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Issues: (i) Whether the disallowance of interest expenditure was justified in the absence of proof that borrowed funds were diverted for non-business purposes; (ii) Whether the addition under section 68 and the addition treated as business income were sustainable when the unsecured loans were supported by banking records and the purchase difference was reconciled.
Issue (i): Whether the disallowance of interest expenditure was justified in the absence of proof that borrowed funds were diverted for non-business purposes.
Analysis: The addition was made on the premise that interest-bearing loans were not used for business purposes. The appellate authority found that the Revenue had not brought any material to show a nexus between the borrowed funds and non-business withdrawals. It also accepted that the funds were used for business payments, including licence fee and purchases, and that sufficient interest-free funds were available. The Tribunal agreed that the Revenue had not established diversion of borrowed funds.
Conclusion: The disallowance of interest expenditure was rightly deleted and the issue is decided in favour of the assessee.
Issue (ii): Whether the addition under section 68 and the addition treated as business income were sustainable when the unsecured loans were supported by banking records and the purchase difference was reconciled.
Analysis: The appellate authority accepted the unsecured loans as genuine because the transactions were through banking channels and were supported by bank statements, confirmations, PAN, income-tax returns and TDS records. It further found that the alleged purchase difference arose from reconciliation of TCS and purchase figures and that purchases had been recorded at actual cost, with no excess expenditure shown. The Tribunal found these findings to be detailed and reasoned, and saw no basis to interfere.
Conclusion: The additions under section 68 and on account of alleged business income were rightly deleted and the issue is decided in favour of the assessee.
Final Conclusion: The Revenue's challenge to the deletion of all disputed additions failed, and the appellate relief granted below was sustained in full.
Ratio Decidendi: An addition for interest disallowance requires evidence of a nexus between borrowed funds and non-business use, and an addition under section 68 cannot be sustained where the unsecured loans are established as genuine through banking evidence and supporting documentation.
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