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ITAT allowed the assessee-firm's appeal and deleted the disallowance of interest expenditure u/s 36(1)(iii). The Revenue had treated partners' drawings routed through an overdraft account as diversion of interest-bearing funds for non-business purposes, relying on negative capital balances. ITAT held that in a capital-intensive ship recycling business, partners' drawings are a normal incident of partnership and that overall interest-free funds (partners' capital and trade liabilities) exceeded such drawings. No direct nexus between borrowed funds and non-business advances was established. The negative capital was mainly due to a non-cash diminution already disallowed earlier, and day-wise working of interest-free funds remained unrebutted.
ITAT allowed the assessee-firm's appeal and deleted the disallowance of interest expenditure u/s 36(1)(iii). The Revenue had treated partners' drawings routed through an overdraft account as diversion of interest-bearing funds for non-business purposes, relying on negative capital balances. ITAT held that in a capital-intensive ship recycling business, partners' drawings are a normal incident of partnership and that overall interest-free funds (partners' capital and trade liabilities) exceeded such drawings. No direct nexus between borrowed funds and non-business advances was established. The negative capital was mainly due to a non-cash diminution already disallowed earlier, and day-wise working of interest-free funds remained unrebutted.
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