Deferred-payment price, statutory death relief fund and surtax deduction rules clarified for income-tax computation.

The deferred-payment price under the IDBI scheme was treated as part of the actual cost of the asset because the transaction was a purchase at an enhanced price, not borrowing of capital; Explanation 8 to section 43(1) therefore did not apply. Contributions to a Death Relief Fund created under a settlement enforceable under the Industrial Disputes Act were not hit by section 40A(9), as the fund was required under another law and was not an employer-controlled welfare fund. Surtax liability, however, remained not deductible in computing business income.

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Issues: (i) Whether the enhanced amount payable under the IDBI deferred-payment scheme formed part of the actual cost of the asset under section 43(1) of the Income-tax Act, 1961, or whether Explanation 8 excluded it as interest; (ii) Whether contributions made to a Death Relief Fund established under a settlement under the Industrial Disputes Act were hit by section 40A(9) of the Income-tax Act, 1961; (iii) Whether surtax liability was deductible.

Issue (i): Whether the enhanced amount payable under the IDBI deferred-payment scheme formed part of the actual cost of the asset under section 43(1) of the Income-tax Act, 1961, or whether Explanation 8 excluded it as interest.

Analysis: The deferred-payment transactions were treated as purchases at an enhanced price, not as borrowings by the assessee. The invoices and bills of exchange showed a negotiated total price payable in instalments, with the interest element used only as a measure for fixing the enhancement. Explanation 8 was held to be aimed at capitalisation of interest on borrowed funds after an asset is first put to use, and not at the price component embedded in deferred-payment purchases. The commercial accounting principle and the scheme itself showed that the assessee had not borrowed capital from a financial institution for the acquisition.

Conclusion: The enhanced instalment price formed part of the actual cost, and Explanation 8 did not apply. The issue was decided in favour of the assessee.

Issue (ii): Whether contributions made to a Death Relief Fund established under a settlement under the Industrial Disputes Act were hit by section 40A(9) of the Income-tax Act, 1961.

Analysis: The fund was created pursuant to a settlement enforceable under the Industrial Disputes Act and operated under a proper scheme for the employees, with the assessee having no discretionary control over the corpus. The mischief targeted by section 40A(9) was the creation of employer-controlled welfare funds used for tax avoidance. A fund required under a statutory settlement fell within the exception for sums paid or contributed as required by or under any other law for the time being in force.

Conclusion: The contribution was not disallowable under section 40A(9). The issue was decided in favour of the assessee.

Issue (iii): Whether surtax liability was deductible.

Analysis: The claim was rejected by applying the existing precedent that surtax liability is not allowable as a deduction in the computation of business income.

Conclusion: The surtax liability was not deductible. The issue was decided against the assessee.

Final Conclusion: The appeals substantially succeeded on the main controversy concerning actual cost and also on the Death Relief Fund issue, while the surtax claim failed. The overall result was mixed relief to the assessee with partial confirmation of the disallowance on surtax.

Ratio Decidendi: An amount included in the deferred-payment purchase price is not interest on borrowed capital merely because it is computed with reference to interest for the period of deferment, and a contribution mandated by a statutory settlement under labour law falls within the exception to section 40A(9) when it is required under another law.

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