Accrued liability test denies deduction for later-approved additional milk purchase price under mercantile accounting

Under the mercantile system, an additional purchase price is deductible only when the liability has actually accrued and crystallised during the relevant year. Here, the milk price paid during the year was treated as final, and the later board and general body resolution created a fresh obligation rather than recognising a pre-existing one. Because the extra amount arose only when that later decision was taken, it did not constitute an accrued liability of the accounting year. The claimed deduction was therefore not allowable in that year, and the Revenue's position prevailed.

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Issues: Whether the provision of Rs. 24 lakhs made towards additional milk purchase price was deductible in the relevant accounting year.

Analysis: The price paid during the year was found to be a final price and not a tentative one. The later resolution of the board and general body did not create a pre-existing liability during the accounting year but only brought about a fresh decision to grant an additional amount. The cases relied on by the assessee concerned situations where the additional price or bonus formed part of a liability already crystallised during the accounting year, which was not the position here. In a mercantile system, deduction follows the year in which the liability accrues, and on these facts the liability to pay the extra price arose only when the later resolution was passed.

Conclusion: The deduction was not allowable in the accounting year and the issue is decided against the assessee and in favour of the Revenue.

Final Conclusion: The departmental appeal succeeded because the claimed amount did not represent an accrued liability of the relevant year.

Ratio Decidendi: An additional purchase price becomes deductible only when the liability to pay it is actually incurred and crystallised by a valid later decision, not merely because the underlying purchases were made earlier.

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