The Supreme Court has held that unpaid excise duty which an assessee never claimed as an expense in its Profit and Loss Account cannot be disallowed under Section 43B of the Income Tax Act, 1961. The Court set aside a High Court ruling that had restored an addition of ₹69,91,983 to the taxable income of M/s. Lakshmi Sugar Mills Co. Ltd. for Assessment Year 2005-06.
A Bench of Justice S.V.N. Bhatti and Justice N.V. Anjaria also found that the High Court had proceeded on the premise that the goods had been removed, which was contrary to the record.
Background
The assessee manufactures crystal sugar and produces molasses as a by-product. In its return for Assessment Year 2005-06, it declared a net loss of ₹28,36,167. The Tax Auditor’s Report recorded excise duty leviable on closing stock at ₹2,80,56,430, of which ₹2,10,64,447 had been paid up to 30.09.2005, leaving ₹69,91,983 unpaid. The auditor remarked that this balance should be added back under Section 43B.
The assessee told the Assessing Officer that it followed the exclusive method of accounting and had never debited the unpaid duty to its Profit and Loss Account. It said the stock lay in bonded godowns, and that excise liability arises only on removal of goods from the factory or bonded warehouse.
The Assessing Officer rejected this and added ₹69,91,983 to the income under Section 43B read with Section 145A. The CIT (Appeals) deleted the addition, holding that no expenditure had been claimed and that the net profit impact under Section 145A was Nil. The ITAT, Delhi Bench, upheld that view. The High Court, however, allowed the Revenue’s appeal, holding that the goods were admittedly removed and the duty was therefore payable.
Arguments
Advocate Memoon Zehra, appearing for the assessee, argued that indirect taxes were routed through the balance sheet and not charged to the Profit and Loss Account, so no deduction had been claimed. She submitted that the High Court wrongly assumed the closing stock had been removed, when it remained in the factory premises or bonded warehouse. She relied on the Bombay High Court’s judgment in CIT-III v. Loknete Balasaheb Desai S.S.K. Ltd., (2011) 339 ITR 288.
Additional Solicitor General S Dwarakanath, appearing for the Revenue, contended that the Assessing Officer had relied only on the Tax Auditor’s Report, which showed the amount as payable. He argued that the CIT (Appeals) and the Tribunal had construed the facts liberally, and that the High Court rightly interfered.
Court’s Findings on Section 43B Disallowance
The Court noted that the CIT (Appeals) and the Tribunal had found that the stock remained in the assessee’s bonded warehouse. It held that “the very basis on which the High Court determines excise duty payability is contrary to the record, unsustainable, and liable to be set aside.”
The Bench said that apart from the remark in the Tax Audit Report, there was no other basis for the disallowance, since the amount was neither paid nor treated as payable in the accounts. It held that “Disallowing an amount not treated as an allowance by the Assessee is impermissible under the Act, 1961.”
The Court added that the Revenue had not shown where and how the assessee claimed the allowance in its books of account, and that the Assessing Officer’s order was illegal and rightly interfered with by the CIT (Appeals) and the Tribunal. It found the Bombay High Court’s decision in ITA No. 4297 of 2009, which considered the interplay between Sections 43B and 145A, to be on all fours with the present case.
Outcome
The Supreme Court set aside the impugned High Court order and allowed the assessee’s appeal.
Case Title: M/s. Lakshmi Sugar Mills Co. Ltd. v. Commissioner of Income Tax, Delhi-II
Case No.: Civil Appeal No. 8932 of 2013
Bench: Justice S.V.N. Bhatti and Justice N.V. Anjaria
Date: October 27, 2026
