Interest disallowance fails where sufficient interest-free funds support capital asset acquisition and borrowed funds are not shown used.

Interest disallowance under section 36(1)(iii) was examined in the context of whether the assessee had sufficient own interest-free funds and whether those funds were used to acquire capital assets. The material showed business sale proceeds flowing through current accounts and supported the assessee's case that no interest-bearing borrowings were deployed for the fixed assets. The absence of a separate fund flow statement was not treated as decisive, and the settled presumption in favour of use of interest-free funds where such funds are available was applied. On that basis, the disallowance of interest was deleted.

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Issues: Whether the disallowance of interest under section 36(1)(iii) of the Income-tax Act, 1961 was sustainable where the assessee claimed availability of sufficient own interest-free funds and produced bank account material showing use of such funds for acquisition of capital assets.

Analysis: The assessee's case was that sufficient own funds were available and that the investment in fixed assets was made through current accounts into which business sale proceeds were deposited, so no interest-bearing borrowings were used. The earlier remand was only to examine the relevant details afresh and the absence of a fund flow statement by itself was not treated as conclusive against the assessee. Applying the settled principle that where sufficient interest-free funds exist, the presumption is that investments are made from such funds, the material on record was found adequate to show that no borrowed funds were deployed for acquiring the capital assets.

Conclusion: The disallowance of interest was deleted and the issue was decided in favour of the assessee.

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