“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

Manish Ranjan DCIT Central Circle-1(2) Ahmedabad, Ashram Road vs. Oswal Extrusion Limited, Ushmanpura

In the result, the appeal of the Department is allowed for statistical purposes

ITA 642/AHD/2024[2016-17]Status: DisposedITAT Ahmedabad22 Jan 2025AY 2016-17

Bench: Dr. Brr Kumar & Shri Siddhartha Nautiyal

For Appellant: Shri B.P. Srivastava, Sr. D.RFor Respondent: Ms. Astha Maniar, A.R

Section 36(1)(iii)

brief facts of the case are that during the course of assessment, the Assessing Officer observed that the assessee company had given interest free advances to HCP Enterprise Ltd. for a sum of Rs. 30 crores DCIT vs. Oswal Extrusion Ltd. Asst.Year –2016-17 - 2– and Rs. 50 lakhs ... only if borrowed fund has been utilized for the purpose of business or profession. However, in the instant case, the assessee had given interest free advances to HCP Enterprise Ltd. and Prasthan Infrastructure Ltd. for no business purposes. Further, the asessee company failed to establish the nexus, that interest free

Deputy Commissioner of Income Tax 13(1)(2), Mumbai vs. Olive Bar & Kitchen Private Limited, Mumbai

In the result, the appeal of the revenue is dismissed and the appeal of the assessee is allowed for statistical purposes

ITA 6255/MUM/2024[2017-18]Status: DisposedITAT Mumbai22 Jan 2025AY 2017-18

Bench: Shri Amit Shukla & Smt. Renu Jauhriolive Bar & Kitchen Pvt. V/S. Acit, Circle-13(1)(1), बनाम Ltd. Mumbai 14 Union Park, Palli Hill Maharashtra-400020 Tourist Hotel Pvt. Ltd, Palli Hill Road, Khar West, Mumbai-400052 स्थायी लेखा सं./जीआइआर सं./Pan/Gir No: Aaaco5346G Appellant/अपीलार्थी .. Respondent/प्रतिवादी Dcit, Circle-13(1)(2), V/S. Olive Bar & Kitchen Pvt. Mumbai बनाम Ltd. R. No. 218, Aayakar 14 Union Park, Palli Hill Bhavan, M K Road, Tourist Hotel Pvt. Ltd, Mumbai, Palli Hill Road, Khar West, Maharashtra-400020 Mumbai-400052 स्थायी लेखा सं./जीआइआर सं./Pan/Gir No: Aaaco5346G Appellant/अपीलार्थी Respondent/प्रतिवादी ..

For Appellant: Shri Mahesh RajoraFor Respondent: Shri Mahesh Pmnani

Section 250Section 35D(1)(ii)Section 36(1)(iii)Section 36(1)(lit)Section 37(1)

ground that the decision was rendered in the context of investments made by the assessee and not in the context of grant of interest free advances. However, the said reasoning, in our opinion, would hold no water since the ratio of the cited decision would apply in all cases where

Olive Bar and Kitchen Private Limited, Mumbai vs. Assistant Commissioner of Income Tax, Circle - 13(1)(1), Mumbai

In the result, the appeal of the revenue is dismissed and the appeal of the assessee is allowed for statistical purposes

ITA 5924/MUM/2024[2017-18]Status: DisposedITAT Mumbai22 Jan 2025AY 2017-18

For Appellant: Shri Mahesh RajoraFor Respondent: Shri Mahesh Pmnani

Section 250Section 35D(1)(ii)Section 36(1)(iii)Section 36(1)(lit)Section 37(1)

Maithan Alloys Ltd, Kolkata vs. DCIT, Cir. 1(1), Kolkata

In the result, the appeals of the assessee are partly allowed

ITA 544/KOL/2024[2014-15]Status: DisposedITAT Kolkata21 Jan 2025AY 2014-15

Bench: Shri Rajesh Kumar, Am & Shri Pradip Kumar Choubey, Jm

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

noted that in earlier year, the Tribunal in similar facts and circumstances has confirmed the disallowance of proportionate interest expenditure in respect of interest free advances. He invited our attention to para 3 onwards of the order of the Tribunal to submit that the Tribunal after considering the entire facts ... demonstrated that the total interest-bearing borrowings of the assessee were at Rs.34.34 crores, whereas, the total loans and advances including interest free advances and share application money of the assessee was at Rs.67.03 crores and apart from that, the assessee had interest free funds in the form of trade

Maithan Alloys Ltd, Kolkata vs. DCIT, Cir. 1(1), Kolkata

In the result, the appeals of the assessee are partly allowed

ITA 543/KOL/2024[2011-12]Status: DisposedITAT Kolkata21 Jan 2025AY 2011-12

Bench: Shri Rajesh Kumar, Am & Shri Pradip Kumar Choubey, Jm

For Appellant: Shri Sidhhrath Kejriwal, ARFor Respondent: Shri Abhishek Kumar, DR

