle in Kedarnath Jute, the tax law will treat as having been done what ought to have been done; consequently the absence of an actual book provision does not defeat the claim. The Court rejected the Department's contention that urban land tax can be allowed only in the year of actual payment, distinguishing earlier decisions as not addressing the mercantile/accrual point and relying on the nature of the impost as a tax on land measured by market value to justify accrual treatment.The entire urban land tax liability which became certain before partition is allowable as a deduction in computing business profits for AY 1970-71, notwithstanding that payment occurred later.Deeming of a Hindu undivided family to continue undivided for income-tax purposes until partition is recognised under section 171 - Recoverability of urban land tax as a charge on the owner notwithstanding partial partition of assets - Whether the deduction must be restricted proportionately to the portion of land (27 grounds) retained by the family at the time the liability became certain, or whether the entire assessed liability is that of the family and deductible - HELD THAT: - The Court found that for income-tax purposes the family must be treated as joint until partition is recognised under section 171; the records showed the family remained undivided until the full and final partition on July 7, 1969. Partial partitions not recognised under section 171 are to be ignored for tax assessment purposes. Further, the Urban Land Tax Act casts the liability on the owner and makes the tax a charge on the land; nothing in the Act requires distributive recovery item-by-item so as to limit liability simply because some items had been separated earlier. Consequently the whole assessed urban land tax constituted the liability of the family and was allowable as such.The Tribunal's restriction of the allowance to the portion relating to 27 grounds was erroneous; the entire assessed urban land tax is deductible for AY 1970-71.Final Conclusion: The High Court allowed the reference in favour of the assessee: the entire urban land tax liability assessed (Rs. 52,059) was held deductible as a business outgoing for Assessment Year 1970-71 under the mercantile/accrual treatment and by reason of the family being deemed undivided for income-tax purposes until partition recognised under section 171; certificate of fitness to appeal to the Supreme Court was granted. Issues Involved:1. Deductibility of urban land tax liability as a business expense.2. Timing of the deduction under the mercantile system of accounting.3. Proportion of urban land tax liability deductible by the partitioned family.Detailed Analysis:1. Deductibility of Urban Land Tax Liability as a Business Expense:The primary issue is whether the urban land tax liability can be deducted as a business expense. The Income Tax Officer (ITO) rejected the deduction claim, viewing the tax as a non-business-oriented tax on land ownership. However, the Appellate Assistant Commissioner (AAC) and the Tribunal recognized the tax as a business expense because the urban land was part of the business assets. The Tribunal referenced the Supreme Court's decision in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363, which established that liabilities must be accounted for even if no provision is made in the accounts.2. Timing of the Deduction under the Mercantile System of Accounting:The timing of the deduction under the mercantile system of accounting was another critical issue. The AAC limited the deduction to the last year of the family's business, but the Tribunal extended it to the entire period from 1963 to 1969. The Tribunal held that the liability became certain after the Supreme Court's decision in Asst. Commr. of Urban Land Tax v. Buckingham and Carnatic Co. Ltd. [1970] 75 ITR 603 (SC), and thus, the family could have made a provision for the tax liability in their accounts. The judgment emphasized that the mercantile system allows for the deduction of accrued liabilities, even if no provision is made in the accounts.3. Proportion of Urban Land Tax Liability Deductible by the Partitioned Family:The Tribunal initially limited the deduction to the urban land tax liability proportionate to the 27 grounds held by the family after partial partitions. However, the High Court disagreed, stating that for income tax purposes, the family remained undivided until the full partition on July 7, 1969, as recognized under Section 171 of the Income Tax Act. Thus, the entire liability of Rs. 52,059 was deductible, regardless of the partial partitions.Conclusion:The High Court concluded that the entire sum of Rs. 52,059 was allowable as a deduction in the computation of the assessee's profits under the head 'Business' for the assessment year 1970-71. The court rejected the contention that the decision in CIT v. Woodlands Hotel [1981] 128 ITR 603 (Mad) stood in the way of the assessee claiming the deduction. The judgment emphasized that under the mercantile system, liabilities are deductible when they become certain, irrespective of actual payment or provision in the accounts.Certification for Appeal:The court granted leave to appeal to the Supreme Court, acknowledging the substantial questions of law regarding the apparent conflict with the decision in CIT v. Woodlands Hotel and the applicability of Kedarnath Jute Mfg. Co. Ltd. v. CIT to the present case.