Business use of borrowed funds supports interest deduction where no specific diversion for personal or capital purposes is proved.

Interest on unsecured borrowings was held to be allowable under section 36(1)(iii) where the assessee showed that the funds were reflected in the balance sheet and deployed in business through trade creditors and sundry debtors. No specific diversion of the borrowed funds for personal use or capital investment was established, and the record supported business expansion and commercial expediency. In the absence of any pinpointed finding of non-business use, the disallowance was treated as conjectural and the addition was deleted in favour of the assessee.

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Issues: Whether the disallowance of interest on unsecured loans under section 36(1)(iii) of the Income-tax Act, 1961 was sustainable when the borrowed funds were claimed to have been used wholly for business purposes.

Analysis: The assessee showed that the unsecured loans were reflected in the balance sheet and were deployed in the business through movement of funds in trade creditors and sundry debtors. The material on record did not show any specific diversion of borrowed funds for personal or capital investment purposes. The increase in sales and corresponding business expansion supported the explanation that the borrowings were used for business needs and commercial expediency. In the absence of a pinpointed finding of non-business use, the disallowance was treated as based on conjecture.

Conclusion: The addition made under section 36(1)(iii) was deleted and the issue was decided in favour of the assessee.

Ratio Decidendi: Interest on borrowed funds is not disallowable under section 36(1)(iii) where the borrowings are shown to have been used for business purposes and no specific personal or capital diversion is established.

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