Mercantile system deduction for sales tax provision allowed where charging liability had arisen and was reasonably ascertainable

A provision for sales tax debited to profit and loss account was treated as an ascertained liability where the charging provision had already created a present tax obligation. Under the mercantile system, deduction is available when liability has arisen and can be estimated with reasonable precision, even if assessment and final quantification occur later. Difficulty in exact computation does not make the liability contingent if the statutory levy and applicable rate make the obligation sufficiently ascertainable. The Rs. 15,000 provision was therefore allowable in computing business income.

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Issues: Whether the sum of Rs. 15,000 debited in the profit and loss account as provision for sales tax represented an ascertained liability deductible under section 10 of the Indian Income-tax Act, 1922, on the mercantile system of accounting.

Analysis: The liability to tax under a charging provision arises when the statute imposes the charge and fixes the rate, while assessment only quantifies the amount. A liability which has arisen under the charging section is not contingent merely because assessment has not yet been completed. On the mercantile system, a present and ascertainable liability may be debited even if the exact amount requires estimation. The sales tax provision here was made against a statutory levy under the relevant charging provision, and the estimate was supported by the applicable rate and the surrounding statutory scheme. Difficulty in exact computation did not convert the liability into a contingent one.

Conclusion: The Rs. 15,000 provision was an ascertained liability and was allowable as a deduction in computing business income.

Ratio Decidendi: Under the mercantile system, a tax liability becomes deductible when the charging provision creates a present obligation and the amount is ascertainable with reasonable precision, even though assessment and quantification occur later.

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