The Supreme Court held that entries in a balance sheet could amount to an acknowledgment of liability under Section 18 of the Limitation Act, 1963, giving rise to a fresh period of limitation.

A bench of Justice Vikram Nath, Justice Augustine George Masih, and Justice Sandeep Mehta held so while setting aside a Delhi High Court order that had rejected a plaint as barred by limitation under Order VII Rule 11 of the Code of Civil Procedure, 1908 (CPC), allowing the appeal filed by the legal heir of the original plaintiff and restored the suit before the trial court.

The original plaintiff filed a summary suit under Order XXXVII CPC in 2014, seeking recovery of Rs 11,16,000 along with annual interest of Rs 11,04,840 at 9%, under a civil works contract with the defendant. The work dealt with construction of a multi-storey building in Mayur Vihar, Delhi. He relied on running bills raised between 2000 and 2003.

The defendant applied for rejection of the plaint under Order VII Rule 11 CPC, arguing that the suit was time-barred, disclosed no cause of action, and was not maintainable. However, the trial court rejected the application in 2020, observing that the outstanding amounts were reflected in the defendant's balance sheets from 2004, 2005 till 2013, which amounts to acknowledgment of debt consequently giving rise to a fresh period of limitation.

In a revision petition, the Delhi High Court allowed the defendant's plea in 2024 and rejected the plaint, holding that the bank statements did not establish an acknowledgment of liability beyond 2005. It noted that the balance sheet as in 2013 showed Rs 21,79,465 under 'sundry creditors' for 2004-05 but did not indicate that the amount was due and payable to the plaintiff. It also noted that no balance sheet or other document showing acknowledgment had been produced by the plaintiff.

Aggrieved by the High Court's order, the original plaintiff (appellant) approached the Supreme Court, which framed the question as “whether in the face of entries of defendant's balance sheets up to 2013, the suit could have been rejected at threshold as being barred by limitation.”

Referring to Section 18 of the Limitation Act, the Court observed as follows:

“Simply stated, a written acknowledgment of a subsisting liability gives rise to a fresh period of limitation, commencing from the date on which the acknowledgment is made. In effect, the period of limitation is renewed, or extended.”

The bench referred to Asset Reconstruction Company (India) Ltd v Bishal Jaiswal, wherein it was held that entries in books of account, including balance sheets, may constitute an acknowledgment under Section 18. The bench observed that this decision carried a caveat that the entry must be assessed in the context of the balance sheet as a whole, including any qualifications or explanations in the notes or auditor's report. The Court also noted that the principle was reiterated in Axis Bank Ltd v Naren Sheth.

Applying the aforesaid, the Court noted that the plaintiff relied on the defendant's balance sheet for 2004-05 and the bank reconciliation statements. The statements “explicitly records three cheques issued in favour of 'Wazir Hussain Contractor'.” The bench observed that these entries directly connect the original plaintiff with the defendant's financial records and transactions underlying the suit.

With regards to Section 18, the Court observed as follows:

“Section 18 of the Limitation Act does not require that an acknowledgment be made to the name of the creditor specifically or be drawn up using a fixed format, so long as it acknowledges a subsisting liability. The only requirement is that the acknowledgment, when read in conjunction with the other circumstances surrounding the transaction, must indicate a subsisting jural relationship.”

It held that the surrounding circumstances “amply support the claim of the original plaintiff that a liability existed, that it was reflected in defendant's own balance sheets and that the same continued to be carried forward to the year 2013, renewing the limitation period every year.”

Further, the Court clarified that its discussion should not be read to mean that the entries conclusively establish that the entire claimed amount was owed.

“The precise relationship between the cheques issued, amounts carried forward and the sum claimed, inter alia, would require examination of evidence. These are matters for trial,” the bench observed.

It added that at the stage of Order VII Rule 11, the Court “ought not to have gone into the depths of evidence and conclusively determined the non-existence of liability. It was required only to assess whether the plaint disclosed a prima facie case on the basis of the material available.”

Rejecting the defendant's argument that a time-barred debt cannot be revived indefinitely, particularly without an application for condonation of delay, it held as follows:

“Since the entries constitute an acknowledgment under Section 18 of the Limitation Act, a fresh period of limitation would automatically run from each subsequent date of acknowledgment. In that event, there was no requirement for an application seeking condonation of delay.”

Applying aforesaid, the Supreme Court set aside the Delhi High Court's order and restored the suit before the trial court.

“In light of the above discussion, we are of the view that the High Court fell in error in allowing the defendant's revision petition and rejecting the plaint as being barred by limitation. The impugned order is accordingly set aside. The suit shall stand revived on the file of the Trial Court. All questions on the merits of the claim shall remain open.”

Appearances:

For Appellant: Mr. Malak Manish Bhatt, AOR

For Respondent: Mr. Aayushmaan Vatsyayana, AOR; Mr. G.L Verma, Adv.; Ms. Aditi Warrier, Adv.; Mr. Vansh Pandey, Adv.; Mr. Manas Pandey, Adv.; Mr. Gourav, Adv.