IT Act | Unpaid Excise Duty On Stock In Bonded Warehouse Can't Be Disallowed If Not Debited To P&L Account: Supreme Court

"Disallowing an amount not treated as an allowance by the Assessee is impermissible under the IT Act, 1961. The Revenue, having failed to show where and how the Assessee claimed the allowance in the books of account, ought not to disallow such amount." Supreme Court has held that a statutory disallowance under Section 43B read with Section 145A of the Income Tax Act, 1961 cannot be made for unpaid central excise duty on uncleared closing stock lying in a bonded warehouse when the assessee has neither charged the amount to its Profit and Loss Account nor claimed it as an allowable deduction.

A bench comprising Justice S.V.N. Bhatti and Justice N.V. Anjaria, in its judgment delivered on October 27, 2026, set aside the High Court's order and restored the findings of the CIT (Appeals) and ITAT deleting the addition made by the Assessing Officer.

The appellant, an assessee engaged in manufacturing crystal sugar and molasses, filed its return for Assessment Year 2005-06 showing a net loss, while its tax audit report noted unpaid excise duty of Rs. 69,91,983 on closing stock located inside bonded warehouses. Invoking Section 43B read with Section 145A of the Income Tax Act, the Assessing Officer added this amount to the returned income on the premise that excise duty on closing stock remained unpaid before filing the return. The CIT (Appeals) and the ITAT deleted the addition because the assessee followed the exclusive method of accounting, did not debit the duty to its Profit and Loss Account, and claimed no deduction. However, the High Court reversed these findings upon an assumption that the excisable goods had already been removed.

Whether unpaid central excise duty on uncleared closing stock of finished goods lying in a bonded warehouse can be added to closing stock valuation and taxable income under Section 43B read with Section 145A of the Income Tax Act, 1961.

Whether the Revenue can make a statutory disallowance under Section 43B of the Income Tax Act when the assessee has neither claimed the indirect tax liability as an expenditure in its Profit and Loss Account nor sought any deduction for it.

High Court proceeded on an erroneous factual assumption regarding removal of goods

The Supreme Court observed that the High Court interfered with the concurrent findings of the CIT (Appeals) and the Tribunal on a premise completely contradicted by the record. The High Court had erroneously assumed that the finished goods were cleared and that excise liability had therefore attached.

The bench emphasized that the Assessing Officer's remand report, the CIT (Appeals), and the Tribunal all arrived at the factual finding that the finished sugar remained stored inside the assessee's bonded warehouse. The court reiterated that liability to pay excise duty under the Central Excise Act, 1944 crystallises only upon the removal of finished goods from the factory premises or bonded warehouse.

Section 43B disallowance cannot operate in the absence of an expense deduction claim

Scrutinizing the statutory framework, the bench ruled that Section 43B allows deductions for statutory liabilities only in the year of actual payment, but this mechanism presupposes that the assessee has claimed the amount as an allowable expense. The assessee followed the exclusive method of accounting where indirect taxes on stock were routed through the balance sheet without debiting the Profit and Loss Account.

"Disallowing an amount not treated as an allowance by the Assessee is impermissible under the Act, 1961," the court observed, holding that since the unpaid duty was never treated as an expense to suppress taxable profits, the question of disallowing it under Section 43B did not arise.

Assessing Officer committed serious factual and legal errors in enhancing income

The court highlighted that the Tax Auditor's Report had certified that, after giving effect to Section 145A of the Income Tax Act, the net impact on profitability from inventory valuation was nil. The Assessing Officer had acted mechanically on an audit remark without analyzing the assessee's books of account or demonstrating how taxable income was negatively affected.

The bench endorsed the Bombay High Court's ruling in CIT v. Loknete Balasaheb Desai S.S.K. Ltd., noting that it squarely resolved the interplay between Section 43B and Section 145A. The bench held that where an assessee has not claimed excise duty as an expenditure, inventory valuation adjustments under Section 145A cannot be converted into an artificial disallowance under Section 43B.

The Supreme Court allowed the appeal, set aside the judgment of the High Court, and restored the orders of the CIT (Appeals) and the ITAT deleting the addition of Rs. 69,91,983 made to the assessee's taxable income.

Date of Decision: October 27, 2026