Mercantile accounting and accrued liability: interest becomes deductible only when the liability is certain and enforceable.

Under the mercantile system, a deduction can be claimed only when the liability has actually accrued and is reasonably certain. Where the existence or quantification of liability remains uncertain, no earlier provision can be compelled. Here, the assessee's liability to pay interest arose only when the Government later directed that the outstanding amount be treated as a loan carrying interest; until then, the assessee had sought adjustment against shares and no enforceable interest claim existed. The interest paid pursuant to that later demand was therefore a proper business expenditure of the relevant year and deductible as revenue expenditure.

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Issues: Whether interest paid in the relevant year on an amount later treated by the Government as a loan was allowable as revenue expenditure, notwithstanding the assessee's mercantile system of accounting and the Revenue's contention that the liability had accrued in earlier years.

Analysis: Under the mercantile system, a provision can be made only when the liability has actually accrued and can be identified with reasonable certainty. Where the existence of liability itself, or its quantification, is uncertain, no provision can be compelled in earlier years. The assessee had been seeking adjustment of the outstanding amount against shares, and the possibility of interest liability arose only when the Government, years later, directed that the amount be treated as a loan carrying interest. The liability therefore became known and enforceable only in the relevant year, and payment made pursuant to that demand was a proper business expenditure of that year.

Conclusion: The interest payment was deductible in the relevant assessment year as revenue expenditure and not liable to disallowance on the ground of earlier accrual.

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