versus Coir Cushions Ltd. reported as 2005 SCC OnLine DEL 247; The The Commissioner Of Income Tax-Iii v. Shri Vardhman Overseas Ltd…. reported as 2011 SCC OnLine DEL 5599 and M/s Mahabir Cold Storage Versus C.I.T., Patna reported as 1991 Supp (1) Supreme Court Cases
402. The argument is that acknowledgement of debt in the Balance Sheet also amounts to acknowledgement under Section 18 of the Limitation Act.
8. The Judgement in the matter of The Commissioner of Income Tax (supra) was in the context of provisions of the Income Tax Act. In Para
17 of the Judgement, it was observed:-
17. In the case before us, as rightly pointed out by the Tribunal, the assessee has not transferred the said amount from the creditors' account to its profit and loss account. The liability was shown in the balance sheet as on 31st March, 2002. The assessee being a limited company, this amounted to acknowledging the debts in favour of the creditors. Section 18 of the Limitation Act, 1963 provides for effect of acknowledgement in writing. It says where before the expiration of the prescribed period for a suit in respect of any property or right, an acknowledgement of liability in respect of such Company Appeal (AT) (Ins) No.1382 of 2019 property or right has been made in writing signed by the party against whom such property or right is claimed, a fresh period of limitation shall commence from the time when the acknowledgement was so signed. In an early case, in England, in Jones v. Bellgrove Properties, (1949) 2KB 700, it was held that a statement in a balance sheet of a company presented to a creditor- share holder of the company and duly signed by the directors constitutes an acknowledgement of the debt. In Mahabir Cold Storage v. CIT (1991) 188 ITR 91, the Supreme Court held: The entries in the books of accounts of the appellant would amount to an acknowledgement of the liability to Messrs. Prayagchand Hanumanmal within the meaning of Section 18 of the Limitation Act, 1963, and extend the period of limitation for the discharge of the liability as debt. In several judgments of this Court, this legal position has been accepted. The Honble High Court then referred to some of the Judgements.
9. In the Judgement in the matter of Sheetal Fabrics (supra), Honble High Court of Delhi referred to Judgement in the matter of In re. Padam Tea Company Ltd. AIR 1974 Calcutta 170 and referred to the said Judgement as under:-
10. Let me first deal with the case of Padam Tea Co. Ltd. (supra). This case relied upon by learned Counsel for the respondent company in support of his plea that acknowledgement contained in the balance sheet could not be relied upon by the petitioner. However, on going through this judgment, one would clearly notice that it does not lay down the proposition which is sought to be advanced by the learned Counsel. That was a case where balance sheet was not confirmed or passed by the shareholders. The Court observed that such a balance sheet, before it could be relied upon, must be duly passed by the shareholders at the appropriate Company Appeal (AT) (Ins) No.1382 of 2019 meeting and must be accompanied by a report, if any, made by the Directors for its validation. The principle of law laid down was that statement in the balance sheet indicating liability is to be read along with the Directors' report to see whether both so read would amount to an acknowledgement. There is no dispute about this proposition of law. However, in that case, the Court refused to accept entry in the balance sheet as acknowledgement of debt because of two reasons: (a) The balance sheet was not passed by the shareholders at the appropriate meeting. (b) The Directors' report, in the balance sheet, contained the following statement:
11. Your Directors are of the opinion that the liabilities shown in Schedules 'A' and 'B' of the balance sheet excepting those of United Bank of India, M/s. Goenka and Co. Private Ltd. and Caritt, Moran and Co. Pvt. Ltd. are barred by limitations, hence these liabilities are not confirmed by your Directors.
12. These were the two considerations which led the Court to conclude that even the debt shown in the balance sheet in respect of the said petitioning creditor would not amount to an acknowledgement as contemplated under Section 18 of the Limitation Act and following observations in this regard are reported: "Therefore, in understanding the balance sheets and in explaining the statements in the balance-sheets, the balance-sheets together with the Directors' report must be taken together to find out the true meaning and purport of the statements. Counsel appearing for petitioning creditor contended that under the statute the balance sheet was a separate document and as such if there was unequivocal acknowledgement on the balance-sheet is a statutory document and perhaps is a separate document but the balance sheet not confirmed or passed by the shareholders at the appropriate meeting and in order to do so it must be accompanied by a report, if any, made by the Directors. Therefore, even though the balance sheet may be a separate document Company Appeal (AT) (Ins) No.1382 of 2019 these two documents in the facts and circumstances of the case should be read together and should be construed together.
