Mercantile accrual of statutory liabilities: sales tax deductible on accrual, but earlier Employees' State Insurance dues were disallowed later.

Under the mercantile system of accounting, a statutory liability is deductible when it accrues in law, not when it is later quantified or discharged. Sales tax liability arising from taxable sales and additional demand orders passed in the relevant previous years was treated as having accrued in those years, so it was deductible in the corresponding assessment years. By contrast, the Employees' State Insurance contribution was held to have become due at the end of the wage period, and later quantification or dispute did not defer accrual; it therefore could not be claimed in assessment year 1976-77 and was disallowed.

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Issues: (i) Whether sales tax liability relating to earlier years, arising from assessment orders passed during the relevant previous years, was deductible in the assessment years in question under the mercantile system of accounting; (ii) whether the Employees' State Insurance contribution of Rs. 82,077, quantified by order dated 29 October 1975, was deductible in assessment year 1976-77 or had accrued in earlier years.

Issue (i): Whether sales tax liability relating to earlier years, arising from assessment orders passed during the relevant previous years, was deductible in the assessment years in question under the mercantile system of accounting.

Analysis: Under the mercantile system, liability is allowable when it accrues, not when it is ultimately discharged. Sales tax liability arises when taxable sales are made, and the subsequent quantification by assessment does not postpone accrual. The creation of additional demand during the relevant previous years brought the liability into existence in those years, making it deductible in the corresponding assessment years.

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

Issue (ii): Whether the Employees' State Insurance contribution of Rs. 82,077, quantified by order dated 29 October 1975, was deductible in assessment year 1976-77 or had accrued in earlier years.

Analysis: The contribution under the Employees' State Insurance Act became due on the last day of the wage period. Mere dispute by the assessee and later quantification by the Regional Director did not defer accrual to the date of the final order. As the liability related to earlier years, it could not be claimed in assessment year 1976-77.

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

Final Conclusion: The reference was disposed of by allowing the deduction of the sales tax liability while disallowing the Employees' State Insurance claim in the year in question, with no order as to costs.

Ratio Decidendi: Under the mercantile system of accounting, a statutory liability is deductible when it accrues in law, and its subsequent quantification or dispute does not postpone accrual for income-tax purposes.

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