Own-funds presumption defeats proportionate interest disallowance where share investments are fully covered by capital.

Where an assessee's own capital is sufficient to cover investments in shares, a factual presumption arises that the investments were made from own funds rather than borrowed money. On that footing, proportionate interest expenditure cannot be disallowed unless the Revenue proves a direct nexus between the borrowings and the investments. Applying that principle, the ITAT held that the assessee's capital far exceeded the investment value and the required nexus was not established, so the proportionate interest disallowance was deleted.

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Issues: Whether proportionate interest expenditure could be disallowed on the footing that investments in shares were made from borrowed funds, where the assessee's own capital exceeded the value of the investments.

Analysis: The assessee's own capital was far in excess of the investment value. In such a situation, the available factual presumption is that the investments were made out of own funds. Since the own capital substantially covered the investments, the disallowance of interest expenditure attributable to those investments was not justified. The direct nexus suggested by the Revenue was not established on the facts.

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

Final Conclusion: The assessment addition on account of proportionate interest disallowance was set aside, and the appeal succeeded.

Ratio Decidendi: Where an assessee's own funds are sufficient to cover the investment, a presumption arises that the investment was made from those own funds, and proportionate interest disallowance cannot be sustained without a proved nexus to borrowed money.

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