Accrued liability remains deductible despite recovery bar under sick company law where mercantile accounting applies.

A statutory bar on recovery against a sick company does not extinguish or defer an otherwise accrued liability for income-tax purposes. Under the mercantile system, a liability becomes deductible when it crystallises, not only when payment is made or enforcement becomes immediately available. Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 suspends execution and recovery proceedings until the necessary consent is obtained, but that restriction affects enforcement only and does not convert an accrued debt into a contingent liability. The liability therefore remained accrued when the decree was passed, and deduction could not be denied on that basis.

---

---

Issues: Whether a liability, which had accrued under the mercantile system of accounting on the date the decree was passed, became a contingent liability merely because recovery proceedings were barred under Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 until consent of the Board was obtained.

Analysis: Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 suspends recovery proceedings and requires consent of the Board or Appellate Authority before execution or suit for recovery can proceed. That embargo operates on enforcement against the sick company, but it does not nullify the underlying liability or postpone its accrual. Where the assessee follows the mercantile system of accounting, a liability becomes deductible when it crystallises, and not only when it is actually enforceable or paid. The fact that the creditor must obtain permission before recovering the amount does not convert an accrued debt into a contingent one. The principle is consistent with prior decisions holding that restrictions on remittance or recovery affect discharge of liability, not its accrual.

Conclusion: The liability was not contingent. It accrued when the decree was passed, and the deduction could not be denied on the basis of Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985.

Ratio Decidendi: A statutory bar on recovery or execution against a sick company under Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 does not make an otherwise accrued liability contingent for income-tax purposes where the assessee follows the mercantile system of accounting.

---