Mercantile accounting permits deduction of accrued sales-tax liability in the year of the underlying transactions, despite later quantification.

Under the mercantile system, a statutory sales-tax liability accrues when the taxable purchases and sales occur, so a provision made for that liability is deductible in the relevant year even if final quantification or adjustment happens later. A possible refund for export or inter-State sales does not postpone accrual of the primary liability or convert the provision into a contingent liability. The provision was therefore treated as an accrued fiscal liability, and the addition made on account of the sales-tax provision was not sustainable.

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Issues: Whether the assessee, following the mercantile system of accounting, was entitled to deduction of the provision made for sales-tax liability in the relevant accounting year, notwithstanding that part of the liability was quantified or adjusted at a later stage and that refund might become due in respect of export or inter-State sales.

Analysis: The assessee followed the mercantile method and had provided for sales-tax and purchase-tax liabilities arising from purchases and sales made during the year. The statutory scheme showed that the liability under the sales-tax law arose when taxable purchases and sales took place, while any refund in respect of export or out-of-State sales was a later adjustment and did not postpone the accrual of the primary liability. The provision was therefore not a mere contingent liability. On accrual principles, a fiscal liability under a statute is deductible in the year in which the relevant transaction giving rise to the liability occurs, even if final quantification or actual payment occurs later.

Conclusion: The deduction was allowable in the relevant year and the addition made on account of the sales-tax provision was not sustainable.

Ratio Decidendi: Under the mercantile system of accounting, a statutory sales-tax liability is deductible in the year in which it accrues on the relevant transactions, and later quantification or refund does not make it contingent.

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