Interest deduction allowed in full where documents showed borrowed funds were used for lending, not repaid through salary arrears.

Interest expenditure was held allowable in full where documentary evidence showed that the borrowed funds were wholly used to advance a loan, and the sum later received from the borrower was salary arrears rather than loan repayment. On that factual basis, the premise for a proportionate disallowance fell away, and no disallowance of interest under section 57(iii) remained justified. The sustained disallowance was deleted because reliable records, including Form 26AS, Form 16 and the ledger account, displaced the contrary inference and established the income-yielding use of the borrowed funds.

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Issues: Whether the disallowance of interest expenditure under section 57(iii) of the Income-tax Act, 1961 was justified when the borrowed funds were claimed to have been fully utilised for advancing a loan and the alleged repayment was in fact salary arrears received from the borrower.

Analysis: The record, including Form 26AS, Form 16 and the ledger account, showed that the sum of Rs. 50,00,000 was received as salary and not as repayment of loan. On that factual basis, the amount borrowed from IDBI Bank was treated as having been utilised for advancing funds to the borrower. Since the factual premise for restricting the deduction by a proportionate disallowance did not survive, no disallowance under section 57(iii) remained justified.

Conclusion: The disallowance of Rs. 7,00,172 was deleted and the assessee was held entitled to full allowance of the interest claim on these facts.

Final Conclusion: The appeal succeeded and the entire sustained disallowance was set aside on the ground that the interest expenditure was allowable in full.

Ratio Decidendi: Where the evidence establishes that borrowed funds were wholly deployed for the income-yielding purpose and the contrary inference is displaced by reliable documentary material, a proportionate disallowance of interest under section 57(iii) cannot be sustained.

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