The Supreme Court has held that an amount cannot be disallowed under Section 43B of the Income Tax Act, 1961, when the assessee has not claimed it as an allowable expense. Applying this principle, the Court deleted an addition of ₹69.92 lakh relating to unpaid excise duty on closing stock of sugar and molasses that remained in a bonded warehouse.

A Bench of 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 had been removed from the warehouse and that excise duty was therefore payable. The assessment and appellate records showed that the disputed stock remained in the assessee’s bonded warehouse.

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The dispute concerned Assessment Year 2005–06. The company, which manufactured crystal sugar and produced molasses as a by-product, filed its return declaring a net loss of ₹28,36,167.

Its tax audit report recorded excise duty of ₹2,80,56,430 leviable on the closing stock of sugar and molasses. Of this, ₹2,10,64,447 had been paid by September 30, 2005, leaving a balance of ₹69,91,983. An auditor’s remark stated that the unpaid balance should be added back under Section 43B.

However, the audit report also certified that the net impact on profitability after giving effect to Section 145A was nil. Another annexure recorded nil outstanding excise duty liability for the relevant Section 43B disclosure.

During assessment proceedings, the company explained that it followed the exclusive method of accounting and had not debited the disputed excise duty to its profit and loss account. Since no deduction had been claimed, it argued that there was no amount to disallow under Section 43B.

The company further submitted that the goods remained in bonded godowns and had not been cleared. Movement of sugar was controlled by government orders, and the company could not independently release the stock into the market. It therefore disputed the treatment of the amount as excise duty payable on the uncleared goods.

The Assessing Officer rejected these explanations and added ₹69,91,983 to the returned income. Relying on the auditor’s remark, the officer held that the unpaid duty had to be included in closing stock under Section 145A and disallowed under Section 43B.

The officer also declined to make a corresponding adjustment to opening stock, reasoning that it would affect the preceding year’s assessment.

The Commissioner of Income Tax (Appeals) deleted the addition after considering an additional certificate from the tax auditor and obtaining a remand report from the Assessing Officer. The appellate authority found that the company had not claimed the amount as expenditure and that the net impact of the Section 145A adjustment on profit was nil.

It concluded that the Assessing Officer had mechanically relied on the audit remark without verifying whether any corresponding debit or deduction appeared in the profit and loss account.

The Income Tax Appellate Tribunal upheld that decision. It recorded that the Revenue did not dispute the nil impact on profit if opening and closing stock were valued consistently by including excise duty. It also confirmed that the company had not claimed excise duty expenditure in its profit and loss account.

The High Court subsequently allowed the Revenue’s appeal, proceeding on the basis that the goods had admittedly been removed and that the company could not benefit from failing to pay the duty.

The Supreme Court found that premise contrary to the record.

It observed that the findings of the Assessing Officer, the Commissioner (Appeals) and the Tribunal did not establish removal of the disputed goods. Instead, the record showed that the stock remained in the bonded warehouse. The factual foundation of the High Court’s decision was therefore unsustainable.

On Section 43B, the Supreme Court explained that the provision regulates the allowance of specified expenses by reference to actual payment, subject to the applicable return-filing deadline. In the present case, however, the disputed amount had neither been paid nor treated as payable in the accounts, apart from the remark in the tax audit report.

The Court stated:

“Disallowing an amount not treated as an allowance by the Assessee is impermissible under the Act, 1961.”

The Bench emphasised that the Revenue had failed to identify where and how the company had claimed the disputed allowance in its books. To sustain the addition, the Assessing Officer needed to explain, with reference to the accounts and return, how the entry had reduced taxable income.

An isolated audit remark did not establish that a deduction had been claimed or that taxable income had been understated.

The Supreme Court also considered the Bombay High Court’s decision in CIT-III v. Loknete Balasaheb Desai S.S.K. Ltd., (2011) 339 ITR 288, which examined the interplay between Sections 43B and 145A. It found that decision closely applicable to the facts and circumstances before it.

Allowing the civil appeal, the Court set aside the High Court’s order, thereby restoring the relief granted by the Commissioner (Appeals) and the Tribunal.

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