09 April 2015
Dear Sir, I'm working with a Company and the outstanding of invoices is pending to receive from the their customers since 2010. Now as per limitation of liability act 1963 invoices raised for three years can be paid but when we asked to customer that they are liable to pay as per the said law they are being refuse to pay and reason given expenses to be disallowed because it pertain to previous years. Hence, I would like to request to please guide me if it is allowed as per limitation of liability law ac 1963 what implication will be on the customer part if they ready to pay.
02 August 2024
In your scenario, the main issues involve the limitation period for outstanding invoices and the treatment of such invoices in the financial records. Here’s a detailed breakdown addressing both aspects:
### **1. Limitation Act, 1963**
**1.1 Limitation Period:** - The Limitation Act, 1963 prescribes a limitation period within which legal proceedings must be initiated. For contract-related claims, such as unpaid invoices, the limitation period is typically **3 years** from the date on which the cause of action arises (i.e., from when the invoice is due or from when the payment was demanded).
**1.2 Implications for Receivables:** - If the invoices are from 2010, they are likely beyond the 3-year limitation period if no legal action has been taken. This means that while you can still demand payment, your ability to enforce the claim through legal proceedings may be barred if the customer chooses to contest the claim based on the limitation period.
### **2. Accounting and Tax Implications**
**2.1 Disallowance of Expenses:** - **Tax Treatment:** If invoices pertain to previous years, expenses related to these invoices may have already been claimed in the financials of the earlier years. According to the Income Tax Act, if such amounts are not received and are written off, they can be disallowed as a deduction if they pertain to expenses that were previously claimed.
- **Accounting Treatment:** If you are writing off old receivables or recognizing income, ensure that this is properly reflected in your current financial statements. The income or loss from such write-offs should be accounted for in the books of accounts for the year in which the write-off or recognition occurs.
**2.2 Customer Payment:** - **Acceptance of Payment:** If the customer is willing to pay despite the limitation period having expired, this payment can still be received. The primary concern would be ensuring that the payment is recorded appropriately in your current accounts. The receipt of this payment would typically be treated as income in the year it is received, and the amount might need to be disclosed accordingly in the financial statements.
### **3. Implications of Receiving Payment**
- **Revenue Recognition:** If the customer decides to make the payment, it should be recognized as revenue in the year it is received. This is in line with accounting principles of recognizing revenue when it is earned and realizable.
- **Tax Implications:** Ensure that the payment is not double-counted as revenue or income if it had already been accounted for. The amount received should be adjusted against the outstanding receivables or recognized as income in the current period.
### **4. Practical Steps to Take**
1. **Consult Legal and Tax Advisors:** Given the complexity involving the Limitation Act and tax implications, consulting with legal and tax professionals is advisable. They can provide specific guidance based on your situation and jurisdiction.
2. **Document Communication:** Keep detailed records of all communications with the customer regarding the invoices and payments. This can be useful in case of disputes or legal considerations.
3. **Update Financial Records:** Make necessary adjustments in your financial records to reflect the receipt of payments and adjust for any previously disallowed expenses or income.
### **Summary**
- The Limitation Act of 1963 restricts legal action to recover payments beyond 3 years. - Outstanding invoices from 2010 may be beyond the limitation period, potentially barring legal enforcement. - Payment received from a customer, despite being from an expired limitation period, should be recorded as income in the current financial year. - Consult with legal and tax advisors for tailored guidance and ensure that all financial and tax records are updated appropriately.
CAclubindia
