The Supreme Court has clarified that unpaid excise duty on closing stock retained in a bonded warehouse cannot be added to taxable income under Section 43B read with Section 145A of the Income Tax Act, 1961, where the assessee follows the exclusive method of accounting and has not claimed any deduction for such duty in its profit and loss account. The Court set aside the High Court's judgment which had erroneously assumed the goods were removed from the factory premises, contrary to the concurrent findings of the Assessing Officer, CIT (Appeals), and the ITAT that the stock remained in the bonded warehouse.
Background & Facts
The Dispute
The appellant, M/s. Lakshmi Sugar Mills Company Limited, manufactures crystal sugar using the vacuum pan process and produces molasses as a by-product. The dispute pertains to the Return filed for Assessment Year 2005-06 (Financial Year 2004-05). The assessee follows the standard mercantile accounting method and, in its Return dated 28.10.2005 filed under Section 139(3), declared a net loss of Rs. 28,36,167/-. The Tax Auditor's Report in Form 3CD, Annexure-A, noted that the excise duty leviable on the closing stock of sugar and molasses was Rs. 2,80,56,430/-, of which Rs. 2,10,64,447/- had been paid up to 30.09.2005, leaving an unpaid balance of Rs. 69,91,983/-. The Auditor remarked that this balance should be added back under Section 43B as it had not been paid before signing the Report. However, in clause 12(b), the Tax Auditor certified that after giving effect to Section 145A, the net impact on profitability from inventory valuation was Nil. Annexure-E of the Tax Audit Report showed disallowable liabilities under Section 43B as Nil.
Key Facts
- The assessee manufactures sugar and molasses; excise duty liability under the Central Excise Act, 1944 crystallises only upon removal of goods from factory premises or bonded warehouse
- The closing stock on which excise duty remained unpaid was kept in bonded godowns; the Government controls movement of sugar and the assessee could not move goods out on its own
- The assessee follows the exclusive method of accounting under AS-2 (Companies Act, 2013) where indirect taxes and duties are routed through the balance sheet, not the Profit & Loss Account
- No deduction was claimed for the unpaid excise duty of Rs. 69,91,983/- in the Profit & Loss Account
- The Tax Auditor's Certificate dated 14.01.2010 confirmed Nil net impact on profitability under Section 145A
Procedural History
- 28.10.2005: Return filed under Section 139(3) declaring net loss of Rs. 28,36,167/-
- 14.11.2007: Assessee replied to AO's queries under Sections 143(2) and 142(1)
- 20.11.2007: AO passed order under Section 143(3), adding Rs. 69,91,983/- under Section 43B read with Section 145A
- 27.05.2010: CIT (Appeals) deleted the addition, holding no expenditure claimed in P&L and net profit impact under Section 145A was Nil
- 06.05.2011: ITAT, Delhi Bench dismissed Revenue's Appeal No. 3445/Del/2010, confirming CIT(A) order; relied on Gujarat HC decision in ACIT v. Narmada Chematur Petrochemicals Ltd. (2010) 327 ITR 369
- 22.06.2011: Bombay HC judgment in ITA No. 4297 of 2009 (unreported) on similar facts
- Impugned High Court Order: Allowed Revenue's appeal under Section 260A, reversed CIT(A) and ITAT
- 27.10.2026: Supreme Court judgment in Civil Appeal No. 8932 of 2013
Relief Sought
The appellant sought setting aside of the impugned High Court judgment, restoration of the CIT (Appeals) and ITAT orders deleting the addition of Rs. 69,91,983/-, and allowance of the civil appeal.
The Legal Issue
The central questions were: (1) Whether unpaid central excise duty of Rs. 69,91,983/- on uncleared closing stock of processed sugar/goods kept in bonded warehouse can be added to the value of closing stock and thereafter to the assessee's taxable income under Section 145A read with Section 43B; (2) Whether Section 43B applies when the assessee has not debited the unpaid excise duty to its Profit & Loss Account and claimed no deduction; (3) Whether the High Court could interfere with concurrent factual findings that the stock remained in the bonded warehouse and was not removed.
Arguments Presented
For the Appellant
Advocate Memoon Zehra argued that the assessee followed the exclusive method of accounting under AS-2 where indirect taxes are routed through the balance sheet, not the Profit & Loss Account. Since no deduction was claimed for the unpaid excise duty, Section 43B - which allows deductions only for sums actually paid - was inapplicable. The assessee had no obligation to pay excise duty on stocked goods as liability crystallises only upon removal from factory or bonded warehouse under Sections 3 and 4 of the Central Excise Act, 1944, read together as held in Orient Paper Mills Ltd. v. Union of India (AIR 1967 SC 1564). The High Court's finding that goods were "admittedly removed" was contrary to the record; the AO's Remand Report, CIT(A), and ITAT all found the stock remained in the bonded warehouse. The substantial question of law framed by the Revenue was essentially a question of fact, which the High Court could not re-examine under Section 260A. Reliance was placed on the Bombay HC judgment in ITA No. 4297 of 2009 (dated 22.06.2011) which squarely applied.
For the Respondent
Mr. S. Dwarakanath, learned ASG, contended that the AO did not rely on extrinsic material; the Tax Auditor's Report itself indicated the amount was payable. The CIT(A) and ITAT had liberally construed the circumstances and arrived at an erroneous finding. The High Court rightly interfered with the findings of fact and allowed the Revenue's appeal. Section 145A, with its non-obstante clause, mandates inclusion of all duties in stock valuation regardless of payment, and Section 43B operates independently to disallow unpaid statutory liabilities.
