Before the Kerala High Court in the case of CIT v. Kesaria Tea Co. Ltd. (109TAX44) there was a case of an assessee who wrote back in its accounts certain amount representing provision for purchase tax of earlier years though the matter in that respect was pending before sales tax authorities. The Tribunal held that unilateral action on the part of the assessee could not extinguish statutory liability and no part of such amount could be brought to tax.
In interpreting the law under section 41(1) of the Act the High Court held for section 41(1) to be invoked, concerned liability of the assessee must have ceased finally. There must be no possibility of liability reviving in any future time. If there is any such possibility, then cessation is not complete and section 41(1) is not attracted. Further Calcutta Bench of the ITAT in the case of General Fibre Dealers ( P.) Ltd. v. Asstt. CIT( 72TAX163) held that liabilities which neither ceased nor were extinguished but were written back unilaterally would not constitute income liable to tax.
In the case of Rane Brake Linings Ltd. v. IAC (55ITD108) the Madras Bench of the ITAT laid down the following principles governing cessation of trading liability. It held that :-
- The general rule is that a debt subsists notwithstanding the fact that its recovery is barred by limitation. This is because the debtor may well pay the debt. Again, it is well settled that a time barred debt is a good consideration for a fresh promissory note.
(ii) Debts relating to salary/wages/bonus might have been barred by the limitation prescribed under section 19 of the Limitation Act. Yet, by reason of the provisions of special legislations, such as the Industrial Disputes Act, no bar of limitation comes in the way of the employees.
(iii) A debt does not become time barred in the normal way in cases where it is acknowledged by being exhibited as such in the balance sheet of a concern.
(iv) The normal rule again is that in cases where the debt has become barred by limitation, the unilateral act on the part of the debtor in writing back the amount in question to the credit of his capital account or Profit & Loss A/c does not bring about a cessation or remission of his liability.
(v) In such cases cessation of the liability occurs where such write back is coupled with the debtor’s unequivocal declaration of his intention not to honour his liability.
(vi) As long as a debt is not time barred, a remission or cessation thereof can occur only as a result of a bilateral act between the debtor and the creditor.
(vii) Where, however, a debt has become time barred by operation of law, the fact that the debtor has diverted the liability to his P & L A/c must be regarded as one of the most unequivocal modes of the declaration of the debtor’s intention not to pay the debt. In such cases the factum of the debtor’s transferring the sums in question to the credit of his capital account/profit and loss account will amount to cessation of liability.
(viii) Even after writing the sum in question back to the credit of the capital account/profit and loss account, it is open to the debtor to show the existence of extra-ordinary circumstances in support of his contention that his own action of crediting the sum to his capital account/profit and loss account notwithstanding, the liability still survives. Clearly, in such cases a heavy onus is cast on the debtor to bring sufficient material on record in support of his contention.