Deferred sales tax and industrial deduction rules: section 43B treatment, section 80-I computation, and interest disallowance verification.

Deferred sales tax under the Rajasthan Sales Tax Deferment Scheme may satisfy section 43B where the State's amended framework treats the deferred liability as actually paid, and the CBDT circular supports that treatment. The discussion also states that deduction under section 80-I is to be computed on the undertaking's profits without first reducing the deduction under section 80HH, because the provisions operate on the relevant profits and the statutory order of consideration does not require a balance-first approach. On interest disallowance, the material was found insufficient to establish the nexus between borrowed funds and interest-free advances, so the matter required fresh factual verification before any final conclusion.

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Issues: (i) Whether sales tax deferred under the Rajasthan Sales Tax Deferment Scheme could be treated as actually paid for the purposes of section 43B of the Income-tax Act, 1961; (ii) whether deduction under section 80-I of the Income-tax Act, 1961 was to be computed after reducing the deduction allowable under section 80HH of the Income-tax Act, 1961; (iii) whether the disallowance of interest was sustainable or required fresh verification.

Issue (i): Whether sales tax deferred under the Rajasthan Sales Tax Deferment Scheme could be treated as actually paid for the purposes of section 43B of the Income-tax Act, 1961.

Analysis: The relevant CBDT circular clarified that where the State Government had amended the sales-tax law so that deferred tax under the scheme was to be treated as actually paid, the requirement of section 43B stood satisfied. The scheme notification and its operative provisions showed that the deferment scheme had been notified and amended within the relevant period, and the onus of showing compliance with section 43B was therefore discharged.

Conclusion: The addition under section 43B was deleted and the issue was decided in favour of the assessee.

Issue (ii): Whether deduction under section 80-I of the Income-tax Act, 1961 was to be computed after reducing the deduction allowable under section 80HH of the Income-tax Act, 1961.

Analysis: The provisions governing the two deductions were read as allowing each deduction on the profits and gains of the undertaking, while section 80HH(9) only indicated the order in which the deductions were to be considered. The restriction in section 80A(2) was noted, but it was held that the Act did not require section 80-I to be confined to the balance remaining after deduction under section 80HH. Supporting precedent was followed to hold that the two deductions were to operate simultaneously on the relevant profits.

Conclusion: Deduction under section 80-I was to be allowed without first reducing the deduction under section 80HH, and the issue was decided in favour of the assessee.

Issue (iii): Whether the disallowance of interest was sustainable or required fresh verification.

Analysis: The record did not establish a clear nexus between interest-free advances and borrowed funds, nor did it sufficiently show whether the borrowed amounts were used for business purposes or whether the same funds were diverted to related parties. The matter therefore required factual verification before a final finding could be recorded.

Conclusion: The disallowance was set aside and the issue was remanded to the Assessing Officer for fresh examination.

Final Conclusion: The appeal succeeded on the substantive tax issues concerning section 43B and the section 80-I computation, while the interest disallowance issue was sent back for reconsideration.

Ratio Decidendi: Deferred sales tax under a duly notified and amended deferment scheme can satisfy section 43B where the statutory framework treats the deferred liability as actually paid, and deduction provisions for industrial incentives are to be applied on the undertaking's profits without artificially reducing one incentive by another unless the statute expressly so provides.

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