Mercantile accounting allows deduction of disputed liabilities when quantified, accepted, and legally enforceable in the relevant year.

Under mercantile accounting, a disputed liability becomes deductible when it is quantified, accepted and made legally enforceable in the relevant year. The assessee's provision for enhanced land revenue, rent and cess related to earlier disputes with the State, but the obligation was determined, communicated, accepted by agreement, and booked in the previous year relevant to the assessment year. It was therefore not a mere contingent liability or one confined to earlier years. The court held that the liability accrued in that year and was allowable as a deduction in the assessment year in question.

---

---

Issues: Whether the provision made for enhanced land revenue, rent and cess became an allowable deduction in the relevant assessment year when the liability was quantified, accepted and fastened by agreement.

Analysis: The liability for enhanced rent and cess had long remained in dispute between the tea gardens and the State. The amount was determined by the Government, communicated to the assessee, and the assessee accepted the liability, executed the agreement and made provision in its books during the previous year relevant to the assessment year in question. On these facts, the liability was not merely contingent or referable to earlier years; it accrued and arose in the year in which the quantified obligation was accepted and made enforceable. The conclusion is consistent with the principle that a deduction is allowable when a liability, though referable to an earlier period, becomes ascertained and enforceable in the accounting year under the mercantile system.

Conclusion: The provision for land revenue, rent and cess was rightly treated as an allowable deduction in the assessment year 1973-74 and the question was answered in the affirmative, in favour of the assessee.

Ratio Decidendi: A liability disputed for earlier years becomes deductible in the year in which it is quantified, accepted and made legally enforceable, because it then accrues for purposes of mercantile accounting.

---