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“interest free advances”

DisallowancesSection 36(1)(iii)Section 36(1)(iii)565 judgments

The decision most relied on for interest free advances is CIT v. Reliance Utilities & Power Ltd. (313 ITR 340), cited in 2,118 judgments on BharatTax.

Leading authorities on interest free advances

CIT v. Reliance Utilities & Power Ltd.
313 ITR 340 · 2009 · High Court
2,118
citing judgments

Where an assessee claims that investments were made out of own funds, interest disallowance under Section 14A read with Rule 8D may not apply if the assessee demonstrates the availability of sufficient interest-free funds to cover such investments.

S.A. Builders Ltd. v. CIT
288 ITR 1 · 2007 · Supreme Court
1,484
citing judgments

Interest paid on borrowed funds cannot be disallowed merely because the assessee made interest-free advances, provided those advances were made for business purposes and commercial expediency. The Revenue cannot dictate a businessman's commercial decisions, but the assessee bears the onus to prove the business expediency.

CIT v. Reliance Industries Ltd.
410 ITR 466 · 2019 · Supreme Court
501
citing judgments

When mixed funds are available, interest-free advances are presumed to be made from the assessee's own interest-free funds, preventing disallowance of interest expenditure under section 36(1)(iii). This principle also applies to section 14A disallowance, where interest expenditure is not disallowed if surplus funds are available and no direct nexus is established with borrowed funds for investments earning exempt income.

CIT v. Dalmia Cement (Bharat) Ltd.
254 ITR 377 · 2002 · High Court
417
citing judgments

When there is a nexus between an expenditure and the purpose of business, incurred on grounds of commercial expediency, the Revenue cannot question its reasonableness or assume the role of the businessman to compel profit maximization. This principle applies even if the business is not that of the assessee itself.

Hero Cycles Pvt. Ltd. v. CIT
379 ITR 347 · 2015 · Supreme Court
361
citing judgments

The Revenue cannot substitute its judgment for that of a businessman regarding the necessity or reasonableness of an expenditure. If an expense is incurred wholly and exclusively for business purposes, it is deductible, and the Revenue cannot question its commercial expediency.

CIT v. Abhishek Industries Ltd.
286 ITR 1 · 2006 · High Court
359
citing judgments

For interest on borrowed capital to be deductible under Section 36(1)(iii), there must be a nexus between the use of the borrowed funds and the purpose of the business. This decision has been overruled by the Supreme Court in Munjal Sales Corporation v. CIT (2008).

Munjal Sales Corporation v. CIT
298 ITR 298 · 2008 · Supreme Court
191
citing judgments

The Supreme Court approves the mixed fund theory, holding that no interest disallowance is warranted under section 36(1)(iii) if investments or advances are made from the assessee's own non-interest bearing funds, even when mixed funds are available. This presumption applies when non-interest bearing funds are sufficient to meet the investments.

East India Pharmaceutical Works Ltd. v. CIT
224 ITR 627 · 1997 · Supreme Court
146
citing judgments

Where an assessee has mixed funds (both interest-bearing and interest-free funds) and makes an interest-free advance or investment, it is presumed that the interest-free funds were utilized first if they are sufficient to cover such advances or investments. This prevents disallowance of interest on borrowed funds under Section 36(1)(iii).

Judgments citing interest free advances

Phulchand Exports Pvt Ltd, Mumbai vs. Asst. Commissioner of Income Tax Central Circle 3(3), Mumbai

In the result, appeals of the Revenue in ITA No

ITA 2415/MUM/2025[2018-19]Status: DisposedITAT Mumbai04 Aug 2025AY 2018-19

Bench: Shri Sandeep Gosain & Shri Prabhash Shankar

For Appellant: Respondent byFor Respondent: Shri Shankarlal Jain & Shri Satish Kumar
Section 132Section 143(3)Section 14ASection 153ASection 36(1)(iii)

holding that no disallowance can be made if the surplus fund is in excess of the interest free advances and ignoring the fact that assessee has failed to substantiate that interest free advances has given out of owned funds as no supporting documents like fund flow statement etc. has been ... wherein the ITAT ruled that no disallowance can be made if the surplus funds of the appellant is in excess of the interest free advances. It has been observed that in the instant year also, the surplus fund of the appellant was in excess of the interest free advances

