What this judgment does NOT decide: it does not hold that excise duty on cleared goods escapes tax, does not disturb Section 43B where a deduction was actually claimed but the sum was unpaid, and does not decide any assessment year other than 2005-06. The High Court’s reading of Sections 43B and 145A is set aside on these facts, not as a general ruling that the two provisions can never operate together.
- Case
- M/s. Lakshmi Sugar Mills Co. Ltd. v. Commissioner of Income Tax, Delhi-II
- Court
- Supreme Court of India
- Decision
- Citation
- 2026 INSC 1162
- Bench
- S. V. N. Bhatti; N. V. Anjaria
- Judgment by
- S. V. N. Bhatti
- Case numbers
- Civil Appeal No. 8932 of 2013
- Outcome
- Final judgment allowing Civil Appeal No. 8932 of 2013 and setting aside the High Court’s order; the deletion of the Rs. 69,91,983 addition by the Commissioner (Appeals) and the Tribunal stands in effect.
What the Court decided
On 27 October 2026, the Supreme Court allowed the appeal of M/s. Lakshmi Sugar Mills Co. Ltd. and set aside the High Court’s order, which had restored an addition of Rs. 69,91,983 to the company’s taxable income for assessment year 2005-06. The judgment, authored by Justice S. V. N. Bhatti for a Bench also comprising Justice N. V. Anjaria, held that the Assessing Officer had committed a serious error of fact in disallowing that sum under Section 43B read with Section 145A of the Income-tax Act, 1961.
The core of the decision is narrow and factual: the excise duty had not accrued because the closing stock of sugar and molasses remained in the assessee’s bonded warehouse, and the assessee had never claimed the sum as a deduction. Section 43B, the Court held, cannot disallow an amount that was never treated as an allowance in the first place.
The return, the audit report, and the disputed sum
Lakshmi Sugar Mills manufactures crystal sugar by the vacuum pan process, producing molasses as a by-product. For assessment year 2005-06, corresponding to financial year 2004-05, it filed a return on 28 October 2005 under Section 139(3) of the Act, declaring a net loss of Rs. 28,36,167. It follows the mercantile method of accounting.
The tax auditor's report in Form 3CD recorded, in Annexure-A, that excise duty leviable on the closing stock of sugar and molasses was Rs. 2,80,56,430, of which Rs. 2,10,64,447 had been paid up to 30 September 2005, leaving an unpaid balance of Rs. 69,91,983 shown as payable. The auditor noted that this balance should be added back under Section 43B as it had not been paid before the report was signed. But the same report certified, in clause 12(b), that after giving effect to Section 145A the net impact on profitability from the inventory valuation was nil, and in Annexure-E it declared the outstanding excise duty liable at the close of the year, for Section 43B purposes, to be nil.
The assessee's case throughout was that it followed the exclusive method of accounting: indirect taxes and duties were routed through the balance sheet and never debited to the profit and loss account, so no deduction of Rs. 69,91,983 was ever claimed. Under excise law, it argued, liability to pay duty crystallises only when manufactured goods are removed from the factory or a bonded warehouse, and this stock was kept in bonded godowns whose movement the Government itself controlled, so no duty liability had accrued at all.
From the Assessing Officer to the High Court
After notices under Sections 143(2) and 142(1), the assessee replied on 14 November 2007 on those lines. The Assessing Officer rejected the reply by an order dated 20 November 2007 under Section 143(3) and added Rs. 69,91,983 under Section 43B read with Section 145A, reasoning that Section 145A mandates valuation of stock inclusive of all duties, refusing to adjust the opening stock on the ground that doing so would affect the preceding year's assessment, and enhancing only the closing stock. He also rejected the plea that Section 43B could apply only to amounts debited to the profit and loss account.
The Commissioner (Appeals) deleted the addition on 27 May 2010, admitting a certificate dated 14 January 2010 from the tax auditor, M/s. Kumar, Grover & Co., as additional evidence under Rule 46A after calling for a remand report, and finding that the officer had acted mechanically on the Annexure-A remark without verifying whether any debit or deduction had been claimed; the officer's remand report dated 1 April 2010 itself did not dispute the nil profit impact under Section 145A or the nil outstanding liability under Section 43B. The Tribunal, Delhi Bench, dismissed the Revenue's appeal on 6 May 2011 on the same footing, relying on the Gujarat High Court's decision in ACIT v. Narmada Chematur Petrochemicals Ltd. that excise liability arises only upon removal of goods from the factory or a bonded warehouse.
The Revenue's appeal under Section 260A succeeded before the High Court, which held that Section 145A's non-obstante clause directs inclusion of any tax, duty, cess or fee actually paid for valuation alone, while Section 43B regulates deduction of liabilities incurred but unpaid, and, relying on Orient Paper Mills Ltd. v. Union of India, read Sections 3 and 4 of the Central Excise Act, 1944 together to hold that removal implies duty is leviable and not postponed. It concluded that the goods were admittedly removed, so the duty was payable, and reversed the Commissioner (Appeals) and the Tribunal.