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

Subhash Chand, Faridabad vs. ITO, Ward- 2(4), Faridabad

In the result, the appeal of the assessee is allowed

ITA 989/DEL/2018[2014-15]Status: DisposedITAT Delhi20 Jan 2025AY 2014-15

Bench: Shri Yogesh Kumar U.S & Shri Manish Agarwal[Assessment Year : 2017-18] V.V. Transport, Vs Acit, 96-A, Sindhu Bhawan, Rohtak Subhash Nagar, Rohtak, Haryana-124001. Pan-Aadfv5250G Appellant Respondent Appellant By Ms. Sakshi Pandey, Adv. Respondent By Shri Om Prakash, Sr. Dr Date Of Hearing 15.05.2025 Date Of Pronouncement 08.08.2025 Order Per Manish Agarwal, Am : The Present Appeal Is Filed By The Assessee Against The Order Dated 05.01.20248 Passed By Ld. Commissioner Of Income Tax (A)/Addl/Jcit(A)-7, Kolkata [“Ld.Cit(A)”] In Appeal No.Cit(A), Rohtak/10584/2019-20 U/S 250 Of The Income Tax Act, 1961 [“The Act”] Arising From The Assessment Order Dated 20.12.2019 Passed U/S 143(3) Of The Act Pertaining To Assessment Year 2017-18. 2. Brief Facts Of The Case Are That The Assessee Is A Partnership Firm, Engaged In The Business Of Running Of Petrol Pump. The Return Of Income For The Year Under Appeal Was Filed On 28.10.2017, Declaring Total Income Of Inr 4,29,25,730/-. The Case Of The Assessee Was Selected For Complete Scrutiny For The Reasons Of Cash Deposits During Demonetization Period & Notice U/S 143(2) Was Issued On 24.09.2018. After Considering The Submissions & The Books Of Accounts Submitted, The Ao Had Taken No Adverse Inference On The Issue Of Cash Deposited During Demonetization Period However, He Has Made Disallowance Of Inr 12,20,700/- By Holding That The Assessee Has Made Interest Free Advances To Staff & To One Of The Partners Whereas It Is Paying Interest On The Borrowings. In First Appeal, Ld.Cit(A) Has Deleted The Disallowance Made Out Of The Interest Payments Towards The Staff Advances Given However, Confirmed The Disallowance On Account Of Advances Given To The Partner Of Inr 1 Crore.

Section 143(2)Section 143(3)Section 234ASection 250Section 36

cash deposited during demonetization period however, he has made disallowance of INR 12,20,700/- by holding that the assessee has made interest free advances to staff and to one of the partners whereas it is paying interest on the borrowings. In first appeal, Ld.CIT(A) has deleted the disallowance ... raised by the assessee with 4. respect to the disallowance of INR 12,20,700/- being the proportionate interest cost on the interest free advances given to the partner therefore, they are taken together for consideration. 5. Before us, Ld.AR for the assessee submits that the assessee is having sufficient

Asst. Commissioner of Income Tax- 14(1)(2), Mumbai, Aayakar Bhavan vs. T Bhimjyani Realty Private Limited, Mumbai

In the result, the appeal filed by the revenue is dismissed

ITA 4901/MUM/2024[2018-19]Status: DisposedITAT Mumbai16 Jan 2025AY 2018-19

Bench: Shri B.R. Baskaran & Shri Anikesh Banerjeea.Y : 2018-19 :

For Appellant: Shri Hemanshu Joshi, Sr. DRFor Respondent: Shri Vijay Mehta

Section 28Section 36(1)(iii)Section 37

assessment proceedings, the AO noticed that the assessee has borrowed interest bearing loans and was paying interest thereon. However, the assessee has given interest free advances to various persons. Accordingly, the AO took the view that the interest expenditure attributable to interest free advances are not allowable as deduction. Accordingly ... Court in the case of S A Builders Ltd vs. CIT (288 ITR 1)(SC) that if there is commercial expediency in giving interest free advances, then it is not necessary that the said advance should carry interest. The relevant discussions made by Hon’ble Supreme Court in the above

K.C.Social Welfare Trust (Regd.), Nawanshahr vs. DCIT (Exemptions), Circle-1, Chandigarh

