Mercantile system deduction depends on accrued tax liability; later assessment cannot create retrospective liability where none existed.

Under the mercantile system, a tax deduction is allowable only when a legal liability has accrued in the relevant year. The assessee had collected purchase tax, but on the facts no enforceable liability to purchase tax on arhar dal had arisen in that previous year under section 3D of the U.P. Sales Tax Act, and a later assessment order could not create retrospective liability. As no statutory liability had accrued when the books entries were made, the amount was not deductible and was rightly added to taxable income.

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Issues: Whether the amount of Rs. 49,768 collected as purchase tax but not paid over in the relevant previous year was deductible in computing the assessee's income, or was rightly added as part of his taxable income.

Analysis: The collection of purchase tax formed part of the assessee's trading receipt. For an assessee following the mercantile system, a tax liability may be deducted in the year in which it accrues, but only if a legal liability has arisen in that year. On the facts, the assessee was not liable to purchase tax on arhar dal in the relevant previous year under section 3D of the U.P. Sales Tax Act, and the later assessment order could not create a liability retrospectively for that year. Since no enforceable liability had accrued when the books entries were made, the amount could not be deducted in that year.

Conclusion: The addition of Rs. 49,768 to the assessee's income was justified, and the issue was decided against the assessee.

Ratio Decidendi: Under the mercantile system, a tax deduction is allowable only when a legal liability has accrued in the relevant year; a later assessment or quantification does not create retrospective accrual where no statutory liability existed in that year.

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