The question before the Supreme Court
The question, as framed by the Supreme Court, was whether the unpaid central excise duty of Rs. 69,91,983 on uncleared closing stock of processed sugar and goods could be added to the value of the closing stock and then to the assessee’s taxable income, and whether the disallowance under Section 43B read with Section 145A was maintainable at all.
For the assessee, advocate Memoon Zehra argued that the High Court had proceeded on an erroneous assumption contrary to the record — that the closing stock had been removed — that the substantial question of law framed by the Revenue was an accusation of fact already rejected by the Commissioner (Appeals) and the Tribunal, and that it had exercised jurisdiction beyond Section 260A. She relied on the Bombay High Court’s judgment in CIT-III v. Loknete Balasaheb Desai S.S.K. Ltd., decided on 22 June 2011 in ITA No. 4297 of 2009, as squarely applicable. For the Revenue, Additional Solicitor General S. Dwarakanath argued that the officer had relied on nothing extrinsic, that the tax auditor’s report itself indicated the amount was payable, and that the High Court had rightly interfered with findings of fact.
Why the High Court’s premise failed on the record
The Supreme Court first tested the premise on which the High Court had interfered. The impugned judgment had noted, in its paragraph 15, that the goods were admittedly removed and therefore excise duty was payable. That, the Court held, was not what the record showed: the Assessing Officer’s remand report, the Commissioner (Appeals) and the Tribunal had all found that the stock on which no excise duty was paid or treated as payable remained in the assessee’s bonded warehouse. The very basis on which the High Court determined payability was therefore contrary to the record, unsustainable, and liable to be set aside.
The Court then gave four reasons why the disallowance was impermissible. First, the assessee follows the standard accounting system and the exclusive method, routing indirect taxes through the balance sheet rather than the profit and loss account. Second, the disputed entry was never routed through the profit and loss account, more so without the duty actually having been paid. Third, Section 43B first allows an expense only in the year in which the sum is paid. Fourth, a statutory payment made on the accrual method beyond 31 March but before the return date is still allowable for the financial year of the return — the Court gave the example of a payment on 1 August 2005 for a liability accrued before 31 March 2005 — while, conversely, if dues are not paid before the return date, no amount can be claimed as an allowable expense. Here, the amount was neither paid nor, for accounting purposes, treated as payable, except for the remark in the tax audit report, and no other basis existed to disallow it.
The Court added a burden point with practical bite: the officer’s order would have merited acceptance if it had stated, with reference to the accounts and the return, how the entry was factored in and how it affected taxable income negatively. Disallowing an amount not treated as an allowance by the assessee is impermissible, and the Revenue, having failed to show where and how the assessee claimed the allowance in its books, ought not to disallow it. The Court also perused the Bombay High Court’s unreported judgment in ITA No. 4297 of 2009 and held it to be on all fours with this case on the interplay of Sections 43B and 145A.
The final order, and its limits
For those reasons, the Court set aside the impugned High Court order, allowed the civil appeal, and disposed of any pending applications. In effect, the deletion of the Rs. 69,91,983 addition, ordered by the Commissioner (Appeals) and confirmed by the Tribunal, stands.
The limits matter for readers: the judgment turns on a record finding — stock uncleared in a bonded warehouse, no debit to the profit and loss account, and a nil net profit impact under Section 145A — not on a holding that unpaid duties generally escape Section 43B. Where a deduction was in fact claimed for an unpaid statutory sum, Section 43B’s payment condition continues to apply, and where goods have in fact been removed, excise duty accrues on removal.
BANTHRY ANALYSISFor law students
This is a clean illustration of a point students often miss about Section 43B: it is a disallowance provision, not a charging provision. It can defer or deny a deduction that was claimed; it cannot create income by adding back a sum the taxpayer never deducted. Before reaching for Section 43B, ask the threshold question the Assessing Officer skipped here — was the amount debited to the profit and loss account at all?
It is also a lesson in appellate discipline under Section 260A. A substantial question of law must rest on the record: the High Court’s answer collapsed once the Supreme Court checked its factual premise — admitted removal — against the remand report and the orders below, which said the opposite. And note the Section 145A point: because opening and closing stock were to be valued on the same basis, the net profit impact was nil, so enhancing only the closing stock distorted rather than measured income.
READING PROMPTSQuestions for a closer reading
- Why did the Supreme Court hold that Section 43B could not be used to disallow Rs. 69,91,983 when the assessee had never debited that sum to its profit and loss account?
- On what factual ground did the Court reject the High Court’s premise that the closing stock had admittedly been removed from the bonded warehouse?
- How does the judgment distinguish the valuation role of Section 145A from the deduction-disallowance role of Section 43B on these facts?
