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Issues:
- Deduction of municipal taxes for earlier years in the computation of income for the assessment year 1976-77. Analysis: The case involved a reference under section 256(1) of the Income-tax Act, 1961, where the Income-tax Appellate Tribunal referred a question of law to the High Court regarding the deduction of municipal taxes amounting to Rs. 28,687 in the assessment year 1976-77. The dispute arose as the demand notice for these taxes was received in the relevant previous year but related to earlier years. The Income-tax Officer disallowed the deduction, stating that the demand did not pertain to the relevant assessment year. However, the Appellate Assistant Commissioner allowed the deduction, emphasizing that the liability accrued in the relevant previous year upon receipt of the demand notice. The Tribunal upheld this decision, leading to the Revenue's appeal and subsequent reference to the High Court. The High Court examined the provisions of sections 22 and 23 of the Income-tax Act, particularly focusing on the deduction of municipal taxes in determining the annual value of a property. It noted that the deduction is permissible when such taxes are levied, regardless of whether they are paid. The court highlighted that the Mumbai Municipal Corporation Act mandates the payment of municipal taxes upon receipt of the demand notice, indicating the accrual of liability only upon service of the notice. Therefore, the court held that municipal taxes for earlier years demanded during the relevant previous year are deductible in computing the annual value of the property for the relevant assessment year. The High Court supported its conclusion by referencing decisions from the Madras High Court and the Karnataka High Court, emphasizing that municipal taxes demanded in the relevant previous year for earlier years are indeed deductible. As a result, the court answered the referred question in favor of the assessee and against the Revenue, disposing of the reference accordingly with no order as to costs.
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