Mercantile accounting allows excise duty deduction once liability crystallises, even if demand and quantification come later.

Under the mercantile system, excise duty becomes deductible when the taxable event has occurred and the liability has crystallised, even if quantification or a demand notice follows later. The article notes that quantification and recovery steps concern assessment and enforcement, not the accrual of liability itself. Where the assessee's duty position remained uncertain until the licence application and grant clarified the dutiability in the relevant accounting year, a provision made at that stage was treated as an accrued liability rather than a contingent one. The provision was therefore allowable as a deduction in the year under consideration.

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Issues: Whether the assessee's provision for excise duty of Rs. 5,75,000 was an accrued liability in the relevant accounting year and allowable as a deduction under the mercantile system of accounting, notwithstanding that the demand notice was issued later and the amount related to earlier manufacturing years.

Analysis: The liability to excise duty arises on the manufacture or production of excisable goods, and quantification or issue of demand notice is relevant to assessment and recovery, not to the accrual of liability itself. On the facts, the assessee had been manufacturing the goods for years, but the dutiability had remained in genuine doubt until the licence application and grant in February 1977 clarified and crystallised the liability in the relevant accounting year. The assessee maintained mercantile accounts and was entitled to make a provision for the liability once it had become sufficiently certain, even though the amount was quantified later and the ultimate demand underwent revision in subsequent proceedings.

Conclusion: The provision represented an accrued and allowable liability in the relevant year and was not a mere contingent liability; the answer was in the affirmative and against the Department.

Final Conclusion: The reference was answered in favour of the assessee, holding that the excise duty provision was deductible in the year under consideration.

Ratio Decidendi: Under the mercantile system, a statutory liability is deductible when the taxable event has occurred and the liability has crystallised, even if the amount is quantified or demanded later.

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