Komal Enterprises Vs ITO (ITAT Mumbai)
SECTION 36(1)(iii): OPEN LAND CAN WORK BEFORE THE GODOWN DOES—STORAGE-YARD USE &; SUFFICIENT OWN FUNDS DELETE ₹23.05 LAKH INTEREST DISALLOWANCE
Land purchased for storing heavy trading goods
The assessee, a partnership firm, was engaged in trading, import & consignment sale of tools, alloys, pipes, steel & scrap.
During FY 2011-12, it purchased Plot No. 13, admeasuring 3,741.83 sq. yards, at Cherlapally, Andhra Pradesh, for ₹2,01,12,560, including stamp duty. The property was acquired for constructing a godown & supporting the assessee’s trading operations.
During AY 2014-15, the assessee claimed interest expenditure comprising ₹15,12,841 paid on an HDFC Bank term loan & ₹7,92,611 attributable to an overdraft facility, aggregating to ₹23,05,452.
The AO disallowed the amount u/s 36(1)(iii), holding that borrowed funds had been utilised for acquiring the land & that the property had not yet been put to use.
AO treats incomplete construction as unused land
The assessee explained that the open plot was already being used for storing steel rods, pipes, steel scrap, tools & other bulky trading material.
Such goods required substantial open space for stacking, loading, unloading, parking of trucks & movement of forklifts. The plot was situated in an industrial area & had roads on three sides, making it commercially suitable as a storage yard.
To establish actual use, the assessee furnished sample purchase bills, transport documents showing Cherlapally as the place of unloading, electricity bills & photographs.
The AO, however, noticed that construction of a godown or office structure was still in progress & appeared as capital work-in-progress. Since the completed structure had not been put to use, he treated the assessee’s contention regarding use of the open land as an afterthought.
The CIT(A) agreed, observing that the documents did not establish continuous & exclusive business use of the property.
Land & structure can have separate working lives
The ITAT found that the assessee never claimed that the structure under construction had been completed. Its specific case was that the open land itself was already functioning as a storage yard.
Construction of an additional godown or office on one part of the land did not establish that the remaining open area was unused. The land & the superstructure under construction were capable of separate use & separate examination.
Showing expenditure on the incomplete structure as capital work-in-progress might be relevant for determining the treatment of the cost or interest directly attributable to that structure. However, it could not erase the existing business use of the land.
The AO had neither verified the transport documents, electricity bills or photographs nor brought any contrary evidence to show that goods were not delivered to or stored at Cherlapally.
Section 36(1)(iii) does not require the property to be used continuously & exclusively every day. It requires the borrowed capital & asset to serve the purposes of business.
No construction-specific borrowing identified
The Revenue attempted to distinguish the assessee’s favourable Tribunal order for AY 2015-16 by arguing that the earlier decision did not examine interest attributable to construction of the incomplete godown.
The ITAT rejected the distinction. The AO had not identified any particular borrowing utilised for construction of the structure. Nor had he quantified interest directly attributable to the construction activity.
The impugned disallowance related to the HDFC loan & overdraft facility on the allegation that those funds financed the original land acquisition. In the absence of a demonstrated nexus with construction, capital work-in-progress could not sustain disallowance of the entire interest.
Interest-free funds exactly matched the land cost
The assessee’s statement of sources showed interest-free unsecured loans of ₹1,15,16,180 & partners’ capital of ₹85,96,380. Together, these amounted to ₹2,01,12,560, exactly corresponding to the cost of the land.
The assessee contended that the overdraft facility was sanctioned against stock & book debts exclusively for working-capital operations. The HDFC loan was also obtained for business requirements & secured against the partners’ personal properties.
The CIT(A) rejected the explanation because receipts & payments were routed through a common overdraft account & no further fund-flow statement was furnished.
Following CIT v. Reliance Utilities & Power Ltd. [313 ITR 340 (Bom.)], the ITAT held that where sufficient interest-free funds & borrowed funds coexist in a common pool, the investment is presumed to have been made from the available interest-free funds.
The mere routing of transactions through a common bank account did not establish that interest-bearing borrowings financed the land.
