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.
(Expert)
14 September 2012
You have done it properly....
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.
---
### 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.
---
### Summary:
| Situation | Tax Treatment |
| ---------------------------------------- | --------------------------------------------------- |
| Liability written off & credited to P\&L | Treated as income and taxable under business income |
---
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?
### 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.
---
### 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.
---
### Summary:
| Situation | Tax Treatment |
| ---------------------------------------- | --------------------------------------------------- |
| Liability written off & credited to P\&L | Treated as income and taxable under business income |
---
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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