Mercantile system treats disputed liability as deductible only when arbitration makes the claim enforceable.

Under the mercantile system, a disputed commercial claim arising from speculative cotton transactions became deductible only when it was ascertained and enforceable through the arbitral award, not when the transactions were settled. Because the claim had been repudiated and remained contingent until the arbitrators quantified it, the loss could not be debited as an ascertained liability in the earlier year. The loss was therefore attributable to the later assessment year, 1946-47, and not to 1945-46.

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Issues: Whether the loss of Rs. 14,994 arising from speculative cotton transactions was attributable to the assessment year 1945-46 or to the assessment year 1946-47.

Analysis: The assessee maintained mercantile accounts, but the claim in respect of the speculative transactions was not admitted and was repudiated, so the amount did not become an enforceable liability merely when the transactions were settled. The parties had agreed to resolve disputes through arbitration, and the liability became fixed and quantified only when the arbitrators made their award. Until that stage, the amount was no more than a claim or contingent liability and could not be debited as an ascertained loss in the earlier year.

Conclusion: The loss was not pertaining to the assessment year 1945-46 but pertained to the assessment year 1946-47.

Ratio Decidendi: Under the mercantile system, a disputed commercial claim becomes deductible only when it is transformed into an ascertained and enforceable liability, and not when it remains merely contingent or unadjudicated.

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