FAIRCHEM ORGANICS LTD.,,AHMEDABAD vs. ACIT, CIR-15(1)(1), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL
“F” BENCH MUMBAI

BEFORE SHRI SAKTIJIT DEY, VICE PRESIDENT &
SHRI MAKARAND VASANT MAHADEOKAR, ACCOUNTANT MEMBER
Fairchem Organics
Limited
253/P and 312, Village
Chekhala, Sanand
Kadi Highway, Taluka
Sanand, Distt
Ahmedabad, Gujarat –
382 115. Vs.
ACIT Circle -
15(1)(1),
Aayakar Bhawan, M.
K. Road, Churchgate,
Mumbai-400 020

PAN/GIR No. AADCF6900E
(Applicant)

(Respondent)

Assessee by Shri Saurabh Soparkar, Ld. AR
Revenue by Shri Ankit Tiwari, Ld. DR

Date of Hearing
04.03.2026
Date of Pronouncement
20.03.2026

आदेश / ORDER

PER MAKARAND VASANT MAHADEOKAR, AM:

This appeal is filed by the assessee against the order dated
26.08.2025 passed by the learned Addl/Joint Commissioner of Income Tax (Appeals) from the Office of Commissioner of Income
Tax (Appeals), Unit-2, Coimbatore[hereinafter referred to as "CIT(A)"], under section 250
of the Income-tax
Act,

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Fairchem Organics Limited

1961[hereinafter referred to as "the Act"], arising out of the assessment order dated 29.09.2022 passed by the Assistant
Commissioner of Income Tax, Circle 15(1)(1) [hereinafter referred to as "Assessing Officer”] under section 143(3) of the Act for A.Y.
2020–21. Facts of the Case
2. The assessee is a company engaged in the business of manufacturing, supplying and exporting speciality oleo chemicals and intermediate 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

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Fairchem Organics Limited aggregating to Rs. 60,70,53,313/- comprising non-current borrowings of Rs. 16.33 crores, and current borrowings of Rs.
44.37 crores. The assessee had also debited interest expenditure of about Rs. 6.57 crores. The Assessing Officer was of the view that the assessee had diverted interest-bearing funds towards non-interest-bearing capital advances given to third parties and accordingly called upon the assessee to explain the source and purpose of such advances.
4. The assessee submitted that the capital advances were made towards purchase of fixed assets and were in the nature of business advances made in the ordinary course of business. It was contended that such advances were made out of internal accruals and not from borrowed funds. The assessee submitted that during the relevant financial year it had net cash generation of about Rs. 43.01 crores. The assessee further submitted that current borrowings were utilized for working capital requirements such as inventory and receivables, non-current borrowings were utilised for acquisition of fixed assets and no specific borrowing was made for giving capital advances. It was also submitted that advances for capital goods are a normal business practice and are generally interest-free in nature and adjusted against final purchase consideration.
5. The Assessing Officer did not accept the contentions of the assessee and held that the assessee failed to establish that the interest-bearing funds were not utilised for granting interest-free advances. The Assessing Officer observed that despite claiming

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Fairchem Organics Limited sufficient internal accruals, the assessee continued to have substantial borrowings and, therefore, the explanation of the assessee was not satisfactory. The Assessing Officer further held that the assessee failed to demonstrate commercial expediency in granting such advances and also failed to establish nexus between own funds and advances. Relying upon the provisions of section 36(1)(iii) and the decision of the Hon’ble Supreme Court in the case of S.A. Builders vs. CIT (Appeals) [2007] 288 ITR 1 (SC), the Assessing Officer held that interest on borrowed funds is allowable only when such funds are used for the purposes of business.
Accordingly, the Assessing
Officer computed proportionate disallowance of interest at Rs. 68,14,949/- and added the same to the total income of the assessee.
6. Aggrieved by the said assessment order, the assessee preferred an appeal before the learned CIT(A). The learned CIT(A), vide impugned order, 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.

