Interest disallowance failed where sufficient interest-free funds covered advances and no direct nexus to borrowed funds was shown.

Interest disallowance under section 36(1)(iii) was unsustainable where the assessee had sufficient interest-free partner capital to cover the advances and the record did not show a direct nexus between borrowed funds and the advances. Applying commercial expediency and the settled principle that no disallowance arises when interest-free advances are supported by adequate interest-free funds, the addition was deleted.

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Issues: Whether disallowance of interest under section 36(1)(iii) of the Income-tax Act, 1961 was justified where the assessee had sufficient interest-free partner capital and the advances were stated to be for business exigency.

Analysis: The assessee had interest-free partner capital exceeding the amount of interest-free advances. The record did not establish a direct nexus between borrowed funds and the advances. In such circumstances, and applying the principles of commercial expediency and the settled rule that no disallowance is warranted when interest-free advances are covered by sufficient interest-free funds, the interest addition could not stand.

Conclusion: The disallowance of interest was not sustainable and was deleted. The assessee succeeded on this issue.

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