Old creditor balances have been sitting in my books for twenty years and nobody has sued. If I move them to reserves, does section 41(1) tax them?
No, on the law as it stood for assessment year 1965-66. The Supreme Court held that section 41(1) requires the assessee to have obtained an amount, in cash or otherwise, or a benefit by way of remission or cessation of the liability, and that obtaining is the condition on which the section works. A debtor cannot bring about remission or cessation by his own unilateral act; remission must come from the creditor. Expiry of limitation bars the creditor's remedy but does not extinguish the debt, and whether limitation has in fact run cannot be decided without the creditor before the authority.
Decided by the Supreme Court (Supreme Court of India - M. Srinivasan and U.C. Banerjee JJ) on 1999-02-04, reported as AIR 1999 SC 1144; 1999 (2) SCC 355; 1999 AIR SCW 804; 1999 Tax LR 358; (1999) 102 Taxman 713; (1999) 1 SCALE 323; (1999) 236 ITR 518; (1999) 1 JT 329 (SC). It bears on section 41(1) of the Income Tax Act 1961, in Assessment & Scrutiny matters.
This is the decision that settles what section 41(1) actually requires, and its two limbs are separate weapons. The first is contractual: remission is the creditor's act, and cessation happens by operation of law, by contract, or by payment, none of which a book entry achieves. The second, which the Court says the Bombay High Court in Bennett Coleman overlooked entirely, is textual: the section speaks of an amount obtained, and unless something is actually received - in cash, by adjustment entry, by credit note or in some equivalent form - the charge does not arise at all, whatever the accounting method. The Court also disapproves the reasoning in Bennett Coleman and confines the Calcutta decision in General Industrial Society to its own facts, where the assessee had made a practice of writing such balances back year after year and had withheld details from the officer.
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The assessee was a private limited company. In the year ended 30 June 1964, relevant to assessment year 1965-66, it transferred Rs 3,45,000 from a suspense account running from 1946-47 to 1948-49 to its capital reserve account. The Income Tax Officer found that Rs 1,29,000 related to deposits and advances that had been repaid, and included the balance of Rs 2,56,529 in total income under section 41. The Appellate Assistant Commissioner confirmed. The Tribunal accepted the assessee's case that a unilateral entry transferring the amount to capital reserve did not bring the matter within section 41, and decided in its favour. On reference the High Court agreed, holding that the transfer of an entry is a unilateral act of a debtor, that remission has to be granted by the creditor, that cessation may occur by operation of law where the liability becomes unenforceable and the debtor unequivocally declares his intention not to honour it when payment is demanded, or by contract between the parties, or by discharge through payment, and that a transfer of entry is neither an agreement nor payment. The Commissioner appealed, arguing that more than twenty years had passed without the creditors taking any step to recover, so the debt had ceased.
The appeal was dismissed, with no order as to costs. The reasoning of the High Court, which had followed J.K. Chemicals Ltd v CIT (1966) 62 ITR 34, was correct. Obtaining a benefit by way of remission or cessation is the condition precedent for section 41(1), and the mere fact that the assessee made a transfer entry in his accounts unilaterally does not let the Department apply the section. A debtor cannot get rid of his liability by an entry in his own books. Whether a liability is in fact barred by limitation cannot be decided on the assessee's case alone; it can be decided only with the creditor before the authority, since circumstances may allow a creditor to enforce a debt even after the ordinary period has run. On the settled principle in Bombay Dyeing & Manufacturing Co Ltd v State of Bombay (1958) SCR 1122, expiry of limitation does not extinguish the debt but only prevents the creditor from enforcing it, so a unilateral entry cannot show that the liability has come to an end, and in any event confers no benefit of the kind the section contemplates. The Court declined to accept the reasoning of the Bombay High Court in CIT v Bennett Coleman and Co Ltd (1993) 201 ITR 1021, and held that CIT v General Industrial Society Ltd (1994) 207 ITR 169 turned on its own peculiar facts, while CIT v Jiajee Rao Cotton Mills Ltd (1997) 227 ITR 860 contained no separate reasoning.
