Accrued liability under a stayed decree remains deductible where the legal obligation has already arisen.

A stay of a decree suspends enforceability but does not extinguish the underlying obligation, so the liability continues to exist for mercantile accounting purposes. Interest payable under a decree made rule of court therefore accrued when the decree creating the obligation was passed, not only when execution resumed or the appeal ended. On that basis, the interest remained an accrued and deductible liability in the relevant assessment year, and the later appellate stay did not convert it into a contingent or non-existent liability.

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Issues: Whether interest payable under a decree made rule of court remained an accrued and deductible liability for income-tax purposes merely because execution of the decree was stayed in appeal.

Analysis: A stay of operation of a decree suspends its enforceability but does not obliterate the decree or erase the underlying liability. In mercantile accounting, liability accrues when the legal obligation arises, and not only when payment is ultimately enforced. Once the award was made rule of court, the obligation to pay interest under that decree arose in the relevant previous year. The pendency of appellate proceedings and the stay granted by the Division Bench did not convert the liability into a non-existent or contingent one. The reasoning that liability arose only on the later final judgment was inconsistent with settled law on the effect of stay orders and accrual of liability.

Conclusion: The interest liability had accrued notwithstanding the stay order and was deductible in the relevant assessment year; the question was answered in favour of the assessee and against the Revenue.

Ratio Decidendi: A stay of a decree suspends its operation but does not wipe it out, and for mercantile accounting purposes the corresponding liability accrues when the decree creating the obligation is passed.

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