Interest disallowance fails where sufficient own funds cover sister concern advances and diversion of borrowings is unproved.

Where an assessee has sufficient interest-free own funds to cover advances to sister concerns, a disallowance of interest under section 36(1)(iii) cannot be sustained unless the revenue shows direct diversion of interest-bearing borrowings for non-business use. The Tribunal noted that the assessee's own funds exceeded the advances, the revenue failed to prove any such diversion, and the computation of finance cost proceeded on an incorrect assumption that borrowed funds financed the advances. Applying the settled presumption that advances are drawn from interest-free funds when those funds are adequate, the disallowance was deleted and the revenue's challenge failed.

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Issues: Whether the disallowance of interest under section 36(1)(iii) was justified where the assessee had sufficient interest-free funds to cover advances made to sister concerns.

Analysis: The assessee's own funds exceeded the advances to sister concerns, while the revenue did not establish a direct diversion of interest-bearing borrowings for non-business use. The actual finance cost was also examined, and the impugned disallowance was found to rest on an incorrect computation and an unwarranted presumption that borrowed funds financed the advances. Applying the settled principle that, where both interest-free and interest-bearing funds are available, the advances are presumed to have come from interest-free funds if those funds are sufficient, the disallowance could not stand.

Conclusion: The disallowance of interest under section 36(1)(iii) was not sustainable and was deleted; the revenue's appeal failed.

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