Interest disallowance limited to actual attributable borrowings, while unsecured loan addition failed after primary evidence proved genuineness.

Under section 36(1)(iii), the disallowance of interest on borrowed funds used for investments and interest-free advances was confined to the interest actually attributable to those borrowings, and could not exceed the real interest paid on the identified loans; the assessee obtained partial relief. Under section 68, the assessee proved the identity, creditworthiness and genuineness of the unsecured loan creditors through incorporation records, PAN, financial statements and bank statements, with receipts and repayments routed through banking channels, and the Revenue brought no contrary material; the addition was deleted.

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Issues: (i) Whether the disallowance of interest under section 36(1)(iii) of the Income-tax Act, 1961 was to be sustained in full, reduced, or deleted. (ii) Whether the addition of unsecured loan under section 68 of the Income-tax Act, 1961 was justified.

Issue (i): Whether the disallowance of interest under section 36(1)(iii) of the Income-tax Act, 1961 was to be sustained in full, reduced, or deleted.

Analysis: The assessee had interest-free funds in the form of preferential share capital and loans from directors, but the Tribunal found that interest-bearing unsecured borrowings to the extent of funds used for investments and interest-free advances had been diverted. It also found that the first appellate authority had applied an 8% rate on the utilised borrowings despite the assessee having actually incurred interest at lower rates on the relevant loans. The Tribunal accepted that disallowance could not exceed the actual interest paid on the identified borrowings, and additionally considered one borrowing on which interest at 10% had been paid.

Conclusion: The disallowance under section 36(1)(iii) was restricted to INR 10,81,593, and the assessee succeeded to that extent.

Issue (ii): Whether the addition of unsecured loan under section 68 of the Income-tax Act, 1961 was justified.

Analysis: The assessee furnished incorporation details, PAN, financial statements and bank statements of the lenders, and the loans were received through banking channels and repaid in the subsequent year. The Tribunal held that the assessee had discharged the burden of proving identity, creditworthiness and genuineness, while the Revenue failed to produce material showing that the transactions were bogus or represented undisclosed income. The addition was found to rest on suspicion and conjecture.

Conclusion: The addition under section 68 was not justified and was deleted in favour of the assessee.

Final Conclusion: The assessee obtained partial relief on the interest disallowance, while the deletion of the unsecured-loan addition was upheld and the Revenue's challenge failed.

Ratio Decidendi: A disallowance under section 36(1)(iii) cannot exceed the interest actually attributable to the borrowed funds used for non-business purposes, and an addition under section 68 cannot survive once identity, creditworthiness and genuineness are established through primary evidence and the Revenue brings no contrary material.

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