The Supreme Court has held that Section 43B of the Income Tax Act cannot be invoked to disallow unpaid excise duty unless the assessee has actually claimed such duty as a deduction. Where the excise duty was neither charged to the Profit & Loss Account nor claimed as an expenditure, and the goods remained in closing stock, the Revenue cannot artificially increase taxable income by adding the unpaid duty amount.
The Apex Court reiterated that an unpaid statutory liability cannot be disallowed unless the assessee has first claimed it as an expenditure in computing taxable income. Since the assessee had not debited the excise duty amount to its Profit & Loss Account, there was no question of making an addition under Section 43B.
The Court also said that a disclosure in the tax audit report regarding unpaid excise duty cannot, by itself, justify an addition unless the books of account show that the assessee claimed the amount as deductible expenditure. The Court found that the High Court wrongly proceeded on the basis that the goods had been cleared from the bonded warehouse, whereas the stock remained uncleared and continued to be part of closing inventory.
Briefly, the appellant, Lakshmi Sugar Mills vs Commissioner of Income Tax, is engaged in the manufacture of sugar and molasses. For Assessment Year 2005-06, the company filed its income tax return declaring a loss. The tax audit report mentioned that excise duty of Rs. 69.91 lakhs remained unpaid on the closing stock of sugar and molasses lying at the end of the financial year. However, the assessee had followed the exclusive method of accounting and had not debited this unpaid excise duty to its Profit & Loss Account nor claimed it as a deduction.
During assessment, the Assessing Officer invoked Sections 43B and 145A of the Income Tax Act and added the unpaid excise duty amount to the closing stock valuation and taxable income. According to the Assessing Officer, excise duty payable on closing stock had to be treated as part of inventory valuation and, since it remained unpaid, it was liable to be disallowed.
On appeal, the Commissioner of Income Tax (Appeals) and later the Income Tax Appellate Tribunal deleted the addition, holding that the assessee had never claimed the amount as expenditure and that the net impact on profit after applying Section 145A was nil. However, the High Court reversed these findings and restored the addition made by the Assessing Officer.
Also read Supreme Court: Uninvoked Corporate Guarantee Can Constitute Financial Debt Under IBC
A Two-Judge Bench comprising Justice S.V.N. Bhatti and Justice N.V. Anjaria found that the High Court had proceeded on an incorrect factual assumption that the goods forming part of the closing stock had already been removed from the factory or bonded warehouse. The record, however, showed that the stock remained in the bonded warehouse and had not been cleared. Therefore, the very basis on which the High Court held excise duty to be payable was contrary to the material available on record.
The Court observed that the assessee was following the recognised accounting standards and had not routed the disputed amount through its Profit & Loss Account. Since the unpaid excise duty was never claimed as an expenditure or deduction, there was no occasion for the Revenue to disallow it under Section 43B. A disallowance presupposes that a deduction has first been claimed by the assessee.
The Court further noted that the Revenue failed to demonstrate from the books of account how the assessee had obtained any tax advantage by claiming the unpaid excise duty. Merely because the tax auditor had made a remark in the audit report could not justify a disallowance when the accounting records themselves did not reflect any such claim. The Apex Court also endorsed the approach taken by the CIT(A) and the Tribunal that, where both opening and closing stock are consistently valued, the net impact on profitability remained nil.
