Sales tax liability crystallisation determines deduction year under mercantile accounting, not the year of the underlying transactions.

A sales tax liability arising from earlier inter-State transactions was held deductible only when it crystallised into an enforceable and ascertainable obligation under retrospective tax legislation and the consequential assessment order. The Court applied the mercantile system principle by focusing on the year in which the liability became legally final, rather than the year of the underlying sales. Because the liability did not exist in enforceable form until the later determination, deduction was allowable in the previous year relevant to assessment year 1973-74.

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Issues: Whether the assessee was entitled to deduction of the sales tax liability of Rs. 1,40,316 in the assessment year 1973-74.

Analysis: The liability related to inter-State sales of 1957-58, but the transactions were not taxable in law until the retrospective amendment of the Central Sales Tax law and the Supreme Court's order finally restored the assessment. The Court held that, on these facts, the liability did not exist in enforceable or ascertainable form until the Commercial Tax Officer passed the consequential order on 31 August 1972. The principle in earlier authorities concerning accrual under the mercantile system did not require the liability to be confined only to the year of sale, because the present case involved a liability that crystallized only after the later legal determination.

Conclusion: The assessee was entitled to claim the deduction in the previous year relevant to assessment year 1973-74.

Final Conclusion: The reference was answered in favour of the assessee and the sales tax liability was held deductible for assessment year 1973-74.

Ratio Decidendi: Where a tax liability is not legally enforceable until it is finally determined pursuant to retrospective legislation and consequential assessment, the deduction becomes allowable in the year in which the liability crystallizes, even if the underlying transactions occurred in an earlier year.

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