Accrued sales tax liability is deductible under mercantile accounting unless a statutory rule makes actual payment mandatory.

Under the mercantile system, sales tax liability is deductible when it accrues, not only when it is actually paid. The sum collected as sales tax forms part of trading receipts, but once the statutory liability has arisen, it is allowable in the year of accrual. Section 43B of the Income-tax Act, 1961, which requires actual payment for deduction of certain tax liabilities, was treated as prospective and not applicable to the assessment year in question. On that basis, the addition by the Income-tax Officer was found unsustainable, and the accrued sales tax deduction was allowed despite non-payment in the year.

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Issues: Whether, where the assessee maintains accounts on mercantile basis, the sales tax liability accrued during the previous year could be disallowed merely because the amount was not actually paid to the Sales Tax Department in that year.

Analysis: Under the mercantile system, deduction depends on the accrual of liability and not on actual disbursement. The sum collected as sales tax forms part of trading receipts, but once the statutory liability has accrued, it is allowable as a deduction in the year of accrual. The subsequent introduction of section 43B of the Income-tax Act, 1961, requiring actual payment for deduction of tax liabilities, was noted as prospective and not applicable to the assessment year in question.

Conclusion: The addition made by the Income-tax Officer was not proper. The assessee was entitled to deduction of the accrued sales tax liability notwithstanding non-payment in that year, and the question was answered in favour of the assessee and against the Department.

Ratio Decidendi: Under the mercantile system of accounting, a tax liability is deductible on accrual once it has arisen, unless a statutory provision expressly requires actual payment for the relevant assessment year.

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