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Issues: (i) whether interest could be disallowed on the amounts standing to the credit of the sister concern on the footing that borrowed funds were diverted without charging interest; and (ii) whether depreciation on the home theatre equipment could be disallowed and whether there was any violation of Rule 46A(3) of the Income-tax Rules.
Issue (i): whether interest could be disallowed on the amounts standing to the credit of the sister concern on the footing that borrowed funds were diverted without charging interest.
Analysis: The outstanding balance was an opening balance and had in fact reduced during the year. The assessee had substantial interest-free funds, and no nexus was shown between borrowed funds and the amounts outstanding in the sister concern's account. In such circumstances, the basis for imputing interest on the premise of diversion of borrowed funds did not survive.
Conclusion: The disallowance of interest was not sustainable and was rightly deleted; the issue was decided in favour of the assessee.
Issue (ii): whether depreciation on the home theatre equipment could be disallowed and whether there was any violation of Rule 46A(3) of the Income-tax Rules.
Analysis: The equipment was accepted as having been used for the business purpose of demonstrating technology to employees and customers. The purchase was supported by banking records, and the inability to produce invoices was explained by the fire accident that destroyed records. The same factual basis was before both authorities, so no fresh evidence was introduced before the appellate authority and there was no Rule 46A(3) infraction.
Conclusion: The depreciation claim was allowable and the disallowance was rightly deleted; the issue was decided in favour of the assessee.
Final Conclusion: No addition survived on either the interest disallowance or the depreciation disallowance, and the revenue's appeal failed in full.
Ratio Decidendi: Where the assessee has sufficient interest-free funds and no direct nexus is shown between borrowed funds and interest-free advances, no disallowance of interest is warranted; similarly, depreciation cannot be denied when the asset is shown to have been used for business and no fresh evidence is admitted in breach of Rule 46A(3).
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