The HC held that Section 41(1) was inapplicable as the liability...

The HC held that Section 41(1) was inapplicable as the liability claimed by the creditor remained unresolved and pending adjudication. Since the suits were sub judice, no remission or cessation of liability had occurred. The assessee had merely made provisions for the liability in the books for AY 2001-02, which did not constitute extinguishment of debt under Section 41(1). The Court relied on established principles that the expiry of the limitation period does not extinguish the debt but only bars enforcement, and unilateral accounting entries by the debtor cannot extinguish liability. Consequently, the assessee was not required to include the amount as income under Section 41(1), affirming the decisions of lower authorities and ruling in favor of the assessee.