TaxTMI 
TaxTMI 
2026 (3) TMI 1277
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....e nutraceuticals derived from by-products generated during refining of crude vegetable oil. The assessee filed its return of income for the assessment year 2020-21 on 15.02.2021 declaring total income at Rs. 34,71,14,410/- and book profit under section 115JB at Rs. 36,41,95,611/-.The case of the assessee was selected for scrutiny under CASS and statutory notices under sections 143(2) and 142(1) of the Act were issued from time to time. The assessee furnished details and explanations as called for during the course of assessment proceedings. The assessment was completed by the Assessing Officer vide order dated 29.09.2022 passed under section 143(3) of the Act determining total income at Rs. 35,39,29,360/- by making an addition of Rs. 68,14,949/- on account of disallowance of interest under section 36(1)(iii) of the Act. 3. During the course of assessment proceedings, the Assessing Officer observed from the balance sheet that the assessee had made capital advances amounting to Rs. 6,53,87,800/-.The Assessing Officer further noted that the assessee had borrowings aggregating to Rs. 60,70,53,313/- comprising non-current borrowings of Rs. 16.33 crores, and current borrowings of Rs. ....
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...., confirmed the addition made by the Assessing Officer and dismissed the grounds raised by the assessee. 7. During the appellate proceedings, the assessee reiterated that capital advances were made for purchase of plant and machinery for replacement and upgradation of existing facilities and were purely for business purposes. Reliance was placed on judicial precedents to contend that where sufficient own funds are available, no disallowance under section 36(1)(iii) is warranted. 8. The learned CIT(A), after considering the submissions of the assessee, upheld the action of the Assessing Officer. The CIT(A) observed that the assessee failed to substantiate with documentary evidence that the capital advances were made for business purposes or that they were made out of interest-free funds. The CIT(A) recorded that the assessee merely furnished breakup of advances but failed to provide supporting documents such as invoices, agreements, or other evidences to establish commercial expediency. The CIT(A) further held that the assessee failed to establish nexus between availability of own funds and advances and, therefore, the contention regarding internal accruals could not be accept....
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.... 6,53,87,800/-, whereas the assessee had substantial interest-free funds in the form of equity and reserves amounting to Rs. 12,856.52 lacs. It was thus contended that the advances could not be said to have been made out of borrowed funds. The learned AR further drew our attention to the statement of profit and loss (paper book page No. 44) and submitted that the profit after tax itself was Rs. 3,654.86 lacs (rounded Rs. 3,645.21 lacs as per comprehensive income), which clearly demonstrated availability of substantial internal accruals. The learned AR also referred to the cash flow statement and submitted that operating profit before working capital changes was Rs. 5,124.78 lacs, and net cash generated from operating activities was Rs. 3,117.60 lacs. It was contended that these figures clearly establish that the assessee had sufficient internally generated funds during the year. 11. Based on the above financial data, the learned AR submitted that: i. There was no nexus between borrowed funds and capital advances; ii. No specific borrowings were utilized for granting such advances; iii. The presumption in law, in case of mixed funds, is that advances ar....
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.... 7. Insofar as the first question is concerned, the issue raises a pure question of fact. The High Court has noted the finding of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee. The Tribunal has also followed its own order for Assessment Year 2002-03. 8. In view of the above findings, we find no reason to interfere with the judgment of the High Court in regard to the first question. Accordingly, the appeals are dismissed in regard to the first question. 16. Further, in S.A. Builders vs. CIT (Appeals) (288 ITR 1), the Hon'ble Supreme Court has held that allowability of interest depends upon commercial expediency and not on whether the assessee earns profit from such advances. 17. In the present case, it is an undisputed fact that the assessee had capital advances of Rs. 6,53,87,800/-.However, from the audited financial statements placed on record, the following position emerges: i. Interest-free funds (equity and reserves): Rs. 12,856.52 lacs ii. Capital advances: Rs.....