Case at a Glance
For assessment year 2005-06, the Assessing Officer added Rs 69,91,983 to a sugar mill’s income as unpaid excise duty on closing stock, under Section 43B read with Section 145A of the Income Tax Act. The CIT(A) and the ITAT deleted the addition, but the High Court restored it on the premise that the goods had been removed. The Supreme Court held that premise was contrary to the record, since the stock remained in the bonded warehouse, and that an amount the assessee never claimed as a deduction cannot be disallowed. The appeal was allowed and the High Court’s order set aside.
The assessee manufactures crystal sugar by the vacuum pan process, with molasses as a by-product, and follows the mercantile system of accounting. Its return for AY 2005-06 declared a net loss of Rs 28,36,167. The tax audit report showed excise duty leviable on closing stock of Rs 2,80,56,430, of which Rs 2,10,64,447 was paid up to 30 September 2005, leaving Rs 69,91,983 unpaid; the auditor flagged it as disallowable under Section 43B. The assessee replied that excise liability crystallises only on removal of goods from the factory or bonded warehouse, and that the stock was still in bonded godowns.
The Assessing Officer added the amount by order dated 20 November 2007. The CIT(A), after admitting a chartered accountant’s certificate under Rule 46A and obtaining a remand report, deleted it on 27 May 2010. The ITAT Delhi dismissed the Revenue’s appeal on 6 May 2011, relying on ACIT v. Narmada Chematur Petrochemicals Ltd., (2010) 04 GUJ CK 0081 On the Revenue’s appeal under Section 260A, the High Court reversed both, holding that the goods had admittedly been removed and duty was payable.
The Key Question Before the Court
Can unpaid central excise duty on uncleared closing stock lying in a bonded warehouse be added to the assessee’s income by invoking Section 43B read with Section 145A, when the assessee never claimed it as a deduction?
A Premise Contrary to the Record
The Supreme Court found that the High Court’s foundation was wrong on facts. The remand report, the CIT(A) and the Tribunal had all found that the stock on which duty was unpaid remained in the bonded warehouse. In the Court’s words, “the very basis on which the High Court determines excise duty payability is contrary to the record.” Under the Central Excise scheme relied upon by the assessee, duty becomes payable on removal, which had not happened.
On Section 43B, the Court explained that the provision allows a deduction for such sums only on actual payment (with payment up to the return due date counting for that year). Here the assessee had followed the exclusive method, had not routed the amount through its profit and loss account, and had not claimed it as an allowance; the only reference was the auditor’s remark. The Court held that “Disallowing an amount not treated as an allowance by the Assessee is impermissible under the Act, 1961,” and found the Bombay High Court decision in CIT-III v. Loknete Balasaheb Desai S.S.K. Ltd., (2011) 06 BOM CK 0113, which considers the interplay between Sections 43B and 145A, to be on all fours.
What the Court Actually Held
- The High Court’s assumption that the goods had been removed was contrary to the concurrent findings that the stock remained in the bonded warehouse.
- Section 43B operates on deductions actually claimed; an amount not treated as an allowance by the assessee cannot be disallowed under it.
- The Revenue failed to show where the assessee had claimed the unpaid excise as an allowance in its accounts.
- The High Court’s order was set aside and the civil appeal allowed, so the deletion of the Rs 69,91,983 addition by the CIT(A) and ITAT stands.
Why This Judgment Matters
- It gives manufacturers storing excisable goods in bonded warehouses a clear answer against Section 43B additions on uncleared stock.
- It confirms that a tax auditor’s remark alone does not convert an unclaimed item into a disallowable deduction.
- It reminds High Courts in Section 260A appeals not to displace concurrent factual findings with a premise unsupported by the record.
What Should Advocates Take Away From the Judgment?
For Assessees
- Keep records showing that excisable stock remained in the bonded warehouse at year end.
- If you follow the exclusive method and do not claim unpaid duty, a Section 43B addition can be resisted.
- Respond to tax audit remarks on Section 43B early in assessment.
For Counsel
- In Section 260A appeals, highlight concurrent findings of fact by the CIT(A) and ITAT.
- Rely on Lakshmi Sugar Mills, (2026) 10 SC CK 3499 and CIT-III v. Loknete Balasaheb Desai S.S.K. Ltd. on Sections 43B and 145A.
- Ask the Revenue to point to where the allowance was actually claimed.
Key Takeaways
- No Section 43B disallowance of an amount never claimed as a deduction.
- Excise on goods still in a bonded warehouse was not shown to be payable.
- Auditor’s remark alone is not a claim of allowance.
- High Court’s order set aside; CIT(A) and ITAT deletion restored.
Frequently Asked Questions
What was the amount in dispute?
Rs 69,91,983, being excise duty on closing stock that remained unpaid by the return due date for AY 2005-06.
Why did the Supreme Court reject the High Court’s view?
The High Court proceeded on the basis that the goods had been removed, but the remand report, CIT(A) and ITAT had all found that the stock remained in the bonded warehouse.
Is this judgment reportable?
The judgment is marked non-reportable, though it carries the neutral citation 2026 INSC 1162.
Conclusion
Lakshmi Sugar Mills resolves a dispute that began in 2007 with a straightforward principle: Section 43B disallows what is claimed but unpaid; it does not create an addition out of an amount the assessee never claimed.
Practical takeaway: Where excisable stock remains uncleared in a bonded warehouse and the unpaid duty is not claimed as an expense, a Section 43B read with Section 145A addition is open to challenge.
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