Limitations bars remedy but does not extinguish the right

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Explain – Limitations bars remedy but do not extinguish the right.
Extracts from the judgment in the case of Bombay Dyeing and Mfg Co. Ltd. v. State of Bombay AIR 1958 SC 328 :

Section 27 of the Limitation Act provides that when the period limited to a person for instituting a suit for possession of any property has expired, his right to such property is extinguished. And the authorities have held-and rightly, that when the property is incapable of possession, as for example, a debt, the section has no application, and lapse of time does not extinguish the right of a person thereto.

Under Section 25(3) of the Contract Act, a barred debt is good consideration for a fresh promise to pay the amount. When a debtor makes a payment without any direction as to how it is to be appropriated, the creditor has the right to appropriate it towards a barred debt. It has also been held that a creditor is entitled to recover the debt from the surety, even though a suit on it is barred against the principal debtor. And when a creditor has a lien over goods by way of security for a loan, he can enforce the lien for obtaining satisfaction of the debt, even though an action thereon would be time-barred.

In American Jurisprudence, Vol. 34, page 314, the law is thus stated:

‘A majority of the courts adhere to the view that a statute of limitations as distinguished from a statute which prescribes conditions precedent to a right of action, does not go to the substance of a right, but only to the remedy. It does not extinguish the debt or preclude its enforcement unless the debtor chooses to avail himself of the defense and especially pleads it. Indebtedness does not lose its character as such merely because it is barred, it still affords sufficient consideration to support a promise to pay, and gives a creditor an insurable interest.’

In Corpus Juris Secundum, Vol. 53, page 922, we have the following statement of the law: ‘The general rule, at least with respect to debts or money demands, is that a statute of limitation bars, or runs against, the remedy and does not discharge the debt or extinguish or impair the right, obligation or cause of action. ‘

The position then is that under the law a debt subsists notwithstanding that its recovery is barred by limitation.

The modes in which an obligation under a contract becomes discharged are well defined, and the bar of limitation is not one of them. The following passages in Anson’s Law of Contract, 19th edition, page 383, are directly in point:

‘At Common Law, the lapse of time does not affect contractual rights. Such a right is of a permanent and indestructible character unless either from the nature of the contract or from its terms, it is limited in point of duration. But though the right possesses this permanent character, the remedies arising from its violation are withdrawn after a certain lapse of time; interest reipublicae ut si finis lithium. The remedies are barred, though the right is not extinguished.”

“And if the law requires that a debtor should get a discharge before he can be compelled to pay, that requirement is not satisfied if he is merely told that in the normal course he is not likely to be exposed to action by the creditor.”

The Bombay High Court in the case of J.K. Chemicals Ltd. v. CIT [1966] 62 ITR 34, again considered the question. The assessee-company, which kept its accounts on the mercantile system, debited the accounts as and when it incurred any liability on account of wages, salary or bonus due to its employees even though the amounts were not disbursed in cash to the employees, and obtained deduction of the amounts so debited in the respective years in computing its total income. A certain portion of the wages, salary, and bonus, so debited, was in fact not drawn by the employees. On June 30, 1957, a sum of Rs. 5,929 which had remained undrawn but had been allowed to be deducted during the accounting years 1945 to 1953 was credited to the profit and loss account of the said year. The Department included this amount in the total income of the accounting year on the ground that the trading liability in respect of which deduction had been allowed had ceased to exist, and under section 10(2A), the amount in question should be deemed to be income.

The Bombay High Court held that, in order that an amount may be deemed to be income under section 10(2A), there must be remission or cessation of the liability in respect of that amount. The mere fact that more than three years had elapsed since the accrual of the liability and that the debts had become unenforceable against the assessee under the general law does not constitute a cessation of the trading liability within the meaning of section 10(2A). A mere entry of credit in the accounts in respect of the amount would also not bring about a remission or cessation of the liability. Section 10(2A) was not, therefore, applicable and the amount was not liable to be assessed as income of the accounting year in which the credit entry was made.

Keywords: Limitations bars remedy in India, Concept of Limitations bars remedy, Definition of Limitations bars remedy under the Limitation Act.

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