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Fairchem Organics Limited

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Fairchem Organics Limited

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Fairchem Organics Limited

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 are made out of interest-free funds.
12. The learned AR further contended that the learned CIT(A) has failed to deal with the judicial precedents relied upon by the assessee and has merely confirmed the addition without any independent reasoning. It was also submitted that the advances were admittedly given for business purposes, namely for purchase of capital goods required for upgradation and replacement of plant and machinery, which fact has not been disputed by the lower authorities. The learned AR thus submitted that in view of the availability of sufficient own funds and the 8
Fairchem Organics Limited business purpose of the advances, no disallowance under section 36(1)(iii) is warranted and the addition deserves to be deleted.
13. The learned Departmental Representative (DR), on the other hand, strongly relied upon the orders of the Assessing Officer and the learned CIT(A).
14. We have heard the rival submissions and perused the material available on record including the assessment order, the impugned order of the learned CIT(A), and the financial statements placed before us. The sole issue for adjudication is whether the disallowance of Rs. 68,14,949/- made under section 36(1)(iii) of the Act on account of alleged diversion of interest- bearing funds towards capital advances is sustainable in law.
15. The settled legal position governing disallowance under section 36(1)(iii) is that interest on borrowed capital is allowable if the same is used for the purposes of business. Disallowance can arise only when it is established that borrowed funds have been diverted for non-business purposes or for interest-free advances without commercial expediency. It is equally well settled that where an assessee possesses sufficient interest-free funds, a presumption arises that the investments or advances have been made out of such interest-free funds. In this regard, the Hon’ble
(410 ITR 466) has decided the issue. The question before the Hon’ble Apex Court was –

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Fairchem Organics Limited

Thus, the interest-free funds available with the assessee are substantially higher than the advances made.
18. Further, from the profit and loss account and cash flow statement, it is evident that:
 Profit after tax is Rs. 3,654.86 lacs
 Operating profit before working capital changes is Rs.
5,124.78 lacs
 Net cash generated from operating activities is Rs. 3,117.60
lacs

These figures clearly demonstrate that the assessee had substantial internal accruals during the year.
19. In view of the above, the contention of the assessee that advances were made out of internal accruals and interest-free funds merits acceptance. The Revenue has not brought any material on record to establish direct nexus between borrowed funds and the impugned advances.
20. The Assessing Officer has proceeded on a presumption that since the assessee has borrowings, the advances must have been made out of borrowed funds. Such presumption is contrary to the settled law. The learned CIT(A), instead of examining the availability of interest-free funds and the financial position of the assessee, has merely upheld the disallowance on the ground that the assessee failed to furnish supporting documents. In our considered view, once the financial statements clearly demonstrate sufficiency of interest-free funds, the onus shifts on the Revenue to establish nexus between borrowed funds and advances, which has not been discharged in the present case.
Further, the learned CIT(A) has not dealt with the judicial precedents relied upon by the assessee and has not recorded any independent finding rebutting the presumption recognised by the Hon’ble Supreme Court.
21. The assessee has consistently submitted that the advances were given for purchase of capital goods for upgradation and replacement of plant and machinery. This factual assertion has not been controverted by the Assessing Officer by bringing any material on record to show that the advances were for non- business purposes. In such circumstances, the advances being in the nature of business advances, the question of disallowance on the ground of lack of commercial expediency does not arise.
22. Applying the ratio laid down by the Hon’ble Supreme Court in Reliance Industries Ltd. (supra), we hold that where interest- free funds are more than the advances, a presumption arises that the advances are made out of such funds. In the present case, since the interest-free funds of Rs. 12,856.52 lacs are far in excess of the advances of Rs. 653.88 lacs, the said presumption squarely applies. The Revenue has failed to rebut this presumption by establishing any direct nexus between borrowed funds and advances.
23. In view of the above discussion, we hold that the assessee had sufficient interest-free funds and internal accruals; no nexus has been established between borrowed funds and advances; the advances were made for business purposes; and the disallowance evidence on record. Accordingly, the disallowance of Rs.
68,14,949/- made under section 36(1)(iii) and confirmed by the learned CIT(A) is unsustainable and is hereby deleted.
24. The grounds raised by the assessee on the issue of disallowance under section 36(1)(iii) are allowed. The grounds relating to levy of interest under sections 234B, 234C and 234D are consequential in nature. The ground relating to initiation of penalty under section 270A is premature and does not call for adjudication at this stage.
25. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 20.03.2026. (SAKTIJIT DEY)
ACCOUNTANT MEMBER

Mumbai, Dated 20/03/2026
Dhananjay, Sr.PS

आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to :