Contingent business liability becomes deductible only when arbitration crystallises the obligation, not when it is merely booked earlier.

A business liability is deductible under mercantile accounting only when it has become definite and enforceable, not while it remains contingent or disputed. The article explains that the principal sum was not fixed in an earlier year because the contract left the remuneration dependent on a further arrangement that never materialised, so the liability crystallised only when the arbitration award determined it. Interest was treated even more clearly as arising only from the award, since the agreement contained no interest clause and no statutory entitlement existed. A prior book entry did not alter the tax position. The deduction was therefore allowable in the year in which the award crystallised the liability.

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Issues: Whether the amount awarded in arbitration towards principal and interest was deductible in the accounting year in which the award was made, or whether the liability had accrued in an earlier year.

Analysis: The liability for the principal amount was not shown to have become fixed under the contract in the earlier year because the agreement left the remuneration payable under the relevant clause dependent on a further arrangement between the parties, which never materialised, and the liability had been bona fide disputed. In those circumstances, the obligation remained contingent or inchoate until the arbitration award finally determined it in the accounting year. The position regarding interest was even clearer, because the agreement contained no provision for interest and no statutory entitlement to it existed; the liability to pay interest arose only by reason of the award. A mere book adjustment in an earlier year did not alter the true legal character of the liability for income-tax purposes.

Conclusion: The deduction was allowable in the accounting year in which the arbitration award crystallised the liability, and the questions were answered in favour of the assessee.

Ratio Decidendi: Where a business liability remains contingent and is finally crystallised only by an award or similar event in the accounting year, it is deductible in that year under mercantile accounting, and an earlier book entry does not govern the tax treatment.

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