Mercantile accounting allows deduction of accrued sales tax liability as a business expense when sales are effected.

Under the mercantile system, a statutory sales tax liability accrues when sales are effected, not only on assessment or demand, and a provision made on that basis can be deducted in computing business income. The text states that where the assessee does not dispute the liability and estimates the tax in its accounts, the amount represents an accrued trading liability directly connected with the business. Because discharge of that liability is commercially necessary for carrying on the business, the provision is treated as deductible under the relevant income-tax provision.

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Issues: Whether a provision made by an assessee following the mercantile system of accounting for sales tax payable on sales effected during the year is deductible in computing business income.

Analysis: Under the Bengal Finance (Sales Tax) Act, 1941, liability to pay sales tax arises on sales being effected in the case of a registered dealer and is not dependent on assessment or demand. The dealer is required to compute and pay tax according to returns, and any further liability may be assessed later. The assessee had not disputed the liability and had made a provision in its accounts for the estimated tax payable. On the principles applicable to mercantile accounting, expenditure is entered when the legal liability arises, not only when it is paid. The liability for sales tax is a trading liability directly and intimately connected with the business and its discharge is commercially necessary for carrying on the business. On that footing, the provision stood on the same footing as an accrued business liability and was deductible under the relevant income-tax provision.

Conclusion: The provision for sales tax was deductible, and the question referred was answered in the affirmative in favour of the assessee.

Ratio Decidendi: Under the mercantile system, a statutory sales tax liability that has accrued on sales effected and is not disputed by the assessee is deductible as a business liability when it is directly connected with the business and commercially necessary for carrying it on.

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