Accrued liability rule bars deduction of time-barred sales tax where no enforceable assessment or payment existed.

Under the mercantile system of accounting, a sales tax deduction is available only when the liability has accrued as a real, legally enforceable obligation. Where the assessee was not a registered dealer, no sales tax proceedings were initiated, no returns were filed, no assessment or payment occurred, and any supposed liability had become time-barred by the assessment date, the claimed deduction could not be treated as an accrued liability. Mere book entries or a hypothetical obligation are insufficient to support deduction.

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Issues: Whether the assessee, following the mercantile system of accounting, was entitled to deduct the claimed sales tax liability of Rs. 49,110 in the relevant assessment year even though no assessment or payment of sales tax had been made and the liability had become time-barred by the date of assessment.

Analysis: The assessee's claim was based on accrual of liability under the mercantile system, but the Tribunal found that it was not a registered dealer, no proceedings for levy of sales tax had been initiated, no returns had been filed, no tax had been assessed or paid, and by the time of assessment any liability, if it existed, had become barred by limitation. The Court distinguished the authorities relied upon by the assessee on the ground that in those cases the tax liability had either already accrued in a legally enforceable form or had been actually assessed or paid. For a deduction to be allowable, the liability must be a real and legally enforceable liability and not a merely hypothetical one; mere book entries do not suffice where the assessee has not taken steps to discharge an enforceable obligation.

Conclusion: The deduction was not allowable and the reference was answered in favour of the Revenue.

Ratio Decidendi: Under the mercantile system, a statutory liability is deductible only when it has accrued as a real and legally enforceable obligation; a hypothetical or time-barred liability not pursued for assessment or discharge cannot be deducted.

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