Earlier year’s finding covers the same land
In Komal Enterprises v. ITO, ITA No. 753/Mum/2026 for AY 2015-16, the Coordinate Bench had examined the same property, same acquisition, substantially the same borrowings & identical business use.
It had categorically found that the assessee possessed sufficient interest-free funds & used the Cherlapally land as a storage yard.
The Revenue produced no material factual distinction warranting a different conclusion for AY 2014-15. The historical source of acquisition could not change from year to year merely because separate assessments were involved.
Subsequent non-compliance cannot erase existing evidence
The CIT(A) also referred to the assessee’s failure to comply with two later hearing notices.
The ITAT observed that the written submissions & supporting documents were already on record & the CIT(A) had decided the controversy on merits. Subsequent non-compliance could not render the existing evidence non-existent or substitute its proper examination.
Decision
The ITAT held that the Cherlapally land had been put to business use as an open storage yard, notwithstanding construction of an additional structure on part of it.
Further, sufficient interest-free funds covering the entire land cost were available & no direct nexus between interest-bearing borrowings and the acquisition or construction was established.
The disallowance of ₹23,05,452 u/s 36(1)(iii) was deleted & the assessee’s appeal was allowed.
Cases Discussed
- CIT v. Reliance Utilities and Power Ltd., 313 ITR 340 (Bom)
- Metro Exporters Ltd. v. ITO, 29 SOT 531 (Mumbai)
- DCIT v. Subramanya Constructions & Development Co. Ltd., ITA No. 404/2013
- Komal Enterprises v. Income Tax Officer-41(3)(1), ITA No. 753/Mum/2026
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, MUMBAI
This appeal by the assessee is directed against the order dated 07.01.2026 passed by the learned Additional/Joint Commissioner of Income-tax (Appeals)-2, Delhi [hereinafter referred to as “the CIT(A)”], under section 250 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”], for the assessment year 2014-15. The impugned appellate order arises from the assessment order dated 22.12.2016 passed by the Income-tax Officer-30(2)(1), Mumbai [hereinafter referred to as “Assessing Officer”], under section 143(3) of the Act.
2. The assessee has raised the following substantive grounds of appeal:
1. The Ld. CIT(A) erred in wrongly disallowing interest expenses of Rs.23,05,450/- u/s. 36 (1) (iii) which Your Honour is requested to kindly order to delete the same and provide relief to the Appellant.
2. Appellant craves leave to add, alter, amend, delete and / or modify any or all the aforesaid grounds of appeal either at the time of hearing or at any time before the date of hearing.
3. Briefly stated, the assessee is a partnership firm engaged in the business of trading, import and consignment sale of tools, alloys, pipes, steel and scrap. For the year under consideration, the assessee filed its return of income on 22.08.2014 declaring a total income of Rs.5,88,490/-. The case was selected for scrutiny and the assessment was ultimately completed under section 143(3) of the Act on 22.12.2016 after making a disallowance of interest expenditure of Rs.23,05,452/- under section 36(1)(iii) of the Act. The Assessing Officer determined the total income at Rs.28,93,940/-.
4. The controversy relates to the interest expenditure incurred in connection with the funds which, according to the Assessing Officer, were utilised for the acquisition of land situated at Cherlapally, Andhra Pradesh. The Assessing Officer recorded that during the financial year 2011-12, the assessee had purchased the said land for an aggregate consideration of Rs.2,01,12,560/-, inclusive of stamp duty. The land was intended to be used for the construction of a godown.
5. The Assessing Officer referred to the assessment proceedings for the assessment year 2012-13, wherein it had been held that the land had been acquired out of borrowed funds and had not been put to use. In that year, interest of Rs.11,25,450/- paid to HDFC Bank and interest of Rs.6,60,509/- attributable to funds drawn from the overdraft account maintained with ING Vysya Bank had been disallowed. The aggregate disallowance for the assessment year 2012-13 was Rs.17,85,959/-.
6. During the assessment proceedings for the year under consideration, the Assessing Officer required the assessee to furnish a note regarding the status and use of the Cherlapally land. In response, the assessee, by its letter dated 25.08.2016, submitted that it was engaged in the business of trading in iron and steel alloys and scrap and had purchased Plot No. 13, admeasuring 3,741.83 square yards, at Cherlapally during the financial year 2011-12. It was contended that during the financial year 2013-14, the land was used as a storage area for keeping the inventory and trading material of the assessee.
