Hi yes that recess is supposed to have a rubber sealing ring in there, sometimes they are missing from a previous repair or fall out and you didn't notice when you took it apart. Hopefully a new one comes with the gasket kit you will buy to get the other gaskets you are changing, the front crank seal is another place they leak the seal goes hard and cuts a groove in the boss on the front pulley. Hopefully the rear seals not leaking to it's a 2 piece rope seal and the motor has to come out to change the top part.
You won't tell anything much from looking at the tops of the liners as to being sealed water tight. thats why I said oil pan first really to test it, as now you really should put it back together to pressure test the O rings properly, or just do the head and fill it up with coolant and hope you fixed it. either way now you could be chasing your tail fixing it.
sometimes filling the coolant jacket might be enough to see it, or you may see rust marks in the block with the pan off on the outside of the sleeve where it pokes through. are you sure that water didn't get in there when you pulled the head it does happen sometimes, as it's odd you got a big amount of water in the pan and maybe didn't notice other symptoms first.
pulling that pans a fun job, as it's real heavy cast iron so be careful and find the "hidden bolts" you might easily not see up behind the frame rails at the back and up in the front I think there is one or 2 down a deep hole you might miss, you might have to slack the other bell housing bolts to drop the pan to. it's been a while since I did one, and i can't remember if it pinches tight between the bell housing and the front plate. the wish bone has to come off to or remove the axle if the bolts dont come out. I've had them where the bolts and pivot pin is seized and the whole front casting had to come off with the axle.
I have an expensive pressure test kit here as I do quite a few diagnostic tests on tractors with the same type of problems. you can do it with a few psi from a compressor (like 15 or less so you don't stuff the rad first ) in through the overflow pipe outlet with the rad cap on. most of the majors I see don't have a pressure cap, if yours does the oil filler cap will fit on instead to seal the rad filler while you are doing it. Sadly these old majors are like other old tractors now one problem leads to a whole world of headaches, Lots of them are running with worn out cranks, and little oil pressure. Hopefully yours isn't one and you find the cranks worn and needs new bearings if you have to pull any caps. They are a tractor thats not worth fixing unless it has huge sentimental value, or you want to spend money you will never get back selling it.