Mercantile accounting allows deduction of accrued statutory tax liability once it becomes certain, even if paid later.

Under the mercantile system, an accrued statutory liability is deductible once it becomes real and ascertainable, even if payment is made later and no book entry was passed. The urban land tax liability was treated as having crystallised after the taxing statute was upheld, so it could be claimed in computing business income. The Hindu undivided family was also treated as continuing for income-tax purposes until final partition under Section 171, making the tax charge recoverable against the family as a whole rather than only against the remaining divided shares. On that basis, the full urban land tax was allowable as a business deduction for the relevant assessment year.

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Issues: Whether urban land tax liability, though paid after the family had disrupted, was deductible as a business outgoing in computing the assessee's profits for the assessment year 1970-71.

Analysis: The liability for urban land tax became real and ascertainable only after the Supreme Court upheld the validity of the taxing statute, and under the mercantile system of accounting an accrued liability could be provided for and allowed even if actual payment was made later. The absence of an actual book entry did not defeat the claim, since the principle of accrual governs mercantile computation. The restriction adopted by the Tribunal to the proportion relatable only to the 27 remaining grounds was unsound, because for income-tax purposes the Hindu undivided family was to be treated as continuing until the final partition recognised under Section 171 of the Income-tax Act, 1961, and the urban land tax was recoverable from the owner as a charge on the land and not on a fragmented item-by-item basis.

Conclusion: The entire urban land tax liability of Rs. 52,059 was allowable as a deduction in computing the assessee's business income, and the assessee succeeded on the issue.

Final Conclusion: The assessment had to proceed on the basis of the mercantile method, and the full urban land tax paid was deductible as a business expenditure for the relevant year.

Ratio Decidendi: Under the mercantile system, an accrued and ascertainable statutory liability is deductible when it becomes certain, even if no actual provision is made in the accounts and payment is made later.

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