7. The Assessing Officer called upon the assessee to explain why the interest attributable to the borrowed funds utilised for purchasing the land should not be disallowed, having regard to the fact that the assessee had not claimed depreciation on the property and the interest relating to the same land had been disallowed in the assessment years 2012-13 and 2013-14.
8. In response to the show-cause notice, the assessee filed a further reply dated 05.12.2016. The assessee submitted that it had started using the plot of land for storage purposes. It was explained that the assessee dealt in heavy and bulky items, such as iron and steel, which required considerable space for storage as well as adequate space for loading, unloading and parking. The assessee contended that the plot was situated in the heart of an industrial area and had roads on three sides, thereby making it commercially suitable for its business operations. In support of the actual use of the property, the assessee stated that it had furnished sample purchase bills and copies of transport documents showing Cherlapally as the place at which the goods were unloaded. The assessee also furnished an electricity bill relating to Plot No. 13 at Cherlapally. On the basis of these documents, the assessee claimed that the land had been put to use for the purposes of its business and, consequently, the interest expenditure could not be disallowed under section 36(1)(iii) of the Act. Without prejudice to its contention regarding the actual business use of the land, the assessee also submitted that the land had not been acquired out of borrowed funds and, therefore, no part of the interest expenditure was liable to be disallowed.
9. The Assessing Officer did not accept the explanation of the assessee. He referred to the note furnished by the assessee during the assessment proceedings for the assessment year 2012-13, wherein the assessee had stated that the land had been purchased for the construction of a godown and that it intended to shift its major operations from Balanagar to the premises at Cherlapally. In the said note, the assessee had also stated that the construction activity had commenced in the subsequent years and was still in progress.
10. The Assessing Officer observed that the assessee had not stated in its earlier reply that the open land had been used as a godown during the intervening period. He, therefore, treated the subsequent contention regarding the use of the land for storing inventory as an afterthought advanced for claiming the interest expenditure as a deduction in the profit and loss account. The Assessing Officer further observed from the schedule of fixed assets that the construction of the godown on the said land was in progress during the assessment year 2014-15. According to him, the fact that the construction was still incomplete demonstrated that the asset had not been put to use. The assessee had itself disclosed capital work-in-progress in respect of the Cherlapally property. The Assessing Officer, therefore, held that the interest incurred in relation to the acquisition of the land until the godown was put to use could not be allowed as revenue expenditure. As regards the source of investment, the Assessing Officer observed that the contention that the land had not been acquired out of borrowed funds had already been considered and rejected in the assessment proceedings for the assessment year 2012-13. He recorded that the proceeds of the term loan obtained from HDFC Bank had been fully utilised for acquiring the land. Consequently, the interest of Rs.15,12,841/- paid on the HDFC Bank term loan during the financial year 2013-14 was disallowed.
11. The Assessing Officer further recorded that in the assessment year 2013-14, interest of Rs.7,92,611/- attributable to the funds used from the overdraft account maintained with ING Vysya Bank had been disallowed. During the year under consideration, the assessee informed the Assessing Officer that the overdraft facility had subsequently been shifted to ICICI Bank and that the applicable rate of interest was 13 per cent. The Assessing Officer accordingly disallowed a further amount of Rs.7,92,611/-. Thus, the aggregate interest disallowance made under section 36(1)(iii) of the Act was Rs.23,05,452/-, comprising interest of Rs.15,12,841/- on the HDFC Bank loan and interest of Rs.7,92,611/- attributable to the overdraft facility.
12. Aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A). Before the learned CIT(A), the assessee reiterated that the Assessing Officer had disallowed an aggregate interest expenditure of Rs.23,05,452/-, consisting of interest of Rs.15,12,841/- paid to HDFC Bank and interest of Rs.7,92,611/- attributable to the overdraft facility originally obtained from ING Vysya Bank and subsequently shifted to ICICI Bank. The assessee submitted that the disallowance proceeded on the erroneous premise that interest-bearing bank funds had been utilised for acquiring the land and that the land had not been put to business use during the relevant previous year.
13. The assessee submitted that Plