Interest disallowance under business-purpose test deleted where advances for industrial property had no nexus with later borrowings.

Interest expenditure was not disallowed under Section 36(1)(iii) because the long-term advances were made in earlier years for purchase of industrial property, while the borrowed funds carrying interest were obtained later. The Tribunal found no nexus between the interest-bearing borrowings and the advances, and held that the assessee's own funds and surrounding facts, including the dispute with the seller, supported the business character of the advances. The disallowance rested on an incorrect assumption that the advances were unrelated to business, so it was deleted in favour of the assessee.

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Issues: (i) Whether interest expenditure was liable to disallowance under Section 36(1)(iii) of the Income-tax Act, 1961 on the ground that long-term advances made by the assessee were not for business purposes.

Analysis: The assessee had made advances in earlier financial years for purchase of industrial property, while the borrowed funds on which interest was paid were taken in a later financial year. The Tribunal found no nexus between the interest-bearing borrowings and the advances made, and held that the existence of own funds and the surrounding material, including the dispute with the seller, supported the business character of the advances. On these facts, the disallowance was based on an incorrect assumption that the advances were unrelated to business.

Conclusion: The disallowance of interest under Section 36(1)(iii) was not justified and was deleted in favour of the assessee.

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