The Court began with the words of the section: an allowance or deduction must have been made in an earlier assessment, and the assessee must subsequently have obtained, in cash or in any other manner whatsoever, an amount in respect of that loss or expenditure, or some benefit in respect of the trading liability by way of remission or cessation. Obtaining a benefit by remission or cessation is therefore a sine qua non. Remission is an act of the creditor. Cessation can arise by operation of law, by contract, or by discharge through payment, and the transfer of a book entry is none of these. That was the reasoning of J.K. Chemicals, which the Court expressly approved. Second, the Court gave weight to the requirement that an amount be obtained, which it said the Bombay High Court had omitted to consider in Bennett Coleman. It adopted the analysis of the Gujarat High Court Full Bench in CIT v Bharat Iron & Steel Industries (1993) Tax LR 188, following CIT v Rashmi Trading, that the system of accounting is of no relevance to section 41(1) and that the words point to actual receipt of the amount, whether by cash, an adjustment entry, a credit note or another form in which cash or its equivalent may be said to have been received. Third, on limitation, the Court applied Bombay Dyeing: the statute bars the remedy, not the right, so the debt survives; and since the creditor is not before the assessing authority, the question whether limitation has run cannot properly be determined there, especially as circumstances may revive a creditor's ability to sue. Bennett Coleman's alternative reasoning, that an assessee who writes a time-barred liability back to profit and loss cannot afterwards resist section 41(1), was not accepted either, the Court reiterating that a unilateral entry cannot discharge a liability. General Industrial Society was distinguished because the Calcutta Bench had itself identified two special features - a practice of writing back unclaimed liabilities year after year on the plea of limitation, and a failure to give the Assessing Officer particulars despite specific enquiry - which gave that case a different colour.
Just because an assessee makes an entry in his books of accounts unilaterally, he cannot get rid of his liability.
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Handle my notice → Ask a CA on WhatsAppNo, on the law as it stood for assessment year 1965-66. The Supreme Court held that section 41(1) requires the assessee to have obtained an amount, in cash or otherwise, or a benefit by way of remission or cessation of the liability, and that obtaining is the condition on which the section works. A debtor cannot bring about remission or cessation by his own unilateral act; remission must come from the creditor. Expiry of limitation bars the creditor's remedy but does not extinguish the debt, and whether limitation has in fact run cannot be decided without the creditor before the authority. This was decided by the Supreme Court (Supreme Court of India - M. Srinivasan and U.C. Banerjee JJ) and bears on section 41(1) of the Income Tax Act 1961. It is reported as AIR 1999 SC 1144; 1999 (2) SCC 355; 1999 AIR SCW 804; 1999 Tax LR 358; (1999) 102 Taxman 713; (1999) 1 SCALE 323; (1999) 236 ITR 518; (1999) 1 JT 329 (SC). This is the decision that settles what section 41(1) actually requires, and its two limbs are separate weapons. The first is contractual: remission is the creditor's act, and cessation happens by operation of law, by contract, or by payment, none of which a book entry achieves. The second, which the Court says the Bombay High Court in Bennett Coleman overlooked entirely, is textual: the section speaks of an amount obtained, and unless something is actually received - in cash, by adjustment entry, by credit note or in some equivalent form - the charge does not arise at all, whatever the accounting method. The Court also disapproves the reasoning in Bennett Coleman and confines the Calcutta decision in General Industrial Society to its own facts, where the assessee had made a practice of writing such balances back year after year and had withheld details from the officer. If it applies to you, the first step is this: Make the Department identify what you obtained. If nothing was received and no creditor granted anything, the section does not engage however old the balance is.