The Court's Analysis
The Supreme Court first examined whether the premise of the High Court's interference - that the goods were "admittedly removed" - was supported by the record. The Court found it was not. The AO's Remand Report, the CIT(A) order, and the ITAT order all consistently found that the stock on which no excise duty was paid remained in the assessee's bonded warehouse. The High Court's contrary finding was therefore unsustainable and liable to be set aside.
On the interplay between Section 43B and Section 145A, the Court held that Section 43B regulates the deduction of liabilities incurred but unpaid, and applies only where the assessee has claimed such expenditure as a deduction in its Profit & Loss Account. Since the assessee followed the exclusive method of accounting and had not routed the disputed entry through the P&L Account, no deduction was claimed, and Section 43B could not be invoked to disallow an amount never claimed as an allowance. The Court emphasised: "Disallowing an amount not treated as an allowance by the Assessee is impermissible under the Act, 1961."
Regarding Section 145A, the Court noted that the Tax Auditor's Certificate dated 14.01.2010 certified that the net impact on profitability from inventory valuation under Section 145A was Nil. The AO had not disputed this factual position. The Court relied on the unreported Bombay HC judgment in ITA No. 4297 of 2009, which considered the interplay between Sections 43B and 145A and was "on all fours" with the present case.
The Court also reiterated the principle from Orient Paper Mills that Sections 3 and 4 of the Central Excise Act, 1944 must be read together: removal of excisable goods implies the duty is leviable and not postponed. Since the goods were not removed but remained in the bonded warehouse, no excise duty liability had accrued. The assessee could not be penalised for its own omission in not paying duty when no duty was legally payable.
"The AO committed a serious error of fact by disallowing Rs.69,91,983/- under Section 43B of the Act, 1961 and adding it to the value of the closing stock and the Assessee's taxable income. Because (i) the Assessee is following the Standard Accounting System; (ii) the Assessee has not routed the disputed entry through the Profit and Loss Account, more so without actually paying the excise duty; (iii) Section 43B firstly allows allowance of expenses only in the year in which the sum is paid; and (iv) the actual payment on accrual method paid beyond 31st March but before the Tax Return date is accepted, then notwithstanding the payment beyond 31st March, is still allowable as expense of the Financial Year for which Return is filed."
The Verdict
The Supreme Court allowed the Civil Appeal, set aside the impugned High Court judgment, and restored the orders of the CIT (Appeals) dated 27.05.2010 and the ITAT dated 06.05.2011 deleting the addition of Rs. 69,91,983/-. The Court held that the disallowance under Section 43B read with Section 145A was not maintainable where the assessee followed the exclusive accounting method, claimed no deduction for unpaid excise duty, and the stock remained in the bonded warehouse with no removal having occurred. Pending applications, if any, were disposed of accordingly.
What This Means For Similar Cases
Section 43B Applies Only Where Deduction Is Claimed
The judgment establishes a clear boundary: Section 43B operates as a deduction-disallowance provision, not a standalone income-addition mechanism. If an assessee following the exclusive method of accounting (AS-2) does not debit unpaid statutory dues to the Profit & Loss Account and claims no deduction, the Revenue cannot invoke Section 43B to add such amounts to taxable income. Practitioners must:
- Verify the accounting method followed (exclusive vs. inclusive) before the AO invokes Section 43B
- Ensure Tax Audit Reports (Form 3CD) accurately reflect whether expenditure was claimed in P&L
- Obtain certificates under Rule 46A confirming net profit impact under Section 145A is Nil where applicable
Excise Duty Liability Arises on Removal, Not Manufacture
The Court reaffirmed that under the Central Excise Act, 1944, read with Orient Paper Mills, excise duty liability crystallises only upon removal of goods from the factory or bonded warehouse. Stock retained in bonded warehouses - especially where government controls movement (as with sugar) - does not attract excise duty liability. This principle protects assessees from deemed liability on uncleared stock. Key takeaways:
- For goods under government control (sugar, etc.), movement restrictions negate duty liability until actual clearance
- Bonded warehouse retention is not "removal" for excise purposes
- Section 145A valuation must reflect actual duty leviable, not notional duty on unremoved stock
Concurrent Factual Findings Bind High Courts Under Section 260A
The High Court exceeded its jurisdiction under Section 260A by overturning the concurrent factual findings of the AO (Remand Report), CIT(A), and ITAT that the stock remained in the bonded warehouse. The Supreme Court reiterated that Section 260A appeals are confined to substantial questions of law; factual findings, especially when concurrent, are not open to re-appreciation. Practitioners should:
- Frame substantial questions of law precisely, avoiding fact-disguised-as-law questions
- Highlight concurrent findings at every appellate stage to create a barrier against High Court interference
- Cite this judgment when High Courts attempt to substitute their own factual conclusions
Tax Auditor's Certification Under Section 145A Is Critical
The Tax Auditor's certificate in clause 12(b) of Form 3CD certifying Nil net impact on profitability under Section 145A, and Annexure-E showing Nil Section 43B liabilities, carried decisive weight. The AO did not dispute this. This underscores the evidentiary value of properly prepared Tax Audit Reports. Assessees should ensure:
- Tax Auditors specifically address Section 145A impact in clause 12(b)
- Annexure-E accurately reflects Section 43B liabilities
- Remand Reports under Rule 46A are sought to admit supplementary certificates
