Supreme Court Sets Aside ₹69.9 Lakh Tax Addition Against Sugar Mill Over Unclaimed Excise Duty On Bonded Stock

In brief

The question

1. Whether unpaid excise duty of ₹69,91,983 on closing stock remaining in the Assessee’s bonded warehouse could be added to the value of closing stock and the Assessee’s taxable income under Sections 43B and 145A of the Income Tax Act, 1961.

The court held

The Supreme Court held that the addition was unsustainable because the relevant stock had not been removed, the Assessee had not claimed the disputed duty as an expense, and the Revenue had not shown that the amount had reduced taxable income.

It also directed

It set aside the High Court’s judgment and allowed the Assessee’s appeal, thereby restoring the orders of the CIT(A) and ITAT.

01Facts

The Assessee, which followed the mercantile system and an exclusive method of accounting, filed its return for AY 2005–06 declaring a loss.

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Its tax audit report recorded excise duty of ₹69,91,983 as unpaid, but the Assessee maintained that it had neither claimed the amount as an expense in its Profit and Loss Account nor incurred a duty liability on closing stock that remained in its bonded warehouse.

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The Assessing Officer added the amount under Sections 43B and 145A of the Income Tax Act, 1961. The CIT(A) deleted the addition, and the ITAT upheld that decision. The High Court allowed the Revenue’s appeal, reasoning that the goods had been removed and duty was payable. The Assessee appealed to the Supreme Court.

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02Issues

i.1. Whether unpaid excise duty of ₹69,91,983 on closing stock remaining in the Assessee’s bonded warehouse could be added to the value of closing stock and the Assessee’s taxable income under Sections 43B and 145A of the Income Tax Act, 1961.

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ii.2. Whether the High Court was justified in reversing the CIT(A) and ITAT on the premise that the goods had been removed, when that premise was contrary to the factual findings below.

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03Law Applied

Section 43B of the Income Tax Act, 1961 allows specified statutory expenses as deductions only upon payment, subject to the statutory allowance for payment made by the return-filing deadline; it does not permit disallowance of an expense that the Assessee has not claimed.

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Section 145A addresses the inclusion of specified taxes and duties in inventory valuation, but the Court considered its application alongside Section 43B and the Assessee’s accounting treatment.

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The Court also relied on CIT-III v. Loknete Balasaheb Desai S.S.K. Ltd., which it regarded as closely applicable to the interplay between Sections 43B and 145A.

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Provisions in the judgment · 2 · Linked ones open on LawLens

Central Excise Act, 1944 Section 3 Section 4

04Reasoning

The High Court’s conclusion that duty was payable rested on its finding that the goods had been removed. The Supreme Court found that premise unsupported by the record: the lower authorities had found that the relevant stock remained in the bonded warehouse.

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Further, the Assessee had not routed the disputed amount through its Profit and Loss Account or claimed it as a deduction, and the Revenue did not establish where or how the amount had reduced taxable income. In those circumstances, the Assessing Officer could not disallow the amount under Section 43B merely because the audit report described it as outstanding; nor was there a basis to add it to taxable income under Section 145A.

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The Court considered the Bombay High Court decision in Loknete Balasaheb Desai closer to the case’s facts and circumstances.

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