Anbazhagan Ranganathan Vs ACIT (ITAT Chennai)
Chennai ITAT Deletes Interest Disallowance; No Notional Interest Can Be Imputed on Business Advances When Assessee Has Sufficient Own Funds
The Chennai ITAT held that interest cannot be disallowed by imputing notional overdraft interest on business advances where the assessee possesses sufficient own funds to finance such advances. The assessee, a civil contractor executing Government contracts, had advanced amounts to four entities for arranging labour in connection with his business. The Assessing Officer, observing that no ledger copies had been produced during assessment, applied the overdraft (OD) interest rate to the advances and made a disallowance, part of which was sustained by the CIT(A). The Tribunal noted that the assessee had disclosed contract receipts of ₹9.57 crore and business income therefrom, and the Revenue had never disputed the genuineness of the business activity or the business purpose of the advances. Accepting the assessee’s contention that he had adequate surplus own funds, and relying on settled judicial principles that no presumption of borrowed funds arises where sufficient own funds are available, the Tribunal held that the interest disallowance was unjustified. Accordingly, it set aside the order of the CIT(A) and allowed the assessee’s appeal.
Cases Discussed
- M/s Thiruvalluvar Textiles (P) Ltd. (ITAT Chennai), ITA Nos. 854 to 857/Chny/2025
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This appeal filed by the assessee is directed against the order dated 27.01.2026 passed by the ld. Commissioner of Income Tax (Appeals), NFAC, Delhi for the assessment year 2020-21.
2. The assessee raised three grounds of appeal, amongst which the only issue emanating for consideration is as to whether the ld. CIT(A) is justified in confirming the order of the AO in making the addition on account of disallowance of interest. At the outset, it is noted that the AO found that the assessee has withdrawn cash of ₹1,22,00,000 and purchased motor vehicles, etc., and received interest of ₹9,11,301 from the State Bank of India. According to the AO, the assessee had provided advances to four entities and no ledger copies were furnished during the course of the assessment proceedings. Accordingly, he applied OD interest rates on such advances to the said four parties and disallowed the interest. The ld. CIT(A) deleted the interest disallowance to the extent of ₹4,80,920 as unsustainable by holding that the assessee offered an explanation to that effect.
3. Before us, the ld. AR, Mr. Y. Sridhar, F.C.A., submits that the disallowance made by the AO, which was confirmed by the ld. CIT(A), is not maintainable only for the reason that the assessee has surplus own funds and reserves to give such advances. The ld. AR placed on record the order of this Tribunal in the case of M/s Thiruvalluvar Textiles (P) Ltd.in ITA Nos. 854 to 857/Chny/2025 and argued that the Tribunal, considering the decisions of the Hon’ble Supreme Court and the Hon’ble High Courts, held that the interest disallowance is not maintainable when the assessee has surplus own funds in his accounts.
4. Ld. DR, Mr. Kumar Chandan, JCIT, vehemently opposed the same and argued that no evidence in support of such contention was ever produced before the authorities.
5. Having heard both the parties and considering the submissions made before the AO and the ld. CIT(A) as well as before this Tribunal, we hold that the assessee is a civil contractor undertaking civil works for Government undertaking entities. We note that the assessee admitted contract receipts of ₹9,57,59,964, which is more than the information value reported under various heads. Further, the assessee had admitted business income at ₹47,90,730, which is 5% of the contract receipts.
There is no dispute with regard to the business activity of the assessee, wherein the AO observed that the assessee has provided advances to four entities, which are there on page No. 9 of the assessment order, for arrangement of labour. Further, the AO added interest income by taking the OD interest rate only on the ground that there were no ledger copies for the same, which clearly shows that the business of the assessee is not disputed by both the authorities below. We find force in the arguments of the ld. AR that, when there are surplus own funds to engage in the business activity of the assessee, the interest disallowance made by the AO, which was confirmed by the ld. CIT(A), is not justified. Thus, the order of the ld. CIT(A) is set aside and the grounds raised by the assessee are allowed.
6. In the result, the appeal of the assessee is allowed.
Order pronounced on 21st July, 2026 at Chennai.
