Accrual basis deduction for crystallised business liability upheld where renewal license fee became enforceable during the year.

A business liability that crystallises and becomes enforceable during the relevant year is deductible on accrual basis under the mercantile system, even if it relates to an earlier period. Applying that principle, the renewal license fee under the memorandum of understanding was treated as a quantified and final liability recorded in the books during the year. The disallowance was therefore not justified, and the license fee was allowable as business expenditure.

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Issues: Whether the disallowance of license fee of Rs. 87,50,000 was justified, or the amount was allowable as business expenditure in the year of accrual under the memorandum of understanding.

Analysis: The liability related to renewal license fee for the distillery undertaking had been quantified and had attained finality during the year. The liability was found to arise under the memorandum of understanding governing the transfer of the distillery business, and the assessee had recorded the amount in its books and claimed it on accrual basis. The governing principle applied was that under the mercantile system of accounting, a business liability is allowable in the year in which it crystallizes and becomes enforceable, even if it pertains to an earlier period.

Conclusion: The disallowance was not justified. The license fee of Rs. 87,50,000 was allowable as business expenditure, and the deletion of the addition was upheld.

Final Conclusion: The Revenue's challenge to the deletion of the disallowance failed, and the allowance of the expenditure was sustained.

Ratio Decidendi: A business liability that crystallizes and becomes enforceable during the relevant year is deductible on accrual basis under the mercantile system, even if it relates to an earlier period.

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