Deductibility of sales tax demand under mercantile accounting allowed where enforceable demand made, deduction upheld.

Deductibility of a past sales tax demand is permitted where the taxpayer follows the mercantile system of accounting and an enforceable departmental demand is made in the accounting year; such demand, once debited in that year, constitutes a business expenditure deductible under section 10(2)(xv). The accrual principle in section 4 limiting income inclusion to the previous year does not by implication bar the Income-tax Officer from recognising an expenditure incurred in the year of demand. The operative effect is that a final sales tax demand payable in the relevant previous year may be claimed as a deduction in that assessment year where genuineness and compulsiveness of the liability are established.

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Issues: Whether the sum of Rs. 43,377 representing the final demand of sales tax made by the revenue and debited by the assessee in its accounts during the previous year to the assessment year 1958-59 could be allowed as a deduction under section 10(2)(xv) of the Income-tax Act, 1922.

Analysis: The expenditure is wholly and exclusively laid out for the purpose of the assessee's business and the assessee follows the mercantile system of accounting. Under the mercantile system, an enforceable demand which is debited in the assessee's accounts constitutes an expenditure "laid out" in the accounting year in which the demand is made. Authorities considering analogous facts distinguish cases where income or liability is sought to be related back to an earlier year; however, there is no statutory bar preventing an assessee from claiming as a deduction in the year of demand an expenditure which was not debited in earlier accounting years once the demand becomes enforceable and is entered in the books.

Conclusion: The sum of Rs. 43,377 representing the final demand of sales tax debited by the assessee during the relevant previous year is a permissible deduction under section 10(2)(xv) and the question is answered in the affirmative in favour of the assessee.

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