1979 (1) TMI 15 - HC - Income Tax

Urban land tax deductible in year of payment

Commissioner Of Income-Tax, Tamil Nadu I Versus Woodlands Hotel

The court clarified that urban land tax is deductible in the year of payment when demanded, not annually by itself. The judgment favored the assessee, ... Business Expenditure, Urban Land Tax Issues:1. Deductibility of urban land tax paid by the assessee in the assessment for the relevant year.Analysis:The judgment pertains to a reference under section 256(1) of the Income-tax Act, 1961, regarding the deductibility of urban land tax paid by the assessee during the relevant previous year. The assessee, a firm engaged in the business of boarding and lodging, claimed a deduction of Rs. 33,394 as urban land tax paid for specific years. The dispute arose due to the striking down of certain provisions of the Madras Urban Land Tax Act of 1963 as unconstitutional, leading to the enactment of the Tamil Nadu Urban Land Tax Act 12 of 1966 with retrospective effect from 1st July, 1963. The assessee made payments towards urban land tax during the relevant previous year, which the Income Tax Officer (ITO) initially disallowed as a deduction for business premises. However, the Appellate Assistant Commissioner (AAC) and the Tribunal allowed the deduction under section 37 of the Income-tax Act, considering the urban land as a business asset.The key issue in contention was whether the liability to pay urban land tax for earlier years could be claimed as a deduction in the assessment year under consideration. The court referred to a previous decision regarding the nature of urban land tax liability, emphasizing that the liability arises only when a demand notice is served, indicating that the liability does not accrue annually by itself. Therefore, the court concluded that the urban land tax amounts accrued as a liability only in the relevant assessment year, and any provision for deduction in prior years would be for contingent liability. Consequently, the Tribunal's decision allowing the deduction for the current assessment year was upheld, and the question was answered in favor of the assessee, entitling them to costs including counsel's fee.In summary, the judgment clarified the deductibility of urban land tax paid by the assessee, emphasizing that the liability arises only when demanded, and therefore, the deduction can be claimed in the year of payment. The decision provided clarity on the treatment of urban land tax as a business expense, allowing the assessee to claim the deduction for the specific assessment year in question.