This is departmental appeal. main contention in these appeal is whether assessee is entitled to deduction of Rs. 7,56,590. 2. assessee is individual having business in sale of spirits and liquors. They had entered into agreement with M/s. Vishindas Parasram regarding purchase of their stock. By letter dated 19-5-1979, M/s. Vishindas Parasram (V. P. for sake of brevity) wrote to assessee that as condition of their purchases, assessee should bear all sales-tax liability raised on V. P. on all purchases made by assessee. On 25-5-1979, assessee wrote back stating that he was agreeable to terms and conditions as stated in assessee's letter. As far as sales-tax is concerned, he stated that he will be paying by way of Demand Draft or challan direct to Commercial Tax Officer on liquor sold by V. P. and purchased by assessee. 3. On 3-11-1979, V. P. wrote another letter to assessee. In this letter, it was stated that additional sales-tax liability if any in additional to sales- tax agreed to be paid by assessee shall also be borne by assessee, should sales-tax department demand any additional sales-tax from V. P. This arrangement was in respect of transactions commencing from 1-8-1979. assessee had accepted this term also. 4. assessee's accounting year is financial year 1980-81. accounting year of M/s. V. P. however is for period from 1st July, 1979 to 30th of June,, 1980. During accounting year of assessee, he received letter from M/s. V. P. dated 3-7-1980. In this letter, it was stated that additional sales-tax liability which was agreed to be paid by assessee worked out to Rs. 8, 15,208 and this amount was payable by assessee. 5. It is necessary to explain difference between sales-tax and additional sales-tax. It would appear that rate of sales-tax on liquors during this year was 40.5 per cent. Now when seller works out bill for sale of goods he adds sales-tax at rate of 40.5 per cent. Supposing goods were costing Rs. 100, sales-tax levied to be Rs. 40.5 and total bill amount will be Rs. 140.50. However, sales-tax department treats Rs. 140.50 as sale of goods and levies tax thereon. Thus, there will be tax on tax and effective rate of sales-tax then goes up to Rs. 68.07. In this case, seller will have to pay sales-tax of Rs. 68 on goods costing Rs. 100. difference between Rs. 68 and Rs. 40.50 is additional sales-tax. M/s. V. P. and many other dealers had actually filed writ petitions against levy of additional sales-tax. During accounting year under consideration these writ petitions were pending. But, it appears that in 1983 High Court had dismissed these writ petitions and in January 1987 Supreme Court had also upheld Government's method of levy of sales-tax and additional sales-tax. 6. For asst. year 1981-82, assessee claimed before Income-tax Officer that additional sales-tax leviable on M/s. V. P. in respect of goods purchased by assessee is liability of assessee and it should be allowed as deduction. Income-tax Officer in long and detailed order held that assessee is not entitled to this deduction. He pointed out that liability was only contractual liability although it might constitute statutory liability of M/s. V. P. Further, on going through assessment orders of sales-tax Department, he found that department has not levied any additional sales-tax liability at all. He further found that assessee had not unconditionally accepted obligation to pay additional sales-tax liability of M/s. V. P. It was only contingent and was based on department actually raising such as additional demand. Since no such additional demand had been raised in accounting year, he he held that assessee is not entitled to deduction. 7. assessee appealed. Commissioner (Appeals) found that amount payable as additional sales-tax and claimed by assessee was not ad hoc estimates but one which is correctly calculated. He then referred to t h e agreement between assessee and V. P. and pointed out that assessee has to pay sales-tax and additional sales-tax. After noting that V. P. had disputed levy of additional sales-tax in writ petition filed before Andhra Pradesh High Court and had obtained stay of collection of tax, he held that additional sales-tax was accrued liability which had been disputed but since that was accrued liability it should be allowed as deduction. In paragraph 18, he gave his findings as follows: "18. Summing up above factual and legal position, I hold that sales- tax provisions of Rs. 8,15,208 made in appellant's books of account, being in respect of discharge of statutory liability to pay sales-tax on turnover of dealer (VP), would constitute accrued and ascertained liability, considering mercantile system of accounting followed and relevant principle of law as laid down in various Supreme Court decisions and in Andhra Pradesh High Court decision and in case of CENTRAL WINES, regarding treatment of sales-tax paid by purchaser as forming part of sellers' turnover. Merely because seller had disputed tax liability in its own sales-tax assessment proceeding and fact that sales-tax assessment in its case was completed long afterwards, would not make impugned liability contingent liability or liability de-futuro. On contrary, impugned liability is liability in praesenti. Accordingly, impugned addition of Rs. 7,56,590 is deleted." department is in appeal before us. We have heard Sri Santhanam for t h e department and Sri Dasaratharama Reddy for assessee. first question to be decided is nature of this liability. Is this contractual liability or is this statutory liability? We have no doubt in our mind that it is only contractual liability. payment of additional sales-tax by V. P. may be statutory liability for V. P. but as far as assessee is concerned, this is only part of cost of goods, he had purchased from V. P. As per agreements entered into by him, cost of goods would be cost as filed by V. P., sales-tax payable thereon and additional sales-tax payable. As far as cost and sales-tax payable thereon is concerned, there is no dispute that they are fixed at point of time of purchase and assessee had made arrangements for its payments. additional sales-tax payable, although it also forms part of cost is not quantified at that stage. That is clear from letter of V. P. obligating assessee to pay additional sales-tax. That letter is reproduced below: "M/s. Rajaveer Trading Corporation, Ramanthapur, Ranga Reddy District. Dear Sir, additional sales-tax liability if any in addition to sale-tax agreed to be paid by you shall also be borne by you, should sale-tax department demand any additional sales-tax