Accrued excise duty liability remained deductible where the original statutory demand was not withdrawn before year-end.

Under the mercantile system, a statutory liability is deductible when it has crystallised during the accounting year. A disputed excise duty demand did not become contingent merely because the assessee sought relief or because authorities later indicated a revised basis of levy; the original demand was neither withdrawn nor cancelled before year-end. The later reduced demand issued after the accounting year could not alter the character of the earlier accrued liability. The full excise duty liability therefore remained an ascertained and accrued expense for the relevant assessment year.

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Issues: Whether the excise duty demand of Rs. 14,95,252, raised during the accounting year, constituted an ascertained and accrued liability deductible as an expense under the mercantile system, or whether it had become only a contingent liability because of the subsequent correspondence and revised demand.

Analysis: Under the mercantile system, liabilities incurred during the accounting year are deductible when they are ascertained or crystallised. A disputed statutory liability does not cease to be accrued merely because the assessee contests it or seeks relief before the authorities. On the facts, the communication from the excise authorities did not withdraw or cancel the original demand; it only indicated that duty could be reviewed on a compounded levy basis if the assessee agreed to that course. Nothing in that letter, or in the assessee's reply, showed that the original demand had ceased to exist before the close of the accounting year. The later reduced demand was issued only after the year ended and could not retrospectively convert the earlier accrued demand into a mere contingent liability.

Conclusion: The demand of Rs. 14,95,252 remained an accrued and ascertained statutory liability during the accounting year and was allowable as an expense in full; the answer was in favour of the assessee.

Final Conclusion: The reference was answered by holding that the full excise duty liability was deductible in the assessment year concerned.

Ratio Decidendi: A statutory liability that has crystallised by a valid demand during the accounting year remains deductible under the mercantile system unless it is shown to have been withdrawn or cancelled before the year-end; a mere proposal for reassessment or a disputed demand does not make it contingent.

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