This judgment does not decide whether any excise duty is ultimately payable on the stock: duty under excise law crystallises on removal, and the stock remained in the bonded warehouse. It decides only that the Section 43B addition to Assessment Year 2005-06 income was not maintainable. It does not decide any other assessment year.
- 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
- Civil appeal allowed, setting aside the Delhi High Court's order under Section 260A which had restored the Assessing Officer's addition. The Commissioner's and Tribunal's orders deleting the addition stand restored.
Section 43B cannot disallow a deduction the assessee never claimed
The Supreme Court has held that unpaid excise duty cannot be disallowed under Section 43B of the Income Tax Act, 1961 where the assessee never claimed the amount as a deduction. Section 43B allows certain expenses as deductions only when they are actually paid; it cannot be used to add back an amount that the taxpayer never treated as an expense in its Profit and Loss Account.
Allowing the appeal of M/s. Lakshmi Sugar Mills Co. Ltd., the Court set aside the Delhi High Court's order, which had restored an addition of Rs. 69,91,983 to the company's income for Assessment Year 2005-06. The Court held that the High Court's premise — that the goods had admittedly been removed from the warehouse, making the duty payable — was contrary to the record: the Assessing Officer's own remand report, the Commissioner (Appeals), and the Tribunal had all found that the stock remained in the assessee's bonded warehouse, where no excise liability had yet accrued.
Closing stock, an auditor's remark, and an addition of Rs. 69,91,983
Lakshmi Sugar Mills manufactures crystal sugar by the vacuum pan process, producing molasses as a by-product. For Assessment Year 2005-06 (Financial Year 2004-05), its return dated 28 October 2005 declared a net loss of Rs. 28,36,167. The Tax Auditor's Report recorded excise duty leviable on the closing stock of sugar and molasses at 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. The auditor's Annexure-A remarked that the 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 inventory valuation was Nil, and in Annexure-E declared disallowable liabilities under Section 43B to be Nil.
The company follows the mercantile system and the exclusive method of accounting: indirect taxes and duties are routed through the balance sheet and are not charged to the Profit and Loss Account. Its case was that it never debited the unpaid Rs. 69,91,983 to its Profit and Loss Account and claimed no deduction for it, and that under the Central Excise Act, 1944, liability to pay excise duty crystallises only when finished goods are removed from the factory or bonded warehouse — the stock here stayed in bonded godowns, whose movement the company could not control because the Government controls sugar movement.
The Assessing Officer rejected that reply and, by order dated 20 November 2007 under Section 143(3), added Rs. 69,91,983 under Section 43B read with Section 145A, on the ground that unpaid excise duty on closing stock must be added to returned income. Section 145A requires stock to be valued inclusive of duties; the Officer enhanced only the closing stock and refused to adjust the opening stock, saying that would affect the preceding year's assessment.
Two appellate forums deleted the addition; the High Court restored it
The Commissioner of Income Tax (Appeals), by order dated 27 May 2010, deleted the addition. The Tax Auditor's certificate dated 14 January 2010 on the net profitability impact had been admitted as additional evidence under Rule 46A, and the Assessing Officer's remand report dated 1 April 2010 did not dispute that Annexure-A showed Nil impact on profit under Section 145A and Annexure-E showed Nil outstanding liability under Section 43B. The Commissioner held that the Officer had acted mechanically on the Annexure-A remark without verifying whether any debit entry or deduction had been claimed in the Profit and Loss Account; as no expenditure was claimed, Section 43B was inapplicable.
The Income Tax Appellate Tribunal, Delhi Bench, dismissed the Revenue's appeal on 6 May 2011. It recorded that the Revenue did not dispute that valuing opening and closing stock on the same basis would leave profit unaffected, that the assessee claimed no excise-duty expenditure in its Profit and Loss Account, and that the Gujarat High Court's decision in ACIT v. Narmada Chematur Petrochemicals Ltd. held that excise liability arises only on removal of goods from the factory or a bonded warehouse.
The Revenue's further appeal under Section 260A succeeded before the Delhi High Court. Reading Section 145A's non-obstante clause as directing valuation inclusive of duties actually paid, and relying on Orient Paper Mills Ltd. v. Union of India for the proposition that removal of excisable goods makes duty leviable rather than postponed, the High Court held that the sum was unpaid, that the goods were admittedly removed and therefore the duty was payable, and that the assessee could not profit from its own omission in not paying duty after removal. It answered the substantial question of law in the Revenue's favour and reversed both appellate orders.
The removal premise failed on the record
The Supreme Court first tested whether the High Court's premise was supported by the record. It was not. The High Court had noted in paragraph 15 of its judgment that the goods were admittedly removed and therefore excise duty was payable — but the findings of the Commissioner (Appeals), the Tribunal, and the Assessing Officer's own remand report were to the opposite effect: the stock on which no excise duty was paid or treated as payable remained in the assessee's bonded warehouse. The Court held that the very basis on which the High Court determined excise payability was contrary to the record, unsustainable, and liable to be set aside.
The Court then held that the Assessing Officer had committed a serious error of fact. Four points drove the conclusion: the assessee follows the standard accounting system; it had not routed the disputed entry through the Profit and Loss Account, and had not actually paid the excise duty; Section 43B first allows an expense only in the year in which the sum is paid, with payment made after 31 March but before the return date still allowable for that financial year; and conversely, if statutory 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 — so no basis existed to disallow it. The Court added that the Officer's order would have merited acceptance only if it had explained, with reference to the accounts and return, how the entry was factored in and how it reduced taxable income. The Revenue, having failed to show where and how the assessee claimed the allowance in its books, ought not to have disallowed the amount. The Court concluded: "Disallowing an amount not treated as an allowance by the Assessee is impermissible under the Act, 1961."
The Court also noted the Bombay High Court's decision in ITA No. 4297 of 2009 (CIT-III v. Loknete Balasaheb Desai S.S.K. Ltd.), which considers the interplay between Sections 43B and 145A and which, it held, is on all fours with this case. The impugned order was set aside and the civil appeal allowed, with pending applications disposed of.
BANTHRY ANALYSISFor law students: disallowance needs a claimed deduction to disallow
The teaching point is structural. Section 43B is a timing provision: it defers a deduction until payment. It presupposes that a deduction has been claimed in the first place. Where the assessee uses the exclusive method — duties routed through the balance sheet, never debited to the Profit and Loss Account — there is nothing for Section 43B to defer, and an addition that treats an unclaimed amount as disallowed income inverts the provision. Section 145A, which governs stock valuation inclusive of duties, does not cure that inversion: on these facts its net profit impact was Nil, because opening and closing stock valued on the same basis cancel out. The second lesson is appellate discipline under Section 260A: a substantial question of law cannot rest on a factual premise — here, removal of the goods — that the fact-finding forums below had all rejected. When the record contradicts the premise, the High Court's answer falls with it.
READING PROMPTSQuestions for a closer reading
- Why could Section 43B not be used to disallow the Rs. 69,91,983 when the assessee had never debited it to its Profit and Loss Account?
- On what factual ground did the Supreme Court reject the High Court's finding that the goods had been removed from the warehouse?
- How did Section 145A's stock-valuation rule interact with Section 43B on these facts, and why was its net profit impact Nil?
