Accrued commission deductible under mercantile accounting despite foreign remittance restrictions

Under the mercantile system, commission payable to a non-resident agent was deductible in the year the liability accrued, because the obligation arose from an independent agreement and was not contingent on Reserve Bank of India approval. Section 145 required computation in accordance with the regularly employed accounting method, so an accrued and enforceable liability was allowable even though foreign exchange law restricted remittance abroad. The statutory restriction affected only payment and discharge, not accrual, and the possibility of non-remittance did not defer deductibility. The full accrued commission liability was therefore allowable for income-tax purposes.

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Issues: Whether, under the mercantile system of accounting, commission payable under an agreement with a non-resident agent could be deducted in full in the year of accrual, or only to the extent actually remitted after obtaining Reserve Bank of India permission under foreign exchange law.

Analysis: The liability to pay commission arose from an independent agreement and was not itself made contingent on Reserve Bank of India approval. Section 145 of the Income-tax Act, 1961 required income and expenditure to be computed in accordance with the regularly employed method of accounting, and on the mercantile system an accrued liability is deductible in the year in which it accrues. The foreign exchange restriction under section 9 of the Foreign Exchange Regulation Act, 1973 affected only the remittance of payment abroad and postponed discharge of the liability, not its accrual. The liability was therefore certain, with only quantification and payment remaining, and the possibility of non-remittance did not alter its accrual for income-tax purposes.

Conclusion: The deduction was not confined to the amount actually remitted in the relevant year; the full accrued commission liability was allowable, and the answer was in favour of the assessee.

Ratio Decidendi: A contractual liability deductible under the mercantile system accrues when the obligation becomes enforceable, and a statutory restriction only on foreign remittance does not postpone accrual of that liability for income-tax purposes.

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