Accrued liability test bars deduction for unsupported bonus and wage provisions under mercantile accounting.

Under the mercantile system, only a liability that has actually accrued and crystallised on proved facts is deductible. ITAT Ahmedabad held that a provision for bonus payable to bidi workers was not allowable because the assessee did not establish the factual basis, worker-wise details, or that the cited precedent automatically created a bonus liability under the Payment of Bonus Act. It also disallowed the claim for wages relating to damaged bidies because the assessee failed to show an ascertained, enforceable, and properly computed liability in the relevant year. Both claims were therefore sustained as disallowances in favour of Revenue.

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Issues: (i) Whether the assessee was entitled to deduction for provision made towards bonus payable to bidi workers as an accrued liability. (ii) Whether the assessee was entitled to deduction for liability towards wages for damaged bidies.

Issue (i): Whether the assessee was entitled to deduction for provision made towards bonus payable to bidi workers as an accrued liability.

Analysis: The liability claimed as bonus was not shown to be a crystallized liability in the relevant year. The assessee did not furnish the factual basis for computing the amount, did not produce details of the workers to whom the provision related, and did not establish that the Supreme Court ruling concerning bidi workers under the Provident Fund law automatically created a bonus liability under the Payment of Bonus Act, 1965 for all categories of workers. On the material produced, the claim was found to be an estimated and unsupported provision rather than an accrued liability allowable under mercantile accounting principles.

Conclusion: The deduction for bonus provision was not allowable and the finding was in favour of Revenue.

Issue (ii): Whether the assessee was entitled to deduction for liability towards wages for damaged bidies.

Analysis: The assessee failed to produce the particulars necessary to show that the claimed amount represented an ascertained and enforceable liability. The reliance placed on the earlier High Court decision did not help because the factual basis for the computation of the claim was not established and no material was placed to show that the liability had crystallized in the relevant year. In the absence of proof of actual liability and computation, the claim could not be treated as deductible expenditure.

Conclusion: The deduction for wages for damaged bidies was not allowable and the finding was in favour of Revenue.

Final Conclusion: The Tribunal reversed the appellate relief and sustained the disallowance of both claims, holding that neither claim was supported by a crystallized and substantiated liability.

Ratio Decidendi: Under the mercantile system, only a liability that has actually accrued and crystallized on the basis of proved facts is deductible; a mere estimated or unsubstantiated provision is not allowable.

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