Rakesh Kumar Goel, New Rajdhani Enclave vs. CIT, NFAC

In the result, the appeal of the assessee is dismissed

ITA 3378/DEL/2023[2016-17]Status: DisposedITAT Delhi30 Jul 2025AY 2016-17

Bench: Shri Yogesh Kumar U.S. & Shri Manish Agarwalrakesh Kumar Goel, Cit, 289/9, Katra Pedan, Nfac. Tilak Bazar, Delhi-110006. Vs. Pan-Aaepg7376H (Appellant) (Respondent) Assessee By None Department By Shri Rajesh Kumar Dhanesta, Sr. Dr Date Of Hearing 21/07/2025 Date Of Pronouncement 30/07/2025 O R D E R [ Per Manish Agarwal, Am: This Is An Appeal Filed By The Assessee Against The Order Of The Ld. Commissioner Of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [Cit(A) In Short], In Appeal No. Cit(A), Delhi- 16/10301/2018-19 Dated 11.05.2023 Passed U/S 250 Of The Income Tax Act, 1961 (The Act, In Short) For Assessment Year 2016- 17 Is Arising Out From The Order Of Assessing Officer Dated 28.12.2018 Passed U/S 143(3) Of The Act.

Section 143(3)Section 250

observed that the assessee has diverted the funds for non- business purposes where the assessee had purchased properties for personal use besides giving interest free advances and making investment in shares totaling to Rs.15 crore and interest paid on such loans was claimed as expenses in P & L Account

Income Tax Officer, Delhi vs. Mahak Industries Private Limited, Delhi

In the result the cross objection of the assessee is allowed

ITA 661/DEL/2024[2015-16]Status: DisposedITAT Delhi09 Jul 2025AY 2015-16

Bench: MS. MADHUMITA ROY (Judicial Member), SHRI MANISH AGARWAL (Accountant Member)

Section 142(1)Section 143(3)Section 14ASection 250Section 36(1)(iii)

instant case, assessee has successfully demonstrated that it had interest free funds of Rs.3.15 Cr. and the interest free advances made were of Rs.2.23 crores, thus, by following the aforesaid judgment of Hon’ble Supreme Court and Hon’ble Bombay High Court, no disallowance could be made. In view

Gayatri Energy Ventures Private Limited, Hyderabad vs. ACIT., Circle-2(1), Hyderabad

In the result, appeal of the Assessee is allowed

ITA 467/HYD/2025[2018-19]Status: DisposedITAT Hyderabad07 Jul 2025AY 2018-19

Bench: Shri Vijay Pal Rao & Shri Manjunatha G

For Appellant: CA KC Devdas & CA Swapnil DeshukhFor Respondent: Shri B Bala Krishna, CIT-DR

shoes of the directors/partners of the assessee-firm and working solely in the interest of the assessee-firm/company, would have extended such interest free advances. Some business objective should be sought to have been achieved by extending such interest free advances when the assessee-firm/company itself is borrowing

Laqshya Media Limited, Mumbai vs. Assistant Commissioner of Income Tax - Circle 10(2)(1), Mumbai

In the result, the appeal by the assessee is allowed

ITA 1339/MUM/2025[2017-2018]Status: DisposedITAT Mumbai03 Jul 2025AY 2017-2018

Bench: Shri Narendra Kumar Billaiyashri Sandeep Singh Karhaillaqshya Media Limited, Jaganlaxmi, Laqshya House, Next To Rameshwar Temple, Saraswati Baug, Society Road, Jogeshwari (E), ............... Appellant Mumbai - 400060 Pan : Aaacl5004C V/S Acit – 10(1)(1), ……………… Respondent Mumbai

For Appellant: Shri Ravi SawanaFor Respondent: Shri Aditya M. Rai, Sr.DR
Section 142(1)Section 143(3)Section 250Section 36(1)(iii)

submissions of the assessee and held that the assessee has not been able to justify its argument that no nexus exists between interest-free advances and interest-bearing borrowed funds. The AO further held that the assessee has to prove that the loans on which interest was paid were utilised ... made disallowance under section 36(1)(iii) by taking view that assessee is unable to justify the commercial necessity for making interest free advances to its subsidiaries nor been able to substantiate beyond doubt that advance had been made from own funds. The AO disallowed

