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ITAT Mumbai: No U/s 36(1)(iii) Disallowance If Own Funds Exceed Advances

Case Law Details

TaxGuru Citation
2026 taxguru.in 3482
Case Name
Fairchem Organics Limited Vs ACIT (ITAT Mumbai)
Date of Judgement/Order
Only available for paid members
Related Assessment Year
2020-21
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Fairchem Organics Limited Vs ACIT (ITAT Mumbai)

ITAT Mumbai: No Disallowance U/s 36(1)(iii) When Interest-Free Funds Exceed Advances – Presumption Applies in Favour of Assesse

In this case, the assessee company made capital advances for purchase of plant & machinery while having substantial borrowings. The AO alleged diversion of interest-bearing funds and disallowed proportionate interest u/s 36(1)(iii), which was upheld by CIT(A).

The ITAT held that the assessee had sufficient own funds (equity & reserves) and strong internal accrals far exceeding the capital advances. In such cases, settled law (Reliance Industries SC) creates a presumption that advances are made out of interest-free funds unless nexus with borrowed funds is proved by the Revenue.

The Tribunal further observed that the AO proceeded merely on presumption without establishing any direct nexus between borrowings & advances. Also, the advances were for business purposes (capital goods for upgradation), and hence commercial expediency was not in doubt.

Accordingly, disallowance u/s 36(1)(iii) was held unsustainable and deleted.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

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, 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.

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Author Info

CA Vijayakumar Shetty
Qualification: CA in Practice
Company: Shetty & Co, Chartered Accountants, Mangalore
Location: Mangalore, Karnataka
Articles Published: 6,879

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