Mercantile accounting and royalty deduction turn on enforceable liability, which arose only after retrospective statutory amendment.

Under the mercantile system, royalty is deductible only when an enforceable legal obligation to pay has arisen. The earlier enhancement of royalty did not by itself create a recoverable liability in West Bengal because the State's right to enforce royalty had been negatived until the West Bengal Estates Acquisition (Amendment) Act, 1964 retrospectively inserted section 5(2) and revived that right. The liability therefore did not accrue in the earlier year when coal was raised, but only when the amended provision took effect. On that basis, the royalty remained an admissible business expenditure for assessment year 1965-66.

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Issues: Whether the royalty claimed by the assessee was an admissible business expenditure for the assessment year 1965-66, having regard to the retrospective enhancement of royalty and the effect of the West Bengal Estates Acquisition (Amendment) Act, 1964.

Analysis: The royalty demand, though originally linked to the raising of coal, could not be enforced in West Bengal until the amendment of section 5 of the West Bengal Estates Acquisition Act, 1953, because the earlier judicial position had negatived the State's right to recover royalty from the lessees. The 1964 amendment, by inserting sub-section (2) in section 5, retrospectively vested the relevant mines and minerals in the State and revived the State's right to recover royalty. The Court held that the legal liability did not accrue merely because of the earlier notification enhancing royalty; the enforceable right to receive royalty arose only when the amended provision came into force with retrospective effect.

Conclusion: The Tribunal was correct in allowing the deduction, and the royalty was admissible as business expenditure for the assessment year 1965-66.

Final Conclusion: The reference was answered in favour of the assessee on the footing that the enforceable royalty liability arose only upon the retrospective statutory amendment, not in the earlier years when the coal was raised.

Ratio Decidendi: Under the mercantile system, a liability becomes deductible when an enforceable legal obligation to pay arises; a retrospective statute that first creates or revives the right to recover royalty does not make the liability accrue in earlier years.

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