Goldfield Sales Agencies Ltd., Faridabad vs. DCIT, Central Circle- 2, Faridabad

In the result, the appeal being ITA No

ITA 1776/DEL/2019[2013-14]Status: DisposedITAT Delhi30 Jun 2025AY 2013-14

Bench: Shri S.Rifaur Rahman & Shri Anubhav Sharma

For Appellant: Shri Somil Agarwal, AdvocateFor Respondent: Shri Om Prakash, Sr. DR
Section 143Section 143(2)Section 36(1)(iii)Section 37(1)

made this disallowance because the appellant had claimed expense on account of interest on unsecured loan amounting Rs.33,10,022/- whereas interest free advances and loans of Rs.5,33,32,000/- had been given during this year. (ii) Further, during the assessment proceedings, the appellant failed to furnish supporting documents

Goldfield Sales Agencies Ltd., Faridabad vs. DCIT, Central Circle- 2, Faridabad

In the result, the appeal being ITA No

ITA 1775/DEL/2019[2013-14]Status: DisposedITAT Delhi30 Jun 2025AY 2013-14

Bench: Shri S.Rifaur Rahman & Shri Anubhav Sharma

For Appellant: Shri Somil Agarwal, AdvocateFor Respondent: Shri Om Prakash, Sr. DR
Section 143Section 143(2)Section 36(1)(iii)Section 37(1)

made this disallowance because the appellant had claimed expense on account of interest on unsecured loan amounting Rs.33,10,022/- whereas interest free advances and loans of Rs.5,33,32,000/- had been given during this year. (ii) Further, during the assessment proceedings, the appellant failed to furnish supporting documents

Goldfield Sales Agencies Ltd., Faridabad vs. DCIT, Central Circle- 2, Faridabad

In the result, the appeal being ITA No

ITA 1774/DEL/2019[2010-11]Status: DisposedITAT Delhi30 Jun 2025AY 2010-11

Bench: Shri S.Rifaur Rahman & Shri Anubhav Sharma

For Appellant: Shri Somil Agarwal, AdvocateFor Respondent: Shri Om Prakash, Sr. DR
Section 143Section 143(2)Section 36(1)(iii)Section 37(1)

made this disallowance because the appellant had claimed expense on account of interest on unsecured loan amounting Rs.33,10,022/- whereas interest free advances and loans of Rs.5,33,32,000/- had been given during this year. (ii) Further, during the assessment proceedings, the appellant failed to furnish supporting documents

Goldfield Sales Agencies Ltd., Faridabad vs. DCIT, Central Circle- 2, Faridabad

In the result, the appeal being ITA No

ITA 3576/DEL/2018[2012-13]Status: DisposedITAT Delhi30 Jun 2025AY 2012-13

Bench: Shri S.Rifaur Rahman & Shri Anubhav Sharma

For Appellant: Shri Somil Agarwal, AdvocateFor Respondent: Shri Om Prakash, Sr. DR
Section 143Section 143(2)Section 36(1)(iii)Section 37(1)

made this disallowance because the appellant had claimed expense on account of interest on unsecured loan amounting Rs.33,10,022/- whereas interest free advances and loans of Rs.5,33,32,000/- had been given during this year. (ii) Further, during the assessment proceedings, the appellant failed to furnish supporting documents

The Assistant Commissioner of Income Tax, Central Circle-1(2), Ahmedabad vs. N K Proteins Private Limited, Ahmedabad

In the result, no question of law arises

ITA 546/AHD/2022[2012-13]Status: DisposedITAT Ahmedabad23 Jun 2025AY 2012-13

Bench: Dr. B.R.R. Kumar, Vice-Shri T.R. Senthil Kumar

For Appellant: Shri Biren Shah, ARFor Respondent: Shri V. Nandakumar, CIT-DR
Section 142Section 143(1)Section 143(3)Section 250Section 36(1)(va)

Disallowance u/s 36(1)(va) 71,060 Interest Capitalization of WIP 4,88,000 Prior Period Income 1,05,89,848 Interest free advances 4,24,000 Interest free advances to Shri Nilesh Keshavlal Patel 61,677 4. Aggrieved by the order of the Assessing Officer, assessee filed appeal before

N K Proteins Pvt. Limited, Ahmedabad vs. The Dy. Commissioner of Income Tax, Circle- 3(1)(1), Ahmedabad

In the result, no question of law arises

ITA 464/AHD/2022[2012-13]Status: DisposedITAT Ahmedabad23 Jun 2025AY 2012-13

Bench: Dr. B.R.R. Kumar, Vice-Shri T.R. Senthil Kumar

For Appellant: Shri Biren Shah, ARFor Respondent: Shri V. Nandakumar, CIT-DR
Section 142Section 143(1)Section 143(3)Section 250Section 36(1)(va)

Disallowance u/s 36(1)(va) 71,060 Interest Capitalization of WIP 4,88,000 Prior Period Income 1,05,89,848 Interest free advances 4,24,000 Interest free advances to Shri Nilesh Keshavlal Patel 61,677 4. Aggrieved by the order of the Assessing Officer, assessee filed appeal before

DCIT 2 2 1, Mumbai vs. M S Luvish Infotech Projects Private Limited, Mumbai

In the result, the appeal filed by the revenue bearing ITA

ITA 815/MUM/2025[2012-13]Status: DisposedITAT Mumbai17 Jun 2025AY 2012-13

Bench: Shri Vikram Singh Yadav & Shri Anikesh Banerjeedcit (2)(2)(1), Mumbai Vs M/S Luvish Infotech Projects 5Th Room No.545, Floor, Private Limited, Aayakar Bhavan, M.K. Road, Cts 102/2, Sani Armaa, Raut Lane, Mumbai-400 020 Juhu, Vile Parle West, Mumbai-400 049 Pan : Aadcm4966H Appellant Respondent

For Appellant: Shri Shobhit Mishra & Mr. Mahaveer JainFor Respondent: Shri Annavaram Kosuri SR.AR
Section 143(3)Section 14ASection 14A(1)Section 250Section 72

previous year relevant to AY 2012-13 the assessee had outstanding borrowings of Rs. 15,50,38,938/-. Out of these funds, an interest-free advance of Rs.2,58,75,000/- was given to its sister concern and remained outstanding throughout the year. Total interest paid to HDFC Bank ... Rs.2,13,53,117/- – Rs.31,05,000/-). But the said disallowance is challenged assessee before the Ld. CIT(A) related interest on interest free advance to sister concern amount to Rs. 31,05,000/-. 6 ITA 815/Mum/2025 M/s Luvish Infotech Projects Pvt Ltd 5.1. The observation

Livlong Insurance Brokers Limited, Mumbai vs. PCIT -4, Mumbai

ITA 2864/MUM/2025[2020-21]Status: DisposedITAT Mumbai17 Jun 2025AY 2020-21

Bench: Shri Sandeep Gosain & Shri Prabhash Shankar

For Appellant: Shri Pritesh Mehta,ARFor Respondent: Shri Aditya Rai, (Sr. DR)
Section 135Section 143(3)Section 263Section 37Section 80G

accepting the return of income of the assessee, we clearly observe that the Assessing Officer has not made inquiry on the issue of interest free advances and proportionate disallowance of interest thereon, on the issue of verification on TDS and on the claim and calculation of the assessee ... accepting the return of income of the assessee, we clearly observe that the Assessing Officer has not made inquiry on the issue of interest free advances and proportionate disallowance of interest thereon, on the issue of verification on TDS and on the claim and calculation of the assessee

Ila Jitendra Mehta, Mumbai vs. DCIT Central Circle 8(4), Mumbai

In the result, the appeal of the Assessee is allowed

ITA 5219/MUM/2024[2014-15]Status: DisposedITAT Mumbai02 Jun 2025AY 2014-15

Bench: Shri Narender Kumar Choudhry & Smt Renu Jauhriassessment Year: 2014-15

For Appellant: Shri Ravi Ganatra, Ld. A.RFor Respondent: Shri Yogesh Kumar, Ld. Sr. DR
Section 133Section 139(1)Section 250Section 271(1)(c)Section 54F

Dalmia Dyechem Industries (supra) has also dealt with the identical case, wherein the Assessee in its accounts had shown borrowed funds and interest free advances to its sister concerns. The AO disallowed the proportionate interest out of the interest paid for the interest free advances given to the sister concern

Income Tax Officer Ward Hingoli, Ward Hingoli (Camp at Parbhani) vs. Vishwas Agro Product Pvt Ltd, Parbhani

In the result, the appeal filed by the Revenue is allowed for statistical purposes

ITA 1566/PUN/2024[2017-18]Status: DisposedITAT Pune29 May 2025AY 2017-18

Bench: Shri R. K. Panda & Shri Vinay Bhamoreassessment Year : 2017-18

For Appellant: Shri Govind PrasadFor Respondent: Shri Milind Debaje – JCIT (Virtual)
Section 143(2)

Assessing Officer disallowed the said amount of Rs.1,62,84,153/- received from Pranav International Dubai under section 68 considering the same as interest free advances as credit worthiness is not submitted by the appellant to the AO. Further the AO has considered the amount of advance against export received

Involute Engineering Pvt. Ltd., New Delhi vs. DCIT, Circle- 12(2), New Delhi

The appeals is allowed

ITA 6885/DEL/2019[2015-16]Status: DisposedITAT Delhi29 May 2025AY 2015-16

Bench: Shri S. Rifaur Rahman & Shri Anubhav Sharmaassessment Year: 2015-16 Involute Engineering Pvt. Ltd., Vs Dcit, E-30, Anand Niketan, Circle-12(2), Basement, New Delhi. New Delhi – 110 001. Pan: Aaacs2041N (Appellant) (Respondent) Assessee By : Shri Sanjay Arora, Ca; Ms Pallavi Sharma, Ca & Shri Jeetan Nagpal, Ca Revenue By : Shri Om Prakash, Sr. Dr Date Of Hearing : 01.05.2025 Date Of Pronouncement : 29.05.2025 Order Per Anubhav Sharma, Jm: This Appeal Is Preferred By The Assessee Against The Order Dated 31.05.2019 Of The Commissioner Of Income-Tax (Appeals)-22, New Delhi (Hereinafter Referred To As The Ld. First Appellate Authority Or ‘The Ld. Faa’, For Short) In Appeal No.208/18-19/Cit(A)-22, New Delhi Arising Out Of The Appeal Before It Against The Order Dated 27.12.2017, Respectively, Passed U/S 143(3) Of The Income Tax Act, 1961 (Hereinafter Referred To As ‘The Act’) By The Dcit, Circle-12(2), New Delhi (Hereinafter Referred To As The Ld. Ao).

For Appellant: Shri Sanjay Arora, CAFor Respondent: Shri Om Prakash, Sr. DR
Section 143(3)

Appellant out of its interest-bearing funds. He further alleged that the Appellant has diverted its interest-bearing funds to grant interest free advances. And accordingly, the interest expense of Rs. 1,07,02,066 as claimed by the Appellant was disallowed. The Ld. CIT(A) as well upheld ... decision of the AO for AY 2013-14 where the AO has disallowed the proportionate disallowance of interest in the case of interest free advances made during the year to Planet Herbs Life Science Private Limited, a group concern of the appellant. Following the decision

Involute Engineering Pvt. Ltd., New Delhi vs. DCIT, Circle- 12(2), New Delhi

The appeals is allowed

ITA 6884/DEL/2019[2013-14]Status: DisposedITAT Delhi29 May 2025AY 2013-14

Bench: Shri S. Rifaur Rahman & Shri Anubhav Sharmaassessment Year: 2013-14 Involute Engineering Pvt. Ltd., Vs Dcit, E-30, Anand Niketan, Circle-12(2), Basement, New Delhi. New Delhi – 110 001. Pan: Aaacs2041N (Appellant) (Respondent) Assessee By : Shri Sanjay Arora, Ca; Ms Pallavi Sharma, Ca & Shri Jeetan Nagpal, Ca Revenue By : Shri Om Prakash, Sr. Dr Date Of Hearing : 01.05.2025 Date Of Pronouncement : 29.05.2025 Order Per Anubhav Sharma, Jm: This Appeal Is Preferred By The Assessee Against The Order Dated 31.05.2019 Of The Commissioner Of Income-Tax (Appeals)-22, New Delhi (Hereinafter Referred To As The Ld. First Appellate Authority Or ‘The Ld. Faa’, For Short) In Appeal No.208/18-19/Cit(A)-22, New Delhi Arising Out Of The Appeal Before It Against The Order Dated 18.03.2016, Passed U/S 143(3) Of The Income Tax Act, 1961 (Hereinafter Referred To As ‘The Act’) By The Dcit, Circle- 12(2), New Delhi (Hereinafter Referred To As The Ld. Ao).

For Appellant: Shri Sanjay Arora, CAFor Respondent: Shri Om Prakash, Sr. DR
Section 143(3)Section 36(1)(vii)

above discussion and legal precedents has cited above, it is evident that the appellant is claiming interest expense on borrowed fund and giving interest free advances out of same to group concern to avoid taxable profit. These transactions are have been undertaken without any business purpose or commercial expediency

ACIT-6(1)(2), Mumbai vs. J M Financial Properties and Holdings Limited, Mumbai

ITA 1396/MUM/2025[2014-15]Status: DisposedITAT Mumbai28 May 2025AY 2014-15

Bench: SHRI OM PRAKASH KANT, ACCOUNTANT MEMBER SHRI RAHUL CHAUDHARY (Judicial Member)

For Appellant: Shri Dr.K. Shivaram Sr.AdvocateFor Respondent: Ms. Kavita P. Kaushik
Section 143(3)Section 250Section 28Section 36Section 36(1)(ii)Section 36(1)(iii)

sincerely following the Hon’ble judiciary decision, in my considered opinion, the moneys borrowed were for the purpose of business. The facts that interest free advances were given to M/s Sheth Developers Pvt Ltd would not be disqualification as the security deposit was given to take premises on rent from

ACIT-6(1)(2), Mumbai vs. J M Financial Properties and Holdings Limited, Mumbai

ITA 1389/MUM/2025[2013-14]Status: DisposedITAT Mumbai28 May 2025AY 2013-14

Bench: SHRI OM PRAKASH KANT, ACCOUNTANT MEMBER SHRI RAHUL CHAUDHARY (Judicial Member)

For Appellant: Shri Dr.K. Shivaram Sr.AdvocateFor Respondent: Ms. Kavita P. Kaushik
Section 143(3)Section 250Section 28Section 36Section 36(1)(ii)Section 36(1)(iii)

sincerely following the Hon’ble judiciary decision, in my considered opinion, the moneys borrowed were for the purpose of business. The facts that interest free advances were given to M/s Sheth Developers Pvt Ltd would not be disqualification as the security deposit was given to take premises on rent from

ACIT, C. R. Building vs. Hansdeep Industries and Trading Company Ltd., Fourth Floor, Link House

In the result, the appeal is allowed

ITA 3466/DEL/2023[2016-17]Status: DisposedITAT Delhi28 May 2025AY 2016-17

Bench: Shri Satbeer Singh Godara & Shri Manish Agarwalassessment Year: 2016-17 Vs. M/S. Acit, Hansdeep Industries C.R. Building & Trading Company Ltd., New Delhi 4Th Floor, Link House, 3 Bahadur Shah Zafar Marg, New Delhi Pan: Aabcj0776A (Appellant) (Respondent) Assessee By Sh. Ankit Kumar, Adv. Sh. Lalit Mohan, Ca Department By Sh. Rajesh Kumar Dhanesta, Sr. Dr Date Of Hearing 28.05.2025 Date Of Pronouncement 28.05.2025 Order

Section 143(3)Section 5Section 57

what the Revenue seeks to highlight is the fact that the assessee had raised funds by issuing non-convertible debentures and made interest free advances to its sister concern M/s. Udaipur Cements Works Ltd.; and, therefore, the Assessing Officer had rightly added the above notional interest income thereupon. We further