Government-approved royalty liability accrues only on approval, not on execution, and cannot be deducted earlier.

Royalty payable under a collaboration agreement subject to prior Government approval did not accrue as an enforceable liability in the accounting year before approval was granted. Although the assessee maintained mercantile accounts, execution of the agreement alone did not create a deductible obligation because the agreement expressly became effective only on Government approval. The liability arose only in the next accounting year when approval was obtained, and the approval could not relate back to fasten liability earlier. The royalty was therefore not allowable as a deduction for the relevant year.

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Issues: Whether royalty payable under a collaboration agreement subject to Government approval accrued as a deductible liability during the relevant accounting year before such approval was granted.

Analysis: The agreement expressly provided that it would become effective only on approval by the Government of India. The assessee followed the mercantile system of accounting, but the mere execution of the agreement did not create an enforceable liability during the accounting year when approval was still pending. The liability arose only when the Government granted approval in the next accounting year. The approval could not be treated as relating back so as to fasten liability in the earlier year.

Conclusion: The royalty liability did not accrue or arise during the relevant accounting year and was not allowable as a deduction for that year.

Ratio Decidendi: Where payment under an agreement is contingent upon prior Government approval, no enforceable liability accrues until such approval is granted, even under the mercantile system of accounting.

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