Restitution liability on decree reversal accrues immediately, and book-entry omission does not defeat deduction under mercantile accounting.

On reversal of a trial court decree, the obligation to make restitution arose automatically under section 144 of the Code of Civil Procedure, including the normal incident of interest. Under mercantile accounting, that legal liability accrued on the date of reversal and was deductible in the relevant previous years even though not yet discharged. The deduction could not be refused merely because no corresponding entry was made in the books, since an accounting omission does not extinguish a liability created by operation of law. The interest amount was therefore not assessable in the assessee's hands.

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Issues: (i) Whether the assessee's liability to refund the decretal amount with interest accrued when the trial court decree was reversed and the suit dismissed; (ii) Whether the assessee could be denied deduction of the interest liability merely because no corresponding entry was made in its account books.

Issue (i): Whether the assessee's liability to refund the decretal amount with interest accrued when the trial court decree was reversed and the suit dismissed.

Analysis: On reversal of the decree, the obligation to make restitution arose by operation of law under section 144 of the Code of Civil Procedure. The liability was not contingent on any further adjudication or on the pendency of the assessee's appeal, and it extended to the normal incident of restitution, including interest. Under the mercantile system, a legal liability is deductible when it accrues, even if not yet discharged.

Conclusion: The liability accrued on the date of reversal of the decree and was deductible in the relevant previous years.

Issue (ii): Whether the assessee could be denied deduction of the interest liability merely because no corresponding entry was made in its account books.

Analysis: A liability created by operation of law does not depend for its existence upon an accounting entry. The omission to make the entry may make the accounts inaccurate, but it does not destroy the accrued liability or extinguish the right to deduction under mercantile accounting principles.

Conclusion: The absence of an entry in the books did not deprive the assessee of the deduction.

Final Conclusion: The reference was answered in favour of the assessee, and the claimed interest amounts were held not to be assessable in its hands.

Ratio Decidendi: A legal obligation arising automatically on reversal of a decree constitutes an accrued liability under the mercantile system, and its deductibility is not defeated by the mere absence of a book entry.

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