Income Tax Deduction Not Claimed By Taxpayer Cannot Be Disallowed: Supreme Court

The Supreme Court on Tuesday (October 27) ruled that an Assessing Officer cannot disallow an amount that an assessee never claimed as a deduction under the Income Tax Act, 1961.

“Disallowing an amount not treated as an allowance by the Assessee is impermissible under the Act, 1961. The negative impact on the taxable income stated by the Assessee should have been taken into account; i.e., by factoring in this entry, the income has come down, and therefore the tax has come down,” a bench of Justice S.V.N. Bhatti and Justice N.V. Anjaria ruled.

The bench set aside a Delhi High Court judgment that had upheld an addition of nearly ₹69.92 lakh towards unpaid excise duty to the taxable income of Lakshmi Sugar Mills.

The court further observed, “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.”

The dispute arose after the Assessing Officer added nearly ₹69.92 lakh towards unpaid excise duty on the company's closing stock of sugar and molasses for the assessment year 2005-06. The addition was made under Sections 43B and 145A of the Income Tax Act.

The company challenged the addition, arguing that the goods remained in its bonded warehouse. It also contended that it had not claimed any deduction for the unpaid duty.

The Commissioner of Income Tax (Appeals) deleted the addition, and the Income Tax Appellate Tribunal upheld that decision. The Delhi High Court, however, reversed these findings and ruled in favour of the Income Tax Department.

Setting aside the High Court's judgment, the Supreme Court found that the High Court had wrongly assumed that the goods had been removed from the warehouse. The record instead showed that the stock on which excise duty remained unpaid was still in the company's bonded warehouse.

The court also found that the Assessing Officer had failed to establish how the disputed amount had been accounted for in the company's books. Nor had the officer explained how the entry had affected its taxable income.

The amount had neither been paid nor treated as payable in the company's accounts, apart from a remark in the tax audit report.

The court allowed the company's appeal and restored the relief granted by the Commissioner of Income Tax (Appeals) and the tribunal.

For Assessee: Advocate Memoon Zehra 

For Revenue: ASG S. Dwarakanath appeared for the Revenue