Supreme Court Holds Section 43B Disallowance Impermissible Without Claim of Deduction:

M/s. Lakshmi Sugar Mills Co. Ltd. is engaged in the manufacture of crystal sugar and molasses, filed its income tax return for Assessment Year 2005-06, declaring a net loss of Rs 28,36,167. During assessment, the AO noticed that excise duty amounting to Rs 2,80,56,430 was leviable on the closing stock of sugar and molasses. Out of this amount, Rs 2,10,64,447 had been paid by September 30, 2005, leaving Rs 69,91,983 unpaid.

The AO added the outstanding amount to the assessee’s taxable income under Sections 43B read with 145A of the Income Tax Act, 1961, on the ground that the excise duty had not been paid within the prescribed period. The assessee contended that it followed the exclusive method of accounting and had not debited the disputed amount to its Profit and Loss Account. The CIT(A) deleted the addition observing that the assessee had not claimed any deduction for the disputed amount and that the net impact on profitability under Section 145A was nil. The ITAT upheld the deletion. However, the High Court allowed the Revenue’s appeal, holding that the unpaid excise duty was liable to be added to the assessee’s income. Aggrieved by this decision, the assessee approached the Supreme Court.

The Supreme Court examined the findings of the AO, CIT(A), ITAT and the High Court and found that the High Court had proceeded on an incorrect factual premise. The High Court had observed that the goods had been removed and, therefore, excise duty was payable. However, the assessment record and the findings of the CIT(A) and ITAT established that the stock in question remained in the assessee’s bonded warehouse. The Supreme Court held that the basis on which the High Court determined the excise duty liability was contrary to the record and could not be sustained.

The Court further noted that the assessee followed the standard accounting system and had not routed the disputed amount through its Profit and Loss Account. Since the amount had neither been paid nor treated as payable in the accounts for the purpose of claiming a deduction, there was no basis for disallowing it merely on the strength of a remark in the tax audit report. The Court explained that Section 43B governs the allowability of specified expenses and liabilities on the basis of actual payment, subject to the statutory conditions. Where a statutory liability is paid after the close of the financial year but before the due date for filing the return, the deduction may still be allowable for the relevant year in accordance with Section 43B. Conversely, an unpaid liability cannot be claimed as an allowable expense where the statutory payment conditions are not satisfied.

However, the Court emphasised that an amount which the assessee has not claimed as a deduction cannot be disallowed without establishing how the amount was factored into the accounts or return and how it adversely affected the computation of taxable income. The Supreme Court set aside the High Court judgment and allowed the civil appeal filed by M/s. Lakshmi Sugar Mills Co. Ltd.