In the result, both the appeals are allowed for statistical

ITA 7/CHANDI/2024[2014-15]Status: DisposedITAT Chandigarh15 Jan 2025AY 2014-15

Bench: Shri Rajpal Yadav & Shri Krinwant Sahay

For Appellant: Shri Rajinder Chopra, C.AFor Respondent: Shri Rohit Sharma,CIT DR

Section 11Section 12ASection 13Section 13(1)(C)Section 13(1)(c)Section 13(3)Section 143(2)

having Registration u/s 12A as well as 10(23C)(VI) of the Income Tax Act. The Assessing Officer observed that the Assessee extended interest free Advances to related parties in contravention of the Section 11 and Section 13 of the Act and Computed Notional Interest ... interest free advances. Considering the submissions of the Assessee and based on the following points the Ld CIT(A) NFAC rightly allowed the ground taken by Assessee by observing as under "It is noticed that the AO was of the view that appellant had advanced large sum to the related

Assisstant Commissioner of Income Tax, Circle-1, Exemption, Chandigarh vs. K.C. Social Welfare Trust, K.C. Tower

In the result, both the appeals are allowed for statistical

ITA 1/CHANDI/2024[2014-15]Status: DisposedITAT Chandigarh15 Jan 2025AY 2014-15

Bench: Shri Rajpal Yadav & Shri Krinwant Sahay

For Appellant: Shri Rajinder Chopra, C.AFor Respondent: Shri Rohit Sharma,CIT DR

Section 11Section 12ASection 13Section 13(1)(C)Section 13(1)(c)Section 13(3)Section 143(2)

ITO, Kolkata vs. Harmony Vinimay Pvt Ltd, Kolkata

In the result, the appeal of the Revenue is dismissed

ITA 1978/KOL/2024[2018]Status: DisposedITAT Kolkata15 Jan 2025

Bench: Shri Rajesh Kumar, Am & Shri Pradip Kumar Choubey, Jm Ito, Kolkata Harmony Vinimay Pvt. Ltd. Ward11(1), P-7, Chowringhee Square, 6 Th Floor, 67, Chistopher Road, Kolkata Vs. Kolkata-700069 West Bengal West Bengal (Appellant) (Respondent) Pan No. Aacch3211P Assessee By : Shri S.K. Tulsiyan & Smt Puja Somai, Ars Revenue By : Shri Prakash Nath Barnwal, Dr Date Of Hearing: 07.01.2025 Date Of Pronouncement : 15.01.2025

For Appellant: Shri S.K. Tulsiyan and Smt PujaFor Respondent: Shri Prakash Nath Barnwal, DR

Section 143(1)

facts in brief are that the ld. AO observed during the assessment proceedings that assessee has taken interest bearing funds but has made interest free advances to the land co-owners / parties during the financial year and accordingly, disallowed the proportionate interest not charged from the land co-owners/ parties ... shown interest income of ₹8,76,344/-. Thus, the ld. AO observed that the loans were raised at higher rate of interest while interest free advances were given to various parties. Accordingly, the ld. AO, after taking into account the opening balance of unsecured loans and advances, closing balances

Arjanbhai Nanubhai Patel, Ahmedabad vs. Income Tax Officer - Ward -2 TDS, Ahmedabad

In the result, the appeal of the Revenue is dismissed

ITA 483/AHD/2024[2022-23]Status: DisposedITAT Ahmedabad07 Jan 2025AY 2022-23

Bench: Ms. Suchitra Kamble & Shri Narendra Prasad Sinha

interest, involved in Revenue’s appeal, the Ld. Sr. Counsel submitted that the assessee had sufficient own funds to account for the interest free advances and loans. Further, the Assessing Officer had not established any nexus in respect of deployment of borrowed funds towards interest free advances ... paid, towards interest free loans and advances. However, the AO had not established any nexus between the diversion of interest-bearing funds towards interest free advances as alleged in the assessment order. The assessee had sufficient funds of his own which could have been utilized towards interest free loans

Bps Mineral Exports Private Limited, Ahmedabad vs. The Income Tax Officer, Ward-1(1)(2), Ahmedabad

In the result, the appeal of the assessee is allowed

ITA 282/AHD/2024[2016-17]Status: DisposedITAT Ahmedabad01 Jan 2025AY 2016-17

Bench: Ms. Suchitra Kamble

For Appellant: Shri Tushar Hemani, Sr. Adv. &For Respondent: Shri C Dharani Nath, Sr. D.R

Section 250Section 26(1)(iii)Section 36(1)(iii)

initially given by the assessee in the past i.e. there was opening balance of such advances and such funds were not diverted towards interest free advances. Thus, the observation of the Assessing Officer is fallacious. The Ld. A.R. further submitted that these advances were business advances and were also given ... case of business advances. The Ld. A.R. further submitted that the Assessing Officer and the CIT(A) have essentially question necessity of giving interest free advances when assessee is incurring interest expenses. The Ld. A.R. submitted that Revenue Authorities cannot decide as to how in which manner the assessee should