from us. This arrangement is in respect of transaction commencing from 1-8-1979. Thanking you, Yours faithfully, Sd/ Partner." It would be seen that letter is conditional, i.e., "should Sales-tax Department demand any additional sales-tax" then assessee has to pay that amount? This letter was written on 3-11-1979 and reflected doubts of V. P. regarding likelihood of such liability accruing to them. This is not first year when V. P. had been called upon to pay this amount. It is quite likely that for earlier year also, they were called upon to make these payments and matter had already been disputed. That is why, they make it conditional "should Sales Tax Department demand any additional sales-tax". This may be contrasted by agreement between them with regard to payment of sales- tax itself. That letter dated 19-5-1979 reads as follows: "Dear Sir, We have to bring to your notice, further to our oral discussions and conditions already listed out, that you should also bear all sales-tax liability raised on us on all purchase made by you from us. Thanking you, Yours faithfully, for Vishindas Parasram. Sd/ (MANAGER)" There is no doubt expressed in this letter regarding likelihood of sales-tax liability being raised. It is clearcut and direct contract under which liability being raised. It is clearcut and direct contract under which assessee should bear all sales-tax liability on purchases made by assessee. They have not made it contingent on sales-tax department raising demand. This vital point has been missed by Commissioner (Appeals). 8. Therefore, according to contract between assessee and V. P., assessee's liability to pay additional cost of goods equivalent to additional sales-tax payable by V. P. would accrue and arise only when V. P. in turn is required by sales-tax department to pay this additional sales-tax. It cannot be earlier. Since additional sales-tax was not demanded during this accounting year, it cannot be liability of this year. Therefore, Income-tax Officer is justified in his finding that it cannot be allowed as deduction. 9. Sri Reddy submitted that letters embodying that contract should not be read as statute. They are letters of businessmen and it should be understood i n way businessmen understand these letters. By these letters assessee had taken over liability of additional sales-tax. It is true that this liability is contractual liability but according to Sri Reddy statutory liability of V. P. becomes contractual liability of assessee as soon as purchases are made. According to him, it may be that it is not demanded by sales-tax department but it is very easy to quantify them. Such quantified additional cost of goods must be allowed in year in which goods were purchased. We are unable to agree with this submission. It is true those letters should not be treated like statutory provisions and its meaning to be ascertained by applying rules regarding interpretations of documents. At same time, plain tenor of letter should not be ignored. We have noticed earlier difference between ordinary sales-tax and additional sales-tax It is in unmistakable terms that additional sales-tax liability is passed on assessee only when sales-tax department raises demand. As far as regular sales-tax is concerned, assessee as per contract has even agreed to pay by way of demand draft and challan direct to Commercial Tax Officer on liquor purchased by him. This is contained in assessee's commitment to V. P. in letter dated 25-5-1979. There is no such commitment for additional sales-tax. Thus, both V. P. as well as assessee has understood additional sales-tax liability as something different in nature from regular sales-tax liability. Even while reading these letters as businessmen, this point cannot be overlooked. 10. It was next submitted by Sri Reddy that it is not always correct to say, only when demand is raised liability can accrue. prudent businessman would make provision for contingent payment also. When such contingent payment is interlinked with statutory payment, businessman in order to get correct profit is obliged to make provision for contingent liability. It will be only reasonable and would help in ascertaining correct profits of year. He submitted that additional liability is more than 20 per cent and no businessman would take over himself such large liability. he submitted that assessment order was only matter of quantification and claim for liability need not wait till such quantification is done. 11. We are unable to accept this submission also. Under mercantile system of accounts, only liability which has arisen must be allowed as deduction. it is quite true that sometimes provisions are allowed but in those cases liability was definite and only payment is postponed. In this case there is no definiteness about accrual of liability. whole matter was in dispute. V. P. had not admitted such liability. Whether High Court would uphold validity of such imposition was very much debatable at that stage. Andhra Pradesh High Court's decision and Supreme Court's decision on this point came long after end of accounting year. That being so, we cannot accept that provision made to cover possible liability on this should be treated as allowable deduction. Sri Reddy had cited several cases in support of his contentions. But all these cases are easily distinguishable. He had cited Supreme Court's decision in case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 but that was case dealing with statutory liability whereas we are dealing with contractual liability. Andhra Pradesh High Court's decision in case of Buddala China Venkata Rao & Co. v. CIT [1978] 112 ITR 58 was also dealing with sales-tax liability on dealer. other decisions cited like decisions of Calcutta High Court in case of CIT v. Rajeshwari Distributors (P.) Ltd. [1980] 125 ITR 618 and Allahabad High Court in case of ITAT v. B. Hill & co. (P.) Ltd. [1983] 142 ITR 185 also dealing with statutory liabilities arising directly on dealers. These are not relevant in deciding issue at point of time contractual liability to relevant in deciding issue at point of time contractual liability to reimburse statutory liability arises. 12. In ground No. 7, department is contesting finding that sales- tax liability on refundable deposits would also be admissible deduction to assessee. At time of hearing, Sri Reddy for assessee conceded that there was no such liability on assessee. 13. No other point has been pressed. 14. In result, departmental appeal is allowed. *** INSPECTING ASSISTANT COMMISSIONER v. RAJKUMAR V. RUPANI