Mercantile accounting accrual principle: requisition order created a deductible loss when the supply obligation arose.

Under the mercantile system, liability is recognised when it accrues, even if the amount is quantified later. In the discussed decision, service of a requisition order imposing a binding obligation to supply jute bags at a notified price was treated as the point when the sale came into existence for accounting purposes, so the related loss arose then and was allowable on the assessee's claimed basis. The Court also followed the earlier principle that, where the assessee is legally bound to supply below-market goods, the resulting loss may be estimated and later adjusted when actual figures emerge. On that reasoning, the revision under section 263 was not sustained.

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Issues: Whether, for purposes of the assessee's claim of loss under the mercantile system of accounting, a sale could be deemed to have taken place on service of the requisition order so that the loss arose then, and whether the Commissioner's revision under section 263 of the Income-tax Act, 1961 was justified.

Analysis: The requisition order imposed a binding liability to supply jute bags at a notified price, and the Court held that, in such circumstances, the date of service of the order could be treated as the date on which the sale came into being for accounting purposes. Reliance was placed on the settled principle that, under the mercantile system, liability is entered when it accrues, even if its quantification is later. The Court followed the earlier view that where the assessee is legally bound to supply and the price is below market price, the resulting loss may be estimated and later adjusted when actual figures become available. Since the facts were treated as broadly identical to the earlier binding decision, the loss was held allowable on the basis claimed by the assessee.

Conclusion: The question was answered in the affirmative and the assessee's position was accepted; the Commissioner's revision was not sustained.

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