Mercantile accounting and accrued liability prevent shifting excise duty deduction to a later assessment year.

Under the mercantile system of accounting, a liability must be recognised in the year in which it accrues, not in a later year when payment is made. Applying section 13 of the Indian Income-tax Act, 1922 and section 145(1) of the Income-tax Act, 1961, the Kerala HC stated that excise duty liability that arose in 1952 could not be deducted in assessment year 1963-64 merely because it was actually paid in 1962. The Court treated the principle in Kedarnath Jute Mfg. Co. Ltd. as conclusive and held that a past-year liability cannot be shifted to a subsequent assessment year by reason of delayed payment.

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Issues: Whether an assessee following the mercantile system of accounting could claim, in the assessment year 1963-64, deduction of excise duty actually paid in 1962 when the liability to pay had arisen in 1952.

Analysis: Under section 13 of the Indian Income-tax Act, 1922 and section 145(1) of the Income-tax Act, 1961, income is to be computed in accordance with the method of accounting regularly employed by the assessee. On that basis, a liability which had accrued in an earlier year had to be taken into account in that year itself and not in a later year when payment was eventually made. The Court followed the principle that a past-year liability cannot be shifted to a subsequent assessment year merely because payment was delayed, and treated the Supreme Court's decision in Kedarnath Jute Mfg. Co. Ltd. as conclusive.

Conclusion: The deduction was not allowable in the assessment year 1963-64 and the question was answered against the assessee.

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