Interest disallowance fails where sufficient interest-free own funds are available to cover advances.

Disallowance of interest expenditure under section 36(1)(iii) was held unwarranted where the assessee had sufficient interest-free own funds to cover the interest-free advances. The presence of own funds created a presumption that the advances were made from those funds, and the Revenue failed to rebut that presumption or show contrary material. On that basis, the interest disallowance was directed to be deleted.

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Issues: Whether disallowance of interest expenditure under section 36(1)(iii) of the Income-tax Act, 1961 was justified where the assessee had sufficient interest-free own funds to cover the interest-free advances.

Analysis: The assessee demonstrated availability of own funds substantially exceeding the amount of interest-free advances. In such circumstances, the presumption applies that the advances were made out of interest-free funds. The Revenue did not controvert the availability of sufficient own funds or displace that presumption.

Conclusion: The disallowance of interest expenditure was not warranted and was directed to be deleted in favour of the assessee.

Ratio Decidendi: Where an assessee has sufficient interest-free own funds to cover interest-free advances, a presumption arises that such advances were made from those own funds, and disallowance of interest expenditure is not justified absent contrary material.

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