Mercantile system deduction depends on ascertainment of liability; evaded insurance premium allowed in the relevant year.

On the mercantile system, an expenditure becomes deductible only when the liability is ascertained, not when it is merely contingent or vague. The assessee's liability for evaded insurance premium arose under the War Risks (Goods) Insurance Ordinance, 1940, but the exact amount could be determined only by the authorised officer under the scheme. As the sum was both quantified and paid during the relevant accounting year, it was an ascertained liability of that year and could not be attributed to earlier years. The deduction was therefore allowable in the relevant assessment year, in favour of the assessee.

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Issues: Whether the sum of Rs. 51,610 paid by the assessee towards evaded insurance premium was deductible in the relevant assessment year under section 10(2)(iv) of the Income-tax Act, 1922, read with section 10(5), when the assessee kept its accounts on the mercantile system.

Analysis: The liability in question arose under the War Risks (Goods) Insurance Ordinance, 1940, but the amount payable for the evaded premium was not an unascertained or vague liability. Under the scheme framed under the Ordinance, premium became payable on the basis of the value shown in the insurance application, while evaded premium could be determined only under section 7-A by the authorised officer. The amount of Rs. 51,610 was both determined and paid during the relevant accounting year. On mercantile principles, an expenditure cannot be entered unless the liability has become an ascertained sum of money. Since ascertainment took place only in the accounting year, the sum could not be treated as an expenditure of earlier years.

Conclusion: The amount was deductible in the relevant assessment year and the answer to the question was in the affirmative, in favour of the assessee.

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