Mercantile accounting allows deduction of accrued purchase tax liability even when the liability is disputed and unbooked.

Under the mercantile system, purchase tax collections received in the course of business are trading receipts, but the corresponding statutory purchase tax liability is deductible in the year of accrual, even if the liability is disputed or no book entry has been made. The relevant claim is not defeated by the absence of a contemporaneous debit entry, because deductibility depends on accrued liability rather than payment. The record also showed that the deduction issue had already been raised, so the Tribunal was wrong to treat it as a fresh claim and to confine its inquiry only to the character of the receipts.

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Issues: (i) Whether purchase tax realisations collected by the assessee formed part of its trading receipts but were nonetheless deductible in computing business income for the relevant assessment years; (ii) Whether the Tribunal was right in holding that no deduction claim in respect of purchase tax liability had been raised and that the only question was whether the amounts were trading receipts.

Issue (i): The assessee followed the mercantile system of accounting. The amounts collected from customers by way of purchase tax were receipts arising in the course of business and were therefore trading receipts. At the same time, the liability to pay purchase tax to the State arose on the relevant purchases, and under the mercantile system the allowability of deduction depends on the accrual of liability, not on payment or book entries. A disputed liability does not cease to be deductible merely because it is contested, and the absence of a debit entry is not decisive.

Conclusion: The purchase tax realisations were trading receipts, but the corresponding purchase tax liability was deductible in computing the assessee's business income. This issue was answered in favour of the assessee.

Issue (ii): The assessee had raised the claim before the appellate authority, and the record showed that the claim for deduction of purchase tax liability was already in issue. The Tribunal, therefore, erred in treating the claim as a fresh one and in confining the inquiry only to whether the receipts were trading receipts. Such an approach was inconsistent with the material on record and the governing principle that tax liability under the mercantile system is determined by accrual.

Conclusion: The Tribunal's finding that no deduction claim had been made was not sustainable. This issue was answered in favour of the assessee.

Final Conclusion: The assessee was entitled to deduction of the purchase tax liability on the mercantile basis, notwithstanding the dispute about liability or the absence of contemporaneous book entries.

Ratio Decidendi: Under the mercantile system of accounting, a statutory tax liability is deductible in the year of accrual, and the fact that the liability is disputed or not entered in the books does not prevent allowance of the deduction, even though the corresponding collections may be trading receipts.

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