Borrowed funds used for business support through related entities remain deductible where commercial expediency is shown.

Interest on borrowed funds remained deductible where the monies were used for the assessee's business, including advances and investments routed through subsidiaries and associates in furtherance of commercial expediency. The absence of operational income in the year did not, by itself, justify disallowance, because allowability under section 36(1)(iii) turns on the purpose of borrowing and actual business use of the funds. On the facts, the Revenue's allegation of diversion for non-business purposes was not accepted, and the interest disallowance was deleted.

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Issues: Whether interest on borrowed funds used in the assessee's business, including through subsidiaries and associates, was allowable under section 36(1)(iii) despite the Revenue's allegation of diversion for non-business purposes.

Analysis: The borrowed monies were found to have been used for the assessee's power-project business, including investments and advances made in the course of expanding or supporting business activities through subsidiaries and associates. The mere fact that the assessee had no operational income in the year did not by itself justify disallowance, since allowability of interest depends on the purpose of borrowing and use of funds, not on contemporaneous revenue generation. The record also showed commercial expediency in the advances made, and the Revenue's case of non-business diversion was not accepted on the facts.

Conclusion: The interest expenditure was held to be deductible under section 36(1)(iii) and the disallowance was directed to be deleted, in favour of the assessee.

Final Conclusion: The assessee succeeded on the core tax issue and the addition for interest disallowance did not survive.

Ratio Decidendi: Interest on capital borrowed is allowable when the borrowed funds are shown to have been used for the assessee's business and the advances made to related entities are supported by commercial expediency.

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