Sugar never left the godown: Supreme Court scraps Rs 69.9 lakh Section 43B add-back on Lakshmi Sugar Mills

Justice S.V.N. Bhatti and Justice N. V. Anjaria set aside a High Court order, holding that excise duty on uncleared closing stock that was never paid or claimed as an expense cannot be disallowed under Section 43B read with Section 145A.

A High Court cannot reverse two fact-finding authorities on a fact that nobody found. On 27 October 2026 the Supreme Court allowed an appeal by Lakshmi Sugar Mills Company Limited and set aside a High Court judgment that had restored a Rs 69,91,983 addition to the sugar maker’s income for Assessment Year 2005-06. The High Court had reasoned that the goods on which excise duty remained unpaid were “admittedly removed” from the factory, so the duty was payable and the unpaid amount had to be added back under Section 43B read with Section 145A of the Income Tax Act, 1961. A bench of Justice S.V.N. Bhatti and Justice N. V. Anjaria found that the assessing officer, the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal had all found the opposite: the stock sat in the company’s bonded warehouse. The premise of the High Court’s interference was contrary to the record, and the addition itself had no footing once it was clear that the company had never claimed the duty as an expense.

The judgment, written by Justice Bhatti, is marked non-reportable. It settles a thirteen-year-old appeal, Civil Appeal No. 8932 of 2013, over a sum that was never debited to any profit and loss account, and it does so by returning to a basic feature of Section 43B: the provision disallows deductions for unpaid statutory dues, and a deduction that was never claimed cannot be disallowed.

A Rs 28 lakh loss, an auditor’s remark and a Rs 70 lakh addition

Lakshmi Sugar Mills manufactures crystal sugar by the vacuum pan process and produces molasses as a by-product. For Financial Year 2004-05 it filed a return on 28 October 2005 under Section 139(3), declaring a net loss of Rs 28,36,167. The company follows the standard mercantile method of accounting.

The trouble began with the tax auditor’s report in Form 3CD. Annexure-A recorded that excise duty leviable on the closing stock of sugar and molasses came to Rs 2,80,56,430. Of that, Rs 2,10,64,447 had been paid by 30 September 2005, leaving Rs 69,91,983 unpaid. The auditor noted that this balance should be added back under Section 43B, since it had not been paid before the report was signed. The same report, though, pointed the other way in two places. Clause 12(b) certified that after giving effect to Section 145A, the net impact on profitability from inventory valuation was nil. Annexure-E, which lists disallowable liabilities under Section 43B, showed the outstanding excise duty at the close of the year as nil.

The assessing officer issued notices under Sections 143(2) and 142(1). The company replied on 14 November 2007. Section 43B, it said, allows a deduction for an expense only if the sum is paid before the due date for the return; but the company followed the exclusive method, had never debited the unpaid Rs 69,91,983 to its profit and loss account, and had claimed no deduction, so there was nothing to disallow. Under the Central Excise Act, 1944, liability to pay excise duty crystallises only on removal of finished goods from the factory or bonded warehouse. The stock in question was lying in bonded godowns. The Government controls the movement of sugar, and the company could not move the goods out on its own. No liability had accrued, and the payable duty could not be loaded into the value of closing stock.

The assessing officer rejected all of this in an order under Section 143(3) dated 20 November 2007 and added Rs 69,91,983 to the returned income under Section 43B read with Section 145A. His reasons were that Annexure-A showed the amount as excise duty payable on closing stock as on 31 March 2005, with the auditor’s remark that it was disallowable; that Section 145A mandates valuation of opening stock, purchases, sales and closing stock inclusive of all duties; and that the company had not furnished proof of payment of the balance before filing its return. He declined to adjust the opening stock on the ground that doing so would disturb the preceding year’s assessment, and enhanced only the closing stock. He also rejected the plea that Section 43B could apply only to amounts debited to the profit and loss account.

Two appellate authorities delete the addition, the High Court brings it back

The company appealed to the Commissioner of Income Tax (Appeals), New Delhi, in Appeal No. 90/2007-08. During that appeal it produced additional evidence under Rule 46A of the Income Tax Rules, 1962: a certificate dated 14 January 2010 from its tax auditors, M/s Kumar, Grover and Co., on the net impact of the disputed entry on profitability. The CIT(A) called for a remand report before admitting it. In his report of 1 April 2010 the assessing officer did not dispute that Annexure-A showed nil impact on profit under Section 145A and that Annexure-E showed nil outstanding liability under Section 43B(b). On 27 May 2010 the CIT(A) deleted the addition. The officer, he found, had acted mechanically on the remark in Annexure-A without checking whether any debit entry or deduction had been claimed in the profit and loss account. No expenditure having been claimed, Section 43B had no application.

The Revenue went to the Income Tax Appellate Tribunal, Delhi Bench, in Appeal No. 3445/Del/2010, and lost on 6 May 2011. The Tribunal recorded that the Revenue did not dispute that if opening and closing stock were both valued on the footing that excise duty was leviable on the date of manufacture, the effect on profit would be nil; that the company had claimed no expenditure on account of excise duty in its profit and loss account; and that there was a possible view that both opening and closing stock must be valued on the same basis to work out the effect of Section 145A. It relied on the Gujarat High Court’s decision in ACIT v. Narmada Chematur Petrochemicals Ltd., which held that liability to excise duty arises only on removal of goods from the factory or a bonded warehouse.

The Revenue then took the matter to the High Court under Section 260A, on a single substantial question of law: whether the Tribunal had erred in deleting the addition made under Section 43B read with Section 145A on account of excise duty. The High Court answered it for the Revenue. Section 145A, it held, opens with a non-obstante clause and overrides other provisions, directing that any tax, duty, cess or fee actually paid be included for the purpose of valuation alone; Section 43B regulates the deduction of liabilities incurred but unpaid, whereas Section 145A operates strictly for stock valuation. Relying on Orient Paper Mills Ltd. v. Union of India, it held that Sections 3 and 4 of the Central Excise Act must be read together, and that removal of excisable goods means the duty is leviable, not postponed. The sum of Rs 69,91,983 was, no doubt, unpaid; but the goods had admittedly been removed, so the duty was payable, and the company could not profit from its own omission in not paying it. The orders of the CIT(A) and the Tribunal were reversed.

The submissions before the Supreme Court

Advocate Memoon Zehra, for the company, argued that it followed the exclusive method of accounting under Accounting Standard 2, routing indirect taxes and duties through the balance sheet rather than the profit and loss account, and so had claimed no deduction of the Rs 69,91,983 towards unaccrued excise duty. Disallowing an amount never claimed and adding it to taxable income was unsustainable. The company releases finished sugar into the market as and when Government orders permit, and has no obligation to pay excise duty on stocked goods. The Revenue’s substantial question of law, she said, was really an accusation of fact that the CIT(A) and the Tribunal had rejected, and the High Court had not examined it independently. Worse, the High Court had proceeded on the erroneous assumption that the closing stock had been removed, an observation contrary to the record. Dutiability is fixed with reference to the date of movement and the duty becomes payable on clearance; the closing stock had stayed within the factory premises and bonded warehouse, so nothing was payable. The High Court, she argued, had gone beyond its jurisdiction under Section 260A. She relied on the Bombay High Court’s judgment of 22 June 2011 in ITA No. 4297 of 2009, CIT-III v. Loknete Balasaheb Desai S.S.K. Ltd., as squarely applicable.

Additional Solicitor General S. Dwarakanath, for the Revenue, defended the assessment. The assessing officer had relied on no extrinsic material; the tax auditor’s own report said the amount was payable, and the disallowance followed from it. The CIT(A) and the Tribunal had construed the circumstances liberally and reached an erroneous finding, and the High Court had rightly interfered with that finding of fact.

A finding nobody made

The Court began with the premise on which the High Court had interfered. Paragraph 15 of the impugned judgment recorded that the goods were admittedly removed and the duty therefore payable. The findings of the assessing officer, the CIT(A) and the Tribunal were not to that effect. On the contrary, the assessing officer’s remand report, the CIT(A) and the Tribunal had all found that the stock on which no excise duty had been paid, or treated as payable, remained in the company’s bonded warehouse. The very basis on which the High Court determined that excise duty was payable was contrary to the record, unsustainable and liable to be set aside.

The Court then went to the assessment itself and held that the officer had committed a serious error of fact in disallowing the Rs 69,91,983 and adding it both to the value of closing stock and to taxable income. Justice Bhatti set out four reasons. The company follows the standard accounting system. It had not routed the disputed entry through its profit and loss account, and had not actually paid the duty either. Section 43B, in the first place, allows an expense only in the year in which the sum is paid. And where an accrual-basis assessee pays after 31 March but before the return date, the payment is still allowed as an expense of the financial year for which the return is filed: a statutory payment made on 1 August 2005 for a liability that accrued before 31 March 2005 can still be claimed for that year, while dues left unpaid at the return date cannot be claimed at all.

Applied here, that scheme left the addition with nothing to stand on. The amount had been neither paid nor, for accounting purposes, treated as payable; apart from the remark in the tax audit report, there was no basis to disallow it. The officer’s order would have deserved acceptance, the Court said, had it explained with reference to the accounts and the return how the entry was factored in and how net taxable income was negatively affected. It did not. “Disallowing an amount not treated as an allowance by the Assessee is impermissible” under the Act, the Court held. The Revenue, having failed to show where and how the company had claimed the allowance in its books, ought not to have disallowed it. The officer’s order was illegal, and the CIT(A) and the Tribunal had rightly interfered with it.

The Court also examined the Bombay High Court’s judgment in ITA No. 4297 of 2009 on which the company relied, and found it, on all fours, nearer to the facts of this case; it considers the interplay between Sections 43B and 145A.

Order

The High Court’s order allowing the Revenue’s appeal under Section 260A is set aside. Civil Appeal No. 8932 of 2013 is allowed, which leaves in place the orders of the CIT(A) of 27 May 2010 and the Tribunal of 6 May 2011 deleting the addition of Rs 69,91,983 for Assessment Year 2005-06. Pending applications, if any, stand disposed of.