Section 43B Unpaid Excise Duty Not Claimed Cannot Be Disallowed: Supreme Court

The Supreme Court has held that a Section 43B disallowance of unpaid excise duty cannot stand where the assessee never claimed that duty as a deduction. In Lakshmi Sugar Mills Co. Ltd. v. Commissioner of Income Tax, Delhi-II (Civil Appeal No. 8932 of 2013, 2026 INSC 1162), a Bench of Justice S.V.N. Bhatti and Justice N.V. Anjaria on 27 October 2026 set aside a Delhi High Court judgment and restored the deletion of an addition of ₹69,91,983 made for Assessment Year 2005-06 under Sections 43B and 145A of the Income-tax Act, 1961.

The judgment turns on a sentence that tax practitioners will quote in assessment and appeal replies: "Disallowing an amount not treated as an allowance by the Assessee is impermissible under the Act, 1961." The Court also found that the High Court had built its reasoning on a factual premise, that the sugar had left the bonded warehouse, which the record did not support. The judgment is marked non-reportable, but it is a decision of the Supreme Court on a recurring tax audit and assessment issue.

What the tax audit report said about the unpaid excise duty

Lakshmi Sugar Mills manufactures crystal sugar by the vacuum pan process and produces molasses as a by-product. It filed its return for Assessment Year 2005-06 on 28 October 2005 under Section 139(3), declaring a net loss of ₹28,36,167.

The tax auditor's report in Form 3CD worked out the excise duty leviable on the closing stock of sugar and molasses at ₹2,80,56,430. Of this, ₹2,10,64,447 had been paid up to 30 September 2005, leaving ₹69,91,983 unpaid, and the auditor remarked that this balance should be added back under Section 43B. The same report, however, recorded a nil effect on net profit under clause 12(b) from the inventory valuation after applying Section 145A, and Annexure-E to the report showed nil liability disallowable under Section 43B.

When notices under Sections 143(2) and 142(1) came, the company replied on 14 November 2007 that it followed the exclusive method of accounting, had never debited the unpaid duty to its Profit and Loss Account and had therefore claimed no deduction for it. It also argued that under the Central Excise Act, 1944 the duty becomes payable only on removal of goods from the factory or bonded warehouse; its stock remained in bonded godowns and the Government controlled when sugar could be released.

How the AO, CIT(A), ITAT and Delhi High Court decided the addition

The addition went through four forums before reaching the Supreme Court, with the assessee winning at two and losing at two.

At the CIT(A) stage, a certificate dated 14 January 2010 from the company's chartered accountants was admitted as additional evidence under Rule 46A of the Income-tax Rules, 1962. The AO's remand report of 1 April 2010 did not dispute that the audit annexures showed nil profit impact and nil Section 43B liability. The ITAT followed the Gujarat High Court in ACIT v. Narmada Chematur Petrochemicals Ltd. (2010) 327 ITR 369, which holds that excise liability arises on removal from the factory or bonded warehouse.

The High Court took a different route. It read Section 145A, with its non-obstante clause, as a provision for valuing stock and Section 43B as the provision that governs deduction of unpaid liabilities. Relying on Orient Paper Mills Ltd. v. Union of India (AIR 1967 SC 1564) on Sections 3 and 4 of the Central Excise Act, it treated the goods as removed and the duty as payable, and said the assessee could not benefit from its own default.

Why the Supreme Court set aside the Section 43B and 145A addition

The Supreme Court framed two questions: whether unpaid excise duty on uncleared closing stock can be added to the value of closing stock and then to taxable income, and whether the disallowance under Sections 43B and 145A could be sustained.

On the facts, the Court found that the High Court's central premise was not supported by the record. Neither the AO nor the CIT(A) nor the ITAT had found that the goods had been removed. The AO's own remand report, accepted by the CIT(A) and the ITAT, showed that the stock carrying the unpaid duty was still 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."

On the law, the Court held that the AO was wrong to add the amount to closing stock and taxable income when the company had neither paid it nor accrued it in its accounts, and had not routed it through the Profit and Loss Account. Section 43B allows a deduction only in the year of actual payment, with payment before the return due date sufficing for the earlier year; it does not create income out of a liability that was never claimed. A disallowance, the Court said, must show how the entry affects the accounts and the taxable income, and the Revenue had not shown where or how the company had claimed the allowance.

The Court found the unreported Bombay High Court judgment in ITA No. 4297 of 2009, CIT-III v. Loknete Balasaheb Desai S.S.K. Ltd., reported at (2011) 339 ITR 288, to be "on all fours" with the facts, since it dealt with the same interplay between Sections 43B and 145A for a sugar factory.

What the addition did to the declared loss

The effect of an add-back of this kind is easiest to see from the two figures on record. This is an illustration on those numbers alone, ignoring any other adjustments made in the assessment.

• Loss declared in the return: ₹28,36,167
• Unpaid excise duty added under Section 43B: ₹69,91,983
• Resulting figure: ₹69,91,983 minus ₹28,36,167, that is, taxable income of ₹41,55,816

Because the company followed the exclusive method, the unpaid duty had never been charged to the Profit and Loss Account and had never reduced that loss. Adding it back therefore did not reverse a deduction; it converted a declared loss into a positive income of ₹41,55,816 on an amount that had played no part in computing profit. That is the outcome the Supreme Court refused to accept.

Using Form 3CD remarks as the basis for a Section 43B disallowance

The Revenue's argument before the Supreme Court, made through the Additional Solicitor General, was that the AO had relied on no outside material: the auditor's own report said the amount was payable and should be added back. The judgment rejects that approach where the report, read as a whole, shows no deduction claimed and no effect on profit. In this case the remark in the annexure pointed one way while clause 12(b) and Annexure-E pointed the other, and the AO picked the remark without examining the accounts.

For assessees facing additions drawn from a line in the tax audit report, the ruling supports a two-step reply: show from the Profit and Loss Account and the method of accounting that the item was never debited or claimed, and point to the parts of the audit report that record nil profit effect. For tax auditors, the case is a reminder that a stray add-back remark can outlive the rest of the report by two decades of litigation; where a liability was never claimed, the reporting should say so plainly and consistently across the clauses.

The judgment also holds that the stock's location matters for excise-linked items. Where the goods remain in a bonded warehouse and the duty liability arises only on clearance, the Revenue cannot treat the duty as payable on the assumption that the goods have been removed.

Effect on the company's later years and similar pending appeals

The same dispute arose for Lakshmi Sugar Mills in later years. In the Delhi High Court order of 1 September 2014 in ITA 233/2013, concerning Assessment Year 2008-09 and unpaid excise duty of ₹70,87,357, the High Court answered the question in favour of the Revenue on the strength of its Assessment Year 2005-06 decision and remanded the issue to the ITAT to determine the actual facts. That earlier decision has now been set aside, which removes the basis on which the later year was sent back.

The ruling is on the Income-tax Act, 1961 and an assessment year two decades old, but Section 43B disputes over statutory dues on closing stock remain live in many pending appeals for older years. The LiveLaw report on the judgment carries the bench's key findings. Assessees relying on the decision should place the Profit and Loss Account entries and the full audit report on record at the first stage, since the Supreme Court's reasoning rests on what the accounts actually showed rather than on a general rule that Section 43B never applies to stock.

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