Accrued sales tax liability is deductible under mercantile accounting even while the levy's validity is under challenge.

Sales tax liability debited in the accounts was treated as deductible under the mercantile system because the liability arose when sales occurred and was not contingent merely because the taxing enactment was under challenge. The liability was considered accrued and ascertained where the assessee had recognised it as a present business obligation, even if the amount was estimated. Later validation of the levy was treated as confirming that the statutory liability existed during the relevant accounting year. On that basis, the sales tax amount was regarded as an admissible deduction and the question was answered in favour of the assessee.

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Issues: Whether sales tax liability debited in the accounts, though the validity of the taxing enactment was under challenge, was an admissible deduction under the mercantile system of accounting.

Analysis: The liability to sales tax arose under the charging provision of the U.P. Sales Tax Act and attached to sales as they occurred. Under the mercantile system, expenditure is deductible when the legal liability is incurred, not only when it is paid. The fact that the assessee estimated the amount or that the validity of the validating enactment had been challenged did not make the liability contingent or unascertained. The liability had been treated by the assessee as a present and fixed business obligation, and the later judicial controversy over validity did not alter the character of the liability for the relevant accounting year. The court also treated the Supreme Court's validation of the levy as confirming that the statutory liability existed during the year.

Conclusion: The sales tax amount was an accrued and ascertained liability and was deductible. The question was answered in the affirmative, in favour of the assessee.

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