Mercantile system deduction turns on accrual of tax liability, not payment; urban land tax and property tax treated differently.

Under the mercantile system, a fiscal liability is deductible in the year in which it accrues as a legally enforceable and ascertainable obligation, not merely when it is paid. Urban land tax, though imposed retrospectively, became an accrued liability only after the levy was upheld, so the deduction was allowed for the year of accrual. Municipal property tax under the Madras City Municipal Corporation Act accrues half-yearly and becomes payable within the statutory period; Rule 20(3) limits recovery where notice is not served but does not defer accrual. The deduction must therefore be confined to the amount attributable to the relevant half years of the account year.

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Issues: (i) Whether the entire urban land tax paid during the account year was deductible although part of it related to earlier years; (ii) Whether the entire municipal property tax paid during the year was deductible although part of it related to earlier years.

Issue (i): Whether the entire urban land tax paid during the account year was deductible although part of it related to earlier years?

Analysis: The liability for urban land tax, though imposed retrospectively, became a definite and accrued liability only after the Supreme Court upheld the validity of the levy. On the mercantile system, a deduction is allowable in the year in which the liability accrues as a real and ascertainable obligation, even if assessment or demand follows later.

Conclusion: The issue is answered in favour of the assessee and against the Revenue.

Issue (ii): Whether the entire municipal property tax paid during the year was deductible although part of it related to earlier years?

Analysis: Under Section 104 of the Madras City Municipal Corporation Act, 1919, property tax is levied half-yearly and becomes payable within 15 days after the commencement of the relevant half year, subject to Schedule IV and Rule 20(3) of Schedule IV. Rule 20(3) restricts recovery where notice is not served, but it does not defer accrual of liability. The tax accrues with each half year, and under the mercantile system the deduction must be claimed in the year of accrual, not in the year of payment.

Conclusion: The issue is answered against the assessee and in favour of the Revenue.

Final Conclusion: The reference is answered partly for the assessee and partly for the Revenue, with the urban land tax deduction allowed in full for the year of accrual and the municipal property tax deduction confined to the amount attributable to the relevant half years of the account year.

Ratio Decidendi: Under the mercantile system, a fiscal liability is deductible in the year in which it accrues as a legally enforceable and ascertainable obligation, and not merely in the year of payment; where a statute fixes the timing of accrual, deduction must follow that accrual.

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