Interest disallowance for sister concern advance fails absent nexus between borrowed funds and the interest-free advance.

Interest expenditure could not be disallowed merely because the assessee had made an interest-free advance to a sister concern, where the record showed no nexus between borrowed funds and the advance. The assessee also had sufficient interest-free funds exceeding the amount advanced, supporting the absence of a borrowed-fund linkage. In these circumstances, no proportionate disallowance of interest was justified. The note also records that the tax effect was below the monetary limit prescribed in CBDT Circular No. 1903 dated 28-10-1992.

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Issues: Whether interest expenditure could be disallowed on the ground that the assessee had advanced interest-free funds to a sister concern without any established nexus between borrowed funds and such advance.

Analysis: The material on record did not show any nexus between the capital borrowed on interest and the interest-free advance made to the sister concern. The assessee also had sufficient interest-free funds, which were more than the amount of the interest-free advance. In the absence of proof of nexus, no proportionate disallowance out of the interest paid was justified. The Tribunal also noted that the tax effect was below the monetary limit prescribed in CBDT Circular No. 1903 dated 28-10-1992.

Conclusion: The disallowance of interest was rightly deleted and the Revenue's challenge failed.

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