The assessee was a private limited company. In the year ended 30 June 1964, relevant to assessment year 1965-66, it transferred Rs 3,45,000 from a suspense account running from 1946-47 to 1948-49 to its capital reserve account. The Income Tax Officer found that Rs 1,29,000 related to deposits and advances that had been repaid, and included the balance of Rs 2,56,529 in total income under section 41. The Appellate Assistant Commissioner confirmed. The Tribunal accepted the assessee's case that a unilateral entry transferring the amount to capital reserve did not bring the matter within section 41, and decided in its favour. On reference the High Court agreed, holding that the transfer of an entry is a unilateral act of a debtor, that remission has to be granted by the creditor, that cessation may occur by operation of law where the liability becomes unenforceable and the debtor unequivocally declares his intention not to honour it when payment is demanded, or by contract between the parties, or by discharge through payment, and that a transfer of entry is neither an agreement nor payment. The Commissioner appealed, arguing that more than twenty years had passed without the creditors taking any step to recover, so the debt had ceased. The matter was decided on 1999-02-04 by the Supreme Court (Supreme Court of India - M. Srinivasan and U.C. Banerjee JJ). On those facts the Supreme Court held as follows. The appeal was dismissed, with no order as to costs. The reasoning of the High Court, which had followed J.K. Chemicals Ltd v CIT (1966) 62 ITR 34, was correct. Obtaining a benefit by way of remission or cessation is the condition precedent for section 41(1), and the mere fact that the assessee made a transfer entry in his accounts unilaterally does not let the Department apply the section. A debtor cannot get rid of his liability by an entry in his own books. Whether a liability is in fact barred by limitation cannot be decided on the assessee's case alone; it can be decided only with the creditor before the authority, since circumstances may allow a creditor to enforce a debt even after the ordinary period has run. On the settled principle in Bombay Dyeing & Manufacturing Co Ltd v State of Bombay (1958) SCR 1122, expiry of limitation does not extinguish the debt but only prevents the creditor from enforcing it, so a unilateral entry cannot show that the liability has come to an end, and in any event confers no benefit of the kind the section contemplates. The Court declined to accept the reasoning of the Bombay High Court in CIT v Bennett Coleman and Co Ltd (1993) 201 ITR 1021, and held that CIT v General Industrial Society Ltd (1994) 207 ITR 169 turned on its own peculiar facts, while CIT v Jiajee Rao Cotton Mills Ltd (1997) 227 ITR 860 contained no separate reasoning.
The Court began with the words of the section: an allowance or deduction must have been made in an earlier assessment, and the assessee must subsequently have obtained, in cash or in any other manner whatsoever, an amount in respect of that loss or expenditure, or some benefit in respect of the trading liability by way of remission or cessation. Obtaining a benefit by remission or cessation is therefore a sine qua non. Remission is an act of the creditor. Cessation can arise by operation of law, by contract, or by discharge through payment, and the transfer of a book entry is none of these. That was the reasoning of J.K. Chemicals, which the Court expressly approved. Second, the Court gave weight to the requirement that an amount be obtained, which it said the Bombay High Court had omitted to consider in Bennett Coleman. It adopted the analysis of the Gujarat High Court Full Bench in CIT v Bharat Iron & Steel Industries (1993) Tax LR 188, following CIT v Rashmi Trading, that the system of accounting is of no relevance to section 41(1) and that the words point to actual receipt of the amount, whether by cash, an adjustment entry, a credit note or another form in which cash or its equivalent may be said to have been received. Third, on limitation, the Court applied Bombay Dyeing: the statute bars the remedy, not the right, so the debt survives; and since the creditor is not before the assessing authority, the question whether limitation has run cannot properly be determined there, especially as circumstances may revive a creditor's ability to sue. Bennett Coleman's alternative reasoning, that an assessee who writes a time-barred liability back to profit and loss cannot afterwards resist section 41(1), was not accepted either, the Court reiterating that a unilateral entry cannot discharge a liability. General Industrial Society was distinguished because the Calcutta Bench had itself identified two special features - a practice of writing back unclaimed liabilities year after year on the plea of limitation, and a failure to give the Assessing Officer particulars despite specific enquiry - which gave that case a different colour. In the words reproduced by the source cited on this page: "Just because an assessee makes an entry in his books of accounts unilaterally, he cannot get rid of his liability."
It was decided by the Supreme Court on 1999-02-04 and is reported as AIR 1999 SC 1144; 1999 (2) SCC 355; 1999 AIR SCW 804; 1999 Tax LR 358; (1999) 102 Taxman 713; (1999) 1 SCALE 323; (1999) 236 ITR 518; (1999) 1 JT 329 (SC). Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 41(1), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was dismissed, with no order as to costs. The reasoning of the High Court, which had followed J.K. Chemicals Ltd v CIT (1966) 62 ITR 34, was correct. Obtaining a benefit by way of remission or cessation is the condition precedent for section 41(1), and the mere fact that the assessee made a transfer entry in his accounts unilaterally does not let the Department apply the section. A debtor cannot get rid of his liability by an entry in his own books. Whether a liability is in fact barred by limitation cannot be decided on the assessee's case alone; it can be decided only with the creditor before the authority, since circumstances may allow a creditor to enforce a debt even after the ordinary period has run. On the settled principle in Bombay Dyeing & Manufacturing Co Ltd v State of Bombay (1958) SCR 1122, expiry of limitation does not extinguish the debt but only prevents the creditor from enforcing it, so a unilateral entry cannot show that the liability has come to an end, and in any event confers no benefit of the kind the section contemplates. The Court declined to accept the reasoning of the Bombay High Court in CIT v Bennett Coleman and Co Ltd (1993) 201 ITR 1021, and held that CIT v General Industrial Society Ltd (1994) 207 ITR 169 turned on its own peculiar facts, while CIT v Jiajee Rao Cotton Mills Ltd (1997) 227 ITR 860 contained no separate reasoning. It arises in Assessment & Scrutiny matters, on section 41(1) of the Income Tax Act 1961, and was decided by Supreme Court of India - M. Srinivasan and U.C. Banerjee JJ. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Do not treat the limitation period as decisive. Barring the remedy is not extinguishing the debt, and the question cannot be settled in the creditor's absence. Be able to explain each old balance and produce particulars when asked, because concealment of details and a habit of writing back year after year is what made the Calcutta case go the other way. Think before writing a stale liability back to the profit and loss account, since crediting it as income invites the argument that you have treated it as your own. For any year from assessment year 1997-98, read Explanation 1 to section 41(1) before relying on this case, since the statute now addresses a unilateral write-off in the accounts.
Still good law. A citator search returns 350 later decisions citing this judgment. The Delhi High Court adopted its reasoning in CIT v Vardhman Overseas Ltd (23 December 2011); the Jammu and Kashmir High Court in CIT v Abdul Ahad (3 October 2000) expressly rejected a submission that it was per incuriam; and it is applied to this day, for instance by the Pune Tribunal in DCIT v Indus Biotech Pvt Ltd (22 October 2024) and the Kolkata Tribunal in Jashojit Mukherjee v ACIT (4 May 2018). Nothing overruling or doubting it was found - the one challenge to its authority that the search turned up was the per incuriam plea, and it failed. The caution is statutory, not judicial: the year in issue was 1965-66, and Explanation 1 to section 41(1) now deals expressly with a unilateral write-back of the liability in the assessee's accounts, so the section must be read as it stands for the year under assessment. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Until build 87 this library carried a second entry on the same judgment, at /caselaw/case/cit-v-sugauli-sugar-works-cessation-of-liability/, which asked: Old creditors have been lying in my books for twenty years and I have written them back to reserves - can the Assessing Officer tax that under section 41(1)? It was the shorter of the two write-ups and has been merged into this one. That address now redirects here, and every citation, section and subject it carried that this entry did not has been folded in. The judgment does not consider Explanation 1 to section 41(1), which post-dates the assessment year before it, so it says nothing about how a unilateral write-off is treated once that Explanation applies; my note about the Explanation is from my own knowledge and was not checked against a source here. The Court also does not decide what would follow if a creditor were before the authority and the debt were shown to be extinguished. The nature of the suspense account balances is not explained beyond the reference in the extracted High Court passage to the assessee being a debtor to its employees. I have not read the High Court judgment in full or the decisions discussed. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed, with no order as to costs. The reasoning of the High Court, which had followed J.K. Chemicals Ltd v CIT (1966) 62 ITR 34, was correct. Obtaining a benefit by way of remission or cessation is the condition precedent for section 41(1), and the mere fact that the assessee made a transfer entry in his accounts unilaterally does not let the Department apply the section. A debtor cannot get rid of his liability by an entry in his own books. Whether a liability is in fact barred by limitation cannot be decided on the assessee's case alone; it can be decided only with the creditor before the authority, since circumstances may allow a creditor to enforce a debt even after the ordinary period has run. On the settled principle in Bombay Dyeing & Manufacturing Co Ltd v State of Bombay (1958) SCR 1122, expiry of limitation does not extinguish the debt but only prevents the creditor from enforcing it, so a unilateral entry cannot show that the liability has come to an end, and in any event confers no benefit of the kind the section contemplates. The Court declined to accept the reasoning of the Bombay High Court in CIT v Bennett Coleman and Co Ltd (1993) 201 ITR 1021, and held that CIT v General Industrial Society Ltd (1994) 207 ITR 169 turned on its own peculiar facts, while CIT v Jiajee Rao Cotton Mills Ltd (1997) 227 ITR 860 contained no separate reasoning.
TaxSphere, “CIT v Sugauli Sugar Works (P) Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-sugauli-sugar-works-cessation-of-liability/ (validity last checked 2026-08-29)
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