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cessation of liabilty.

Started by CA.BHUPENDRASHAH, October 13, 2008, 09:45:30 PM

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can sundry creditors ,which are >3 years old , be assessed as income from cessation of liabilty ?

sivaiah G

I think it cannot be. If the creditors account is debited by crediting P & L account by the assessee himself, then there is every possibility to tax the amounts under cessation of liability. Otherwise, it is not possible,  so long as they are shown as sundry creditors.


Dear Mr. Sivaiah G, will your tell the authority for your above opinion

sivaiah G

Dear Sir,

If you see the section, it says that the same is applicable only when the person obtains whether any cash or in any other manner whatsoever, any amount in respect of such trading liability which means that the person should obtain the benefit mentioned therein. So far as the liability is shown in the books it cannot be treated that the person has obtained any benefit out of the liability. Only when it is written off in books, it will be treated that he is no longer be under an obligation to pay to his creditor and therefore, the said amount has been credited to p & l account. Even in the Explanation inserted w.e.f. 01-04-1997 also, writing off is mentioned and therefore, I came to the above conclusion. Otherthan this, I didnot come across any case law in this regard. If anybody knows any case law in this regard, please let the same be shared through this forum.


Hi Folks,

The leading judgement on the subject is that of the Supreme Court in Sagauli Sugar Works 236 ITR 518 where the Court held that a unilateral write back of a liability does not mean that the liability has ceased or that the amount can be assessed as income.

To overcome the judgement, the Explanation to s. 41 (1) has been added to provide that a unilateral write back can be assessed as income.

Of course, if the liabilities are not written back, the Explanation does not apply and Sagauli Sugar holds good.

If the amounts writen back are not liabilities (e.g. deposits or advances received from a customer) than the case will be governed by T. V. Sundaram Iyengar 222 ITR 334 (SC) where it was held that an amount bearing the charecter of a capital receipt when received may become a revenue receipt if treated as such by the assessee.

Both judgements have been put in their proper perspective by the SC in Kesaria Tea 254 ITR 434 (SC). See also: Abdul Ahad 247 ITR 710 (J&K) where the Court has nicely explained the import of the said two judgements.

Hope this helps,


bhaskar rao

Dear Sir,

Thank you very much for imp case law.

In one of clients cases AO has added entire amount of liabilities in balance sheet as income. It is very wrong. client was not asked to prove genuiness either. How AO can make such disallowance.

Any light on issue will be helpful.

Yours faithfully,

Bhaskar Rao ITP.

sivaiah G

First of all, it is to be examined whether the said liability has arisen on account of revenue expenditure or a capital receipt. In case, the expenditure is claimed earlier years and because the payment is not made so that  it was reflected as a liability, then the assessee is under an obligation to prove such liability. Even then it can be proved as a carried forward liability and not created during the year under consideration. Therefore, to make such liability as an addition, the A.O. has to wait till the same is credited to P & L account. If it is not credited it cannot be added during the year under consideration and the A.O. should prove that the expenditure claimed is bogus one and the same should be added as income for the year during which the liability has been created by debiting the P & L account.

In case, if the liability is created on account of capital receipt i.e. a loan received from a creditor and now he is unable to substantiate the same, even then it can be added u/s 68 during the year in which the loan is brought into the books. Without writing of the liability by the assessee which is a carried forward one, In my opinion, it cannot be added to the income for the year under consideration. Even in the case of 222 ITR 344 also, liability has been written off and the same was credited to P & L account and again claimed as a capital receipt in the computation. Therefore,  the Apex Court had held that the same is taxable which is a trading receipt. For application of this case law also, the liabilities written off should be  connected to the business of the assessee. In case, assessee is a manufactureing unit of some other goods and the genuine loan taken by the assessee has been shown as a liability and subsequently because of unforeseen circumstances like death of the loan giver, if such liability has been written off in the books, then whether the case law of Apex court 222 ITR 344 will apply or not. I have some doubts in this regard. In such cases,  only the explanation inserted in sec 41(1) will have to be invoked wherein it is mentioned as liability ( not clearly mentioned as a trading liability and therefore, the liabilities written off created on accout of capital receipt ) which is written off. Any other views in this regard are welcome.