Interest disallowance under section 36(1)(iii) remanded for verification of interest-free funds and additional evidence.

Interest disallowance under section 36(1)(iii) turned on whether the assessee had sufficient interest-free funds when advances were made to a director. Account statements, Form 26AS, ledger extracts, the partnership deed, PAN details and the balance sheet were treated as material to verify the source and flow of funds and whether the advances came from borrowed funds or interest-free resources. As the evidence had not been produced before the lower authorities but was necessary for proper adjudication, additional evidence was admitted and the matter was restored for fresh verification by the Assessing Officer.

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Issues: Whether the disallowance of interest under section 36(1)(iii) was sustainable, and whether the additional documentary evidence sought to be produced by the assessee should be admitted and the matter restored for fresh verification.

Analysis: The availability of sufficient interest-free funds at the time of advancing funds to the director was central to deciding the allowability of interest deduction. The account statements, Form 26AS, ledger extracts, partnership deed, PAN details, and balance sheet were found to be material for determining the source and flow of funds, the nature of the transfer, and whether the advances were made out of interest-free funds or borrowed funds. Since these documents had not been produced before the lower authorities and were necessary for a proper adjudication, the power to admit additional evidence was exercised and the issue was restored for verification of their correctness and authenticity.

Conclusion: The matter was remanded to the Assessing Officer for fresh adjudication after admitting the additional evidence and granting adequate opportunity of hearing to the assessee.

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