Commercial expediency and interest-free funds defeated reworking of borrowing cost on related-party advances.

Interest disallowance was held unsustainable where the assessee had substantial interest-free funds exceeding the advances made to related concerns. Advances to companies in which the assessee was a director were accepted as commercially expedient, and the lower interest rate charged on those advances was not treated as a basis to rework the borrowing cost. The Assessing Officer's substitution of an average 6% rate for the actual interest expense was rejected, and the disallowance was deleted.

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Issues: Whether the disallowance of interest expenditure claimed under the head "Income from other sources" was justified when the assessee had substantial interest-free funds and the advances were made to related parties for commercial expediency.

Analysis: The assessee had substantial interest-free funds available, exceeding the amount advanced to the related concerns. The advances were to companies in which the assessee was a director, and the lower interest rate charged on such advances was accepted as commercially expedient. In these circumstances, the Assessing Officer's benchmark-based reworking of the interest claim by substituting an average rate of 6% for the actual borrowing cost was not sustained.

Conclusion: The disallowance of Rs. 21,97,114/- was deleted and the assessee's claim was allowed.

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