13. In the same breath, the High Court also explained as to what would constitute an acknowledgement under Section 18 of the Limitation Act by referring to the judgment of the Supreme Court and this discussion would be found in the following passage: "It was held by the Supreme Court in the case of L.C. Mills v. Aluminium Corpn. of India Ltd., (1971) 1 SCC 67 : AIR 1971 SC 1482, that it was clear that the statement on which the plea of acknowledgement did not create a new right of action but merely extended the period of limitation. The statement need not indicate the exact nature or the specific character of the liability. The words used in the statement in question must, however, relate to a present subsisting liability and indicate the existence of a jural relationship between the parties such as, for instance, that of a debtor and a creditor and the intention to admit such jural relationship. Such an intention need not, however, be in express terms and could be inferred by implication from the nature of the admission and the surrounding circumstances. Generally speaking, a liberal construction of the statement in question should be given. That of course did not mean that where a statement was made without intending to admit the existence of jural relationship, such intention should be fastened on the person making the statement by an involved and far-fetched reasoning. In order to find out the intention of the document by which acknowledgement was to be construed the document as a whole must be read and the intention of the parties must be found out from the total effect of the document read as a whole." [Emphasis supplied]
10. Then the High Court after referring to the Judgement in the matter of Padam Tea Company examined the case, which was before the Honble Company Appeal (AT) (Ins) No.1382 of 2019 High Court, and in the facts of that matter, found that the list of Creditors maintained by the Respondent Company before High Court or in the balance sheet, was without any conditions or any strings attached.
11. Question before us is whether in the Balance Sheet which is being relied on, what is seen in the statement and if the same could be read as acknowledgement. Copy of the Balance Sheet of 2016 relied on by the Adjudicating Authority is at Page 412 of the Paper Book of Appeal. Page
412 is the Directors Report which presented the Annual Report and audited Financial Statements for the Financial Year ended 31st March, 2016. The relevant portion pointed out to us by the parties is at Page
421. It is Annexure A to the Auditors Report and what Auditors Report stated in Sub-Para - (viii), is as under:-
(viii) In our opinion and according to the information and explanations given to us, that Company has not defaulted in the repayment of loans or borrowings to financial institution. The Company did not have any dues outstanding to Government as at the beginning of the year nor did it obtain any such loans during the year. However, the Company has failed to repay its dues owing to bank and has been declared as NPA by bank and the matter is lying with Debts Recovery Tribunal and subjudice (Note No. 29). Amount overdue is as under: United Bank of India, Lohapatty Branch, Kolkata Amount outstanding (/Lacs) Period Term Loan 411.63 2011-2012 Cash Credit 668.99 2014-2015 Working Capital 136.57 2014-2015 [Emphasis supplied] Company Appeal (AT) (Ins) No.1382 of 2019
12. The Note No.29 referred by the Auditor at Page 438 of the Paper Book is as under:-
29. No balance confirmation/Bank Statement in respect of Term Loans and Other Loans obtained from United Bank of India, Lohapatty Branch, Kolkata has been received by the Company for the period from 01.04.2015 to 31.03.2016, the Company has not provided interest on these loans in the books of account. Companys accounts were declared non-performing assets (NPA) earlier on certain defaults in repayment of loans instalments and interest dues thereon to the bank. A Notice under Section 13(2) of the SARFAESI Act, 2002 has been served by bank on 03.04.2014 and date of declaration of NPA is 31.03.2014. The matter is sub judice before the Debts Recovery Tribunal (DRT). [Emphasis supplied]
13. Thus, the Auditor rather stated its own opinion and according to the information and explanations given that the Company has not defaulted in the repayment of loan or borrowings to the financial institution. What is further recorded is statement of fact that bank has declared the Corporate Debtor NPA and proceedings are pending before DRT. In effect, Company claimed to the Auditors that Company has not defaulted in the repayment of loans or borrowings. This cannot be read as Acknowledgement.
14. We have already referred to the Judgements in the matters of Sheetal Fabrics and Padam Tea which show that the Balance Sheet would be required to be read with Directors Report. In the Directors Report Company Appeal (AT) (Ins) No.1382 of 2019 which is before us, there does not appear to be any acknowledgement of debt. The statement recorded by the Auditor with regard to the pending litigation in the facts of the present matter, we find, cannot be read as an acknowledgement by Company under Section 18 of the Limitation Act. The Adjudicating Authority did not go into the particulars. In present matter, we are not deliberating whether entry in Balance Sheet can be termed Acknowledgement in law. In our view, even if we are to consider that contents in Balance Sheet could be read as acknowledgment even then if we read the contents in balance sheet in the matter, for reasons stated above, we do not find that the Corporate Debtor acknowledged as such the liability to pay the alleged outstanding debt.
15. It is stated that the Application under Section 19(4) of SARFAESI Act filed by the Bank on 29th June, 2015 is still pending adjudication before DRT-3, Kolkata.