Deductibility of sales tax interest under mercantile accounting turns on statutory accrual, not payment or interim stay.

Interest on sales tax arrears is deductible under the mercantile system only when the liability accrues in law, not when it is later demanded or actually paid. The High Court stated that the statutory obligation to pay interest arises by operation of the sales tax law itself, and interim stay orders or similar directions do not postpone accrual for income-tax purposes. On that basis, the amount paid as interest on sales tax arrears was held not deductible in the relevant assessment year, and the referred question was answered in favour of the Revenue and against the assessee.

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Issues: Whether interest paid towards sales tax arrears was deductible in the relevant assessment year on the mercantile system of accounting.

Analysis: Liability to pay interest under the sales tax law arises by operation of the statutory provision and not from the subsequent demand notice or payment. On the mercantile system, the relevant factor is the date of accrual of liability, not actual payment. A stay order or other interim directions do not defer the accrual of the liability for income-tax purposes.

Conclusion: The amount paid towards interest on sales tax arrears was not deductible in the relevant assessment year. The answer to the referred question was in the affirmative and against the assessee.

Ratio Decidendi: For an assessee maintaining mercantile accounts, a statutory liability is deductible only when it accrues in law, and interim restraint or deferred payment does not alter the date of accrual.

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