![Unpaid Excise Duty on Stock in Bonded Warehouse Cannot Be Disallowed Under Section 43B When Never Claimed: Supreme Court in Lakshmi Sugar Mills v. CIT [2026 INSC 1162]](/assets/images/article-incometax.svg)
Quick Answer: An assessee that never debited unpaid excise duty to its Profit and Loss Account cannot face a Section 43B disallowance of that amount. In this case the duty related to sugar stock still lying in a bonded warehouse. The Supreme Court set aside the High Court's order and restored the CIT(A) and ITAT orders deleting the addition of Rs.69,91,983 for AY 2005-06.
In M/s. Lakshmi Sugar Mills Co. Ltd. v. Commissioner of Income Tax, Delhi-II (2026 INSC 1162), the Supreme Court held that the High Court wrongly reversed the CIT(A) and ITAT. It found that the High Court's premise, that the goods were "admittedly removed", was contrary to the record, which showed the stock remained in the assessee's bonded warehouse (para 14). A Bench of Justice S.V.N. Bhatti and Justice N.V. Anjaria held that disallowing an amount the assessee never treated as an allowance is impermissible under the Income Tax Act, 1961 (para 14). The civil appeal was allowed (para 16).
Status: Civil Appeal allowed; High Court's order in the Revenue's Section 260A appeal set aside; deletion of the addition by the CIT(A) and ITAT stands (paras 14, 16).
Headnote: Section 43B Disallowance of Unpaid Excise Duty on Closing Stock
Income Tax Act, 1961 – Sections 43B, 145A and 260A – Central Excise Act, 1944 – Unpaid excise duty on closing stock – Bonded warehouse – Exclusive method of accounting – Amount not debited to Profit and Loss Account – Disallowance – Substantial question of law – Finding contrary to record.
Held: (i) The High Court's premise that the goods were admittedly removed, making excise duty payable, was not supported by the findings of the AO, the CIT(A) or the Tribunal (para 14).
(ii) The Remand Report and the findings of the CIT(A) and Tribunal showed that the stock on which no excise duty was paid remained in the assessee's bonded warehouse, so the High Court's basis was contrary to the record (para 14).
(iii) The AO erred in disallowing Rs.69,91,983 under Section 43B and adding it to closing stock and taxable income, as the assessee had not routed the entry through the Profit and Loss Account (para 14).
(iv) Section 43B allows an expense only in the year of payment, and a payment made after 31 March but before the return date is allowable for that year; dues not paid before the return date cannot be claimed (para 14).
(v) Disallowing an amount not treated as an allowance by the assessee is impermissible; the Revenue must show where and how the allowance was claimed in the books (para 14).
(vi) The Bombay High Court's decision in ITA No. 4297 of 2009 on the interplay of Sections 43B and 145A is, on all fours, nearer to the facts (para 15).
(paras 14–16)
Case Details: Lakshmi Sugar Mills v. CIT, Delhi-II (2026 INSC 1162)
Final Outcome: Civil Appeal allowed; impugned High Court order set aside.
Case: M/s. Lakshmi Sugar Mills Co. Ltd. v. Commissioner of Income Tax, Delhi-II
Neutral Citation: 2026 INSC 1162
Case No.: Civil Appeal No. 8932 of 2013
Court: Supreme Court of India (Civil Appellate Jurisdiction) – Non-Reportable
Date of Decision: 27 October 2026
Bench: Justice S.V.N. Bhatti (author) and Justice N.V. Anjaria
Relevant Acts & Sections: Income Tax Act, 1961 – Sections 43B, 139(3), 142(1), 143(2), 143(3), 145A and 260A; Income Tax Rules, 1962 – Rule 46A; Central Excise Act, 1944 – Sections 3 and 4
Impugned Order: High Court judgment allowing the Revenue's appeal under Section 260A of the Income Tax Act, 1961 (paras 7–8); assessment year 2005-06
Counsel: Advocate Memoon Zehra for the Assessee; Mr. S Dwarakanath, learned ASG, for the Revenue (paras 11–12)
Source: Supreme Court of India (official website)
Key Holdings of the Supreme Court
- The High Court's finding that the goods were admittedly removed was contrary to the record and unsustainable (para 14).
- The stock on which excise duty was unpaid remained in the assessee's bonded warehouse, as found in the Remand Report and by the CIT(A) and Tribunal (para 14).
- Since the amount was neither paid nor treated as payable in the accounts, the only basis for the addition, a remark in the Tax Audit Report, was insufficient (para 14).
- Disallowing an amount the assessee never claimed as an allowance is impermissible under the Income Tax Act, 1961 (para 14).
- The AO's order was illegal and rightly interfered with by the CIT(A) and the Tribunal (para 14).
Brief Facts of the Case
The assessee manufactures crystal sugar and produces molasses as a by-product. For AY 2005-06 it filed a return on 28.10.2005 under Section 139(3), declaring a net loss of Rs.28,36,167 (paras 1–2).
The Tax Auditor's 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 30.09.2005, leaving Rs.69,91,983 unpaid, with a remark that it be added back under Section 43B. The same report certified a Nil impact on profit under Section 145A and Nil outstanding Section 43B liability in Annexure-E (para 2).
The assessee replied that it followed the exclusive method, never debited the unpaid duty to the Profit and Loss Account, and that duty arose only on removal of goods from the bonded warehouse. The AO, by order dated 20.11.2007, added Rs.69,91,983 under Section 43B read with Section 145A (paras 3–4).
The CIT(A), admitting a CA certificate dated 14.01.2010 under Rule 46A, deleted the addition on 27.05.2010. The ITAT dismissed the Revenue's appeal on 06.05.2011, relying on ACIT v. Narmada Chematur Petrochemicals Ltd. (paras 5–6).
The High Court allowed the Revenue's appeal under Section 260A, relying on Orient Paper Mills Ltd. v. Union of India and holding that the goods were admittedly removed, so duty was payable (paras 7–8).
Issues Before the Supreme Court
- Whether unpaid central excise duty of Rs.69,91,983 on uncleared closing stock could be added to the value of closing stock and then to taxable income (para 10).
- Whether the disallowance under Section 43B read with Section 145A was maintainable (para 10).
- Whether the High Court's premise that the goods were removed was supported by the record (para 14).
Court's Findings and Reasoning
Assessee's case (paras 11–11.2): The assessee argued that it followed the exclusive method under AS-2, routed indirect taxes through the balance sheet and claimed no deduction; that the closing stock stayed in the bonded warehouse; and that the High Court exceeded its Section 260A jurisdiction by proceeding on a wrong factual assumption.
Revenue's case (para 12): The ASG argued that the AO relied only on the Tax Auditor's Report showing the amount as payable, and that the CIT(A) and Tribunal construed the facts too liberally.
High Court's premise contrary to record (para 14): The Court found that none of the authorities below held the goods to have been removed. The stock remained in the bonded warehouse, so the High Court's basis for holding duty payable was unsustainable.
No disallowance of an unclaimed amount (para 14): The Court gave four reasons: the assessee follows the standard accounting system, it did not route the entry through the Profit and Loss Account, Section 43B allows expenses only in the year of payment, and payment before the return date is allowable for that year. Since the amount was neither paid nor treated as payable, a remark in the audit report was no basis for disallowance.
Bombay High Court decision applied (para 15): The unreported Bombay High Court judgment in ITA No. 4297 of 2009, considering the interplay between Sections 43B and 145A, was held to be on all fours and nearer to the facts.
Final Outcome and Directions
- The impugned order of the High Court is set aside and the Civil Appeal is allowed (para 16).
- The orders of the CIT(A) and the Tribunal deleting the addition of Rs.69,91,983 stand, the AO's order being held illegal (para 14).
- Pending applications, if any, are disposed of (para 17).
Legal Principle Laid Down
Section 43B of the Income Tax Act, 1961 governs when a claimed deduction for a statutory liability is allowable. Where the assessee has not debited unpaid excise duty to its Profit and Loss Account and the goods remain in a bonded warehouse, the AO cannot disallow that amount under Section 43B read with Section 145A and add it to income merely on a remark in the Tax Audit Report. The Revenue must show where and how the allowance was claimed in the books.
Precedents Relied Upon
- CIT-III v. Loknete Balasaheb Desai S.S.K. Ltd., (2011) 339 ITR 288 (Bombay High Court, ITA No. 4297 of 2009, dated 22.06.2011) – Relied upon – interplay of Sections 43B and 145A. Discussed at paras 11.2, 15.
- ACIT v. Narmada Chematur Petrochemicals Ltd., (2010) 327 ITR 369 (Gujarat High Court) – Relied on by the Tribunal – excise liability arises only on removal from factory or bonded warehouse. Discussed at para 6.
- Orient Paper Mills Ltd. v. Union of India, AIR 1967 SC 1564 – Relied on by the High Court; its premise of removal of goods held contrary to the record. Discussed at paras 8, 14.
Important Paragraphs of the Judgment
Verbatim extracts from the judgment. For the full text, refer to the judgment PDF below.
Para 10: "the issue in the circumstances of the Appeal is whether the unpaid central excise duty of Rs.69,91,983/- (Sixty-Nine Lakhs Ninety-One Thousand Nine Hundred and Eighty-Three) on uncleared closing stock of processed sugar/goods can be added to the value of the closing stock and, thereafter, to the Assessee's taxable income"
Para 14: "Therefore, the very basis on which the High Court determines excise duty payability is contrary to the record, unsustainable, and liable to be set aside."
Para 14: "Conversely, if statutory dues are not paid before the ITR date, no amount can be claimed as an allowable expense."
Para 14: "Disallowing an amount not treated as an allowance by the Assessee is impermissible under the Act, 1961."
Para 14: "The Revenue, having failed to show where and how the Assessee claimed the allowance in the books of account, ought not to disallow such amount."
Para 15: "It considers the interplay between Sections 43B and 145A of the Act, 1961."
Practical Impact of the Ruling
- For assessees: Where unpaid excise or similar duty was never debited to the Profit and Loss Account, a Section 43B add-back can be resisted, especially for stock still in a bonded warehouse (para 14).
- For Assessing Officers: A remark in the Tax Audit Report is not enough; the AO must show how the entry was factored into the accounts and affected taxable income (para 14).
- For timing of payment: Statutory dues paid after 31 March but before the return date remain allowable for that year; dues unpaid by the return date cannot be claimed (para 14).
- For High Courts under Section 260A: A reversal resting on a factual premise contrary to the record of the lower authorities will not survive (para 14).
- For practitioners: The Bombay High Court's ruling on Sections 43B and 145A was treated as on all fours and is a useful reference (para 15).
FAQs on Section 43B and Unpaid Excise Duty
1. What did the Supreme Court decide in Lakshmi Sugar Mills v. CIT?
It set aside the High Court's order and allowed the assessee's appeal, so the deletion of the Rs.69,91,983 addition by the CIT(A) and ITAT stands (paras 14, 16).
2. Why was the High Court's order set aside?
The High Court assumed the goods were admittedly removed, but the record showed the stock remained in the bonded warehouse, so its basis was contrary to the record (para 14).
3. Can an amount not claimed as an expense be disallowed under Section 43B?
No. The Court held that disallowing an amount not treated as an allowance by the assessee is impermissible under the Act (para 14).
4. When is a statutory payment allowable under Section 43B?
In the year of payment; a payment made after 31 March but before the return date is allowable for that year, but dues unpaid by the return date cannot be claimed (para 14).
5. Which decision did the Supreme Court find closest to the facts?
The Bombay High Court's judgment 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 (para 15).
Keywords: 2026 INSC 1162, Lakshmi Sugar Mills v. CIT Delhi-II, Section 43B Income Tax Act, Section 145A closing stock valuation, unpaid excise duty, bonded warehouse, exclusive method of accounting, Section 260A, Loknete Balasaheb Desai, Supreme Court non-reportable judgment
Related on LegalTaxGuru
Download Judgment PDF – Lakshmi Sugar Mills v. CIT, Delhi-II
Source: Supreme Court of India (official website).