Interest disallowance on interest-free advances fails where sufficient own funds and no nexus with borrowings are shown.

Proportionate interest disallowance on funds advanced interest-free to the assessee's wife was unsustainable where the assessee demonstrated sufficient interest-free capital and other non-interest-bearing funds to cover the advances. The advances were treated as trade debts, and no nexus was shown between those advances and the interest-bearing borrowings. On these facts, the mere absence of interest charged from the wife did not justify disallowance of interest, and the deletion of the addition was upheld in favour of the assessee.

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Issues: Whether the disallowance of proportionate interest on funds advanced interest-free to the assessee's wife was sustainable.

Analysis: The assessee showed availability of sufficient interest-free capital and other non-interest-bearing funds to cover the advances. The debts in question were treated as trade debts, and no nexus was established between the interest-free advances and the interest-bearing borrowings. On the facts, the absence of interest charged from the wife did not justify a proportionate interest disallowance.

Conclusion: The deletion of the addition/disallowance was upheld and the issue was decided in favour of the assessee.

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