ACIT Vs Mehul Construction Company Pvt. Ltd. (ITAT Pune)
Pune ITAT Upholds Deletion of ₹5.02 Crore Interest Disallowance: Presumption Applies When Interest-Free Funds Exceed Advances
The Pune ITAT dismissed the Revenue’s appeals for three assessment years and upheld the deletion of interest disallowance of ₹5.02 crore, holding that where the assessee possesses sufficient interest-free funds exceeding the amount advanced, a presumption arises that the advances were made out of such funds and no disallowance under Section 36(1)(iii) is warranted.
The assessee company had advanced interest-free loans aggregating to ₹33.49 crore to M.M. Patel Public Charitable Trust, a trust engaged in establishing a medical college and hospital. During the assessment, the Assessing Officer observed that the assessee had incurred substantial interest expenditure on borrowings and therefore disallowed ₹5.02 crore as proportionate interest allegedly attributable to diversion of borrowed funds towards interest-free advances.
Before the appellate authorities, the assessee explained that the advances were made to assist the trust in meeting the margin money requirements for bank finance and that the lender banks had treated such advances as quasi-capital. It was further pointed out that the Charity Commissioner had permitted the trust to accept only interest-free loans, and that the assessee had itself secured construction contracts from the trust through a competitive bidding process.
More importantly, the assessee demonstrated that as against the advance of ₹33.49 crore, it possessed own funds in the form of share capital and reserves exceeding ₹42.61 crore, apart from other interest-free funds. The CIT(A) accepted this factual position and deleted the disallowance by relying on the decisions in Reliance Utilities & Power Ltd. (Bom HC) and Reliance Industries Ltd. (SC).
The Tribunal noted that the Revenue had not challenged similar relief granted to the assessee in earlier assessment years on identical facts, thereby lending support to the principle of consistency. It further observed that the assessee had successfully established the availability of interest-free funds substantially in excess of the advances made to the trust.
Rejecting the Revenue’s argument that the presumption laid down in Reliance Utilities applied only to investments and not to interest-free loans, the ITAT held that the principle depends upon the availability of sufficient interest-free funds and not on the nature of the advance. Once such funds are available, it is presumed that the advances have been made out of those funds rather than borrowed funds.
Accordingly, the Tribunal held that the assessee had successfully demonstrated that the interest-free advances to the charitable trust were funded out of reserves, surplus and other interest-free resources, and therefore the disallowance of ₹5.02 crore under Section 36(1)(iii) was unsustainable. The Revenue’s appeals for all three assessment years were dismissed.
FULL TEXT OF THE ORDER OF ITAT PUNE
These appeals filed by the Revenue are directed against the separate orders dated 25.09.2025 passed by Ld. CIT(A), Pune-11 [‘Ld. CIT(A)’] for the assessment years 2016-17, 2017-18 & 2018-19 respectively.
