1981 (11) TMI 6 - HC - Income Tax

Summary

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.