Mercantile accounting deduction for admitted liability allowed when booked, with later taxation preserved if the liability ceases.

In mercantile accounting, an assessee must reflect an admitted liability or ascertained loss in the year it is booked, even if the claim is not yet legally enforced or remains disputed. The mere absence of recovery proceedings does not justify ignoring the entry, and the accounting recognition of liability for income-tax purposes is distinct from an acknowledgment under the Limitation Act. The deduction is allowable in the year the liability is admitted and entered in the books, while section 41 of the Income-tax Act, 1961 preserves taxation if the liability later ceases.

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Issues: Whether an assessee maintaining mercantile accounts is entitled to claim deduction of a liability as loss in the year in which the liability is admitted and entered in the books, notwithstanding that the claim against the assessee may not yet have been legally enforced or may be disputed.

Analysis: In mercantile accounting, an assessee is not bound to enter every claim made against him, but is bound to reflect an admitted liability or ascertained loss. The distinction between an admission of liability for income-tax purposes and an acknowledgment of liability for extending limitation under the Limitation Act was emphasized. The entry in the books cannot be disregarded merely because recovery proceedings have not been taken or because the liability may remain recoverable or enforceable at a later stage. Section 41 of the Income-tax Act, 1961 preserves the revenue's power to tax the amount in the year of cessation if the liability later ceases.

Conclusion: The assessee was entitled to claim deduction of the loss in the assessment year in which the liability was admitted and entered in the mercantile accounts, subject to section 41 of the Income-tax Act, 1961.

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