Interest-free funds presumption prevents disallowance and capitalisation of borrowing costs on subsidiary investments when own funds exceed investments.

Interest expenditure attributable to investments in subsidiary companies cannot be disallowed or capitalised where the assessee's share capital and accumulated reserves substantially exceed its investments. When sufficient interest-free own funds coexist with borrowings, investments are presumed to have been made from those interest-free funds; the assessee need not maintain separately identifiable pools of own and borrowed funds. On these principles, the interest disallowance and capitalisation were considered unsustainable and liable to be deleted.

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Issues: Whether interest expenditure attributable to investments in subsidiary companies could be disallowed and capitalised where the assessee had sufficient interest-free own funds.

Analysis: The assessee's share capital and accumulated reserves substantially exceeded its investments, including the investment in its subsidiary. Where sufficient interest-free funds coexist with borrowings, a presumption applies that the investments were made from the available interest-free funds; maintaining a separate divisible pool of own and borrowed funds is not required.

Conclusion: The interest disallowance and capitalisation was unsustainable and was directed to be deleted, in favour of the assessee.

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