Facts of the Case

The respondent-assessee, M/s Lakshmi Sugar Mills Co. Ltd., was engaged in the business of manufacture and sale of sugar and also earned income from house property. During Assessment Year 2008-09, the Assessing Officer disallowed an amount of Rs. 70,87,357/- representing excise duty payable but unpaid, by invoking Section 43B of the Income Tax Act, 1961. The Assessing Officer relied upon the tax audit report wherein the amount was disclosed as excise duty payable.

The Commissioner of Income Tax (Appeals) deleted the addition by relying upon the Tribunal’s order for Assessment Year 2005-06 in favour of the assessee. The Income Tax Appellate Tribunal also upheld the deletion. However, the Revenue contended before the Delhi High Court that the earlier Tribunal decision relied upon by the appellate authorities had already been reversed by the High Court in Commissioner of Income Tax vs. Lakshmi Sugar Mills Co. Ltd. relating to Assessment Year 2005-06.

Issues Involved

  1. Whether unpaid excise duty shown as payable can be allowed as deduction under Section 43B of the Income Tax Act, 1961?
  2. Whether Section 145A mandates inclusion of excise duty in valuation of closing stock even if such duty remains unpaid?
  3. Whether excise duty liability crystallizes on manufacture of goods or only upon removal/clearance of goods from factory premises?
  4. Whether the Tribunal was justified in deleting the addition without examining the factual position regarding removal of goods and valuation of stock?

Petitioner’s Arguments (Revenue)

The Revenue argued that:

  • Section 145A is a non-obstante provision mandating inclusion of tax, duty, cess, or fee actually paid or incurred in valuation of goods.
  • Excise duty becomes payable when excisable goods are removed from the factory premises.
  • The Tribunal’s earlier decision relied upon by the assessee had already been reversed by the Delhi High Court in Assessment Year 2005-06.
  • Since the goods had been removed, the duty liability had crystallized and therefore unpaid excise duty could not be allowed under Section 43B.
  • The assessee could not derive advantage from non-payment of statutory liability after removal of goods.

The Revenue relied upon:

  • CIT vs. Lakshmi Sugar Mills Co. Ltd. (ITA No. 1288/2011)
  • Orient Paper Mills Ltd. vs. Union of India, AIR 1967 SC 1564

Respondent’s Arguments (Assessee)

The assessee contended that:

  • Excise duty liability on manufactured goods lying in stock does not crystallize until actual clearance/removal of goods.
  • Section 145A applies only where liability has actually been incurred.
  • Manufactured sugar lying in closing stock had not been cleared from the factory and therefore no excise duty liability had crystallized.
  • The assessee relied upon the Bombay High Court judgment in:
    • CIT-III, Pune vs. Loknete Balasaheb Desai S.S.K. Ltd. [2011] 339 ITR 288 (Bom.)
  • It was argued that excise duty becomes payable only on clearance of goods and not merely upon manufacture.

Court Findings / Court Order

The Delhi High Court observed that:

  • Section 145A requires inclusion of taxes, duties, cess, or fees actually paid or incurred for valuation of stock.
  • Earlier Delhi High Court judgment in assessee’s own case for Assessment Year 2005-06 had already held against the assessee.
  • Excise duty becomes leviable upon removal of goods from factory premises as explained in Orient Paper Mills Ltd. vs. Union of India.
  • However, the exact factual position regarding whether the goods were removed or remained in closing stock had not been properly examined by the lower authorities.
  • The appellate authorities had mechanically relied upon the earlier Tribunal order without independent factual determination.
  • Since the factual matrix was unclear, the matter required fresh examination by the Tribunal.

Accordingly, the High Court:

  • Answered the substantial question of law in favour of the Revenue;
  • Set aside the impugned order;
  • Remanded the matter to the Tribunal for fresh adjudication after proper verification of facts and legal position.

Important Clarification

The Delhi High Court clarified that:

  • Inclusion of excise duty under Section 145A depends upon whether liability was actually incurred.
  • Determination of whether goods were cleared or remained in stock is crucial.
  • Mere manufacture of goods may not by itself determine crystallization of excise duty liability unless removal/clearance has taken place.
  • Proper factual verification is necessary before granting deduction or making addition under Sections 43B and 145A.

Sections Involved

  • Section 43B of the Income Tax Act, 1961
  • Section 145A of the Income Tax Act, 1961
  • Section 260A of the Income Tax Act, 1961
  • Sections 3 & 4 of the Central Excise Act
  • MODVAT/CENVAT Credit Provisions

Link to download the order -  https://delhihighcourt.nic.in/app/case_number_pdf/2014:DHC:4298-DB/VKR01092014ITA2332013.pdf

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