The Supreme Court has held that the Income Tax Department cannot disallow an amount under Section 43B of the Income Tax Act, 1961, if the taxpayer has not claimed it as a deduction in the first place.

A bench of Justice S.V.N. Bhatti and Justice N.V. Anjaria set aside a Delhi High Court judgment that had upheld the addition of around ₹69.92 lakh towards unpaid excise duty on a sugar mill's closing stock.

The Court observed that the tax authorities had failed to establish how the disputed amount had been accounted for or how it had reduced the company's taxable income.

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

The case concerned the assessment year 2005–06. Lakshmi Sugar Mills Company Limited had declared a net loss in its income tax return.

During the assessment, the tax auditor reported that excise duty of ₹2.80 crore was payable on the closing stock of sugar and molasses. Out of this amount, ₹2.10 crore had been paid by the prescribed date, while ₹69.91 lakh remained unpaid.

The Assessing Officer added the unpaid amount to the company's taxable income under Sections 43B and 145A of the Income Tax Act.

The company argued that it had not claimed the unpaid excise duty as an expense in its Profit and Loss Account. It also contended that the goods remained in a bonded warehouse and that the excise duty liability arose upon their removal or clearance.

The Commissioner of Income Tax (Appeals) deleted the addition, holding that the disputed amount had not been claimed as an expense and that its inclusion did not affect the company's net profit. The Income Tax Appellate Tribunal upheld this decision.

However, the Delhi High Court reversed the orders and ruled in favour of the Income Tax Department, following which an appeal was filed before the Supreme Court by an assessee.

Allowing the appeal, the judgment authored by Justice Bhatti held that the High Court had proceeded on an incorrect factual assumption that the goods had been removed from the warehouse. The record showed that the stock remained in a bonded warehouse.

The Court noted that the company had not claimed the disputed excise duty as an expense in its Profit and Loss Account. The tax authorities had also failed to establish how the amount had been accounted for or how it had reduced the company's taxable income.

The Court explained that Section 43B generally allows certain expenses, including excise duty, as deductions only when they are actually paid, subject to the statutory exception for payment by the applicable income tax return-filing deadline.

However, the provision cannot be used to disallow a deduction that the taxpayer never claimed.

In other words, if a taxpayer has not treated an amount as an expense to reduce taxable income, the tax authorities cannot automatically add it back merely because it remains unpaid.

Appearance:

Ms. Memoon Zehra, Adv. for the Assessee

Mr. S. Dwarakanath, ASG for the revenue