Mercantile system deduction for quantified sales tax liability applies when the enforceable demand is raised and booked.

Under the mercantile system, a quantified and enforceable sales tax liability is deductible when it is finally demanded and debited in the books, even if it relates to earlier trading periods. The article states that section 10(2)(xv) of the Indian Income-tax Act, 1922 permits deduction of a real business obligation in the year it becomes enforceable, and that no statutory bar prevents deduction merely because the liability arose from prior periods. It also treats the distinction between income accrual and deductible expenditure as material. The stated result is that the deduction was allowable in the assessment year in which the demand was recognised.

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Issues: Whether sales tax liability, quantified and demanded during the previous year but relating to earlier periods, was deductible in the assessment year 1958-59 under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Analysis: The assessee kept its accounts on the mercantile system. The sales tax demand became an enforceable liability when the department finally quantified and raised the demand during the accounting year, and the assessee debited the amount in its books in that year. The statutory allowance for expenditure laid out or expended permits deduction of a real and enforceable business liability when it is brought into account under the mercantile system. There is no statutory bar preventing deduction of such expenditure in the year of demand merely because the liability related to earlier trading periods, and the distinction between income accruing in a previous year and expenditure claimed on an enforceable demand was held material.

Conclusion: The deduction was allowable and the answer to the referred question was in the affirmative, in favour of the assessee.

Final Conclusion: Sales tax liability, once finally demanded and accounted for as an enforceable business obligation under the mercantile system, could be deducted in the assessment year in which the liability was recognized in the books.

Ratio Decidendi: Under the mercantile system, an enforceable and quantified business liability is deductible in the year in which it is finally demanded and debited, even if it relates to transactions of earlier periods, unless the statute expressly bars such deduction.

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