Treatment of liability written off

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

14 September 2012 As per income tax act what is the treatment of liability (more than 3 years old)which is written off and treated as other income in P&L.

CA Mehta Ankur N.

CA Mehta Ankur N. (Expert)
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14 September 2012 You have done it properly....

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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02 August 2025 Regarding **treatment of liability written off (more than 3 years old) as per Income Tax Act**:

### Key points:

1. When a liability (say, an amount payable or a loan) is written off and credited to the Profit & Loss account as **other income**, it **increases the taxable income** in the year of write-off.

2. **Section 41(1) of the Income Tax Act** deals with recovery of amount previously allowed as a deduction, but does not directly cover liability written off.

3. Generally, the written-off liability **will be treated as income** and taxed under the head **“Profits and gains of business or profession”** for the year in which the write-off is done.

4. There is no specific exemption for such income even if the liability is more than 3 years old.

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### Practical implications:

* The amount of written-off liability added back to income should be disclosed in the tax audit report (if applicable) as per the Income Tax Act.

* It will be included in the total income and taxed accordingly.

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### Summary:

| Situation | Tax Treatment |
| ---------------------------------------- | --------------------------------------------------- |
| Liability written off & credited to P\&L | Treated as income and taxable under business income |

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If you want, I can also help you with the **accounting entries** or any references to specific case laws or circulars. Would you like that?

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