Supreme Court Clarifies the Scope of Section 43B: Lakshmi Sugar Mills Co. Ltd. v. Commissioner of Income Tax, Delhi-II
Introduction
In M/s. Lakshmi Sugar Mills Co. Ltd. v. Commissioner of Income Tax, Delhi-II, 2026 INSC 1162, decided on 27 October 2026, the Supreme Court examined whether unpaid excise duty on closing stock could be added to taxable income under Sections 43B and 145A of the Income Tax Act, 1961, where the assessee had not claimed the amount as an expenditure. The dispute concerned ₹69,91,983 shown as unpaid excise duty on sugar and molasses kept in bonded warehouses during assessment year 2005–06. The Court held that an amount not claimed as a deduction cannot be disallowed under Section 43B. The judgment also underscores the need to distinguish the mercantile system of accounting from the exclusive method of accounting for indirect taxes.
Mercantile System and Exclusive Method of Accounting
A central feature of the case is the distinction between two concepts that are often conflated. The mercantile system determines when income and expenditure are recognised: a transaction is recorded when the right to receive income or the obligation to pay an expense arises, and not when money is actually received or paid. The exclusive method determines how indirect taxes such as excise duty are recorded: the duty is kept out of the value of purchases, sales and expenses in the Profit and Loss Account and is accounted for separately, generally through balance-sheet accounts. Under the inclusive method, by contrast, the tax forms part of those values. The two are not alternative systems; an assessee may follow the mercantile system and the exclusive method together.
The assessee followed the mercantile system. However, before the Assessing Officer and the Supreme Court, the assessee explained that it followed the exclusive method for indirect taxes. The disputed excise duty of ₹69,91,983 had therefore not been debited to the Profit and Loss Account, and no expenditure had been claimed in respect of it. The distinction proved decisive: adoption of the mercantile system did not, by itself, establish that the duty had been claimed as a deduction. What mattered were the actual accounting entries and their effect on taxable income.
Legal Issues Before the Court
Two questions arose: first, whether unpaid excise duty could be added to taxable income under Sections 43B and 145A when no deduction had been claimed; and second, whether the liability to pay excise duty had arisen while the goods remained in the bonded warehouse.
Supreme Court’s Interpretation of Section 43B
Section 43B provides that specified expenses, including taxes and duties payable under law, are allowable as deductions only in the year of actual payment, subject to an exception for payments made on or before the due date for filing the return under Section 139(1).
The Court emphasised that the provision operates on an expenditure claimed as a deduction or allowance. Before any amount can be disallowed under Section 43B, it must first be established that the assessee claimed it as an expenditure. Here, the disputed excise duty had not been routed through the Profit and Loss Account and had not reduced taxable income by way of any claim. The Court observed that “disallowing an amount not treated as an allowance by the assessee is impermissible.” There was, accordingly, no basis for invoking Section 43B.
Liability to Pay Excise Duty on Goods in Bonded Warehouses
The Court also examined whether the excise liability had crystallised. Under the applicable excise law, liability to pay duty arises upon removal of manufactured goods from the factory or bonded warehouse. On a perusal of the records, the Court found that the disputed stock continued to remain in the bonded warehouse. The factual premise on which the High Court had proceeded was therefore incorrect, and the addition could not be sustained on that basis either.
Interplay Between Sections 43B and 145A
The two provisions serve distinct purposes. Section 43B regulates the allowability of specified expenses by linking deductions to actual payment, whereas Section 145A governs the valuation of purchases, sales and inventory by taking applicable taxes and duties into account. The Court’s reasoning indicates that neither provision can be applied mechanically to enhance taxable income without first examining the actual accounting entries, the existence of the liability and its effect on taxable income.
Conclusion
The Supreme Court allowed the appeal and set aside the judgment of the High Court. The central principle is that Section 43B can be invoked to disallow a specified expenditure only where the assessee has claimed it as a deduction or allowance in the first place.
The ruling is a narrow one. It does not exempt unpaid statutory liabilities from Section 43B, which continues to apply where a deduction is claimed for a specified liability without satisfying the payment conditions. It holds only that an amount never claimed as a deduction cannot be disallowed under the provision. The decision also shows why the general accounting basis and the treatment of indirect taxes must be examined separately: following the mercantile system does not, of itself, establish that every unpaid statutory amount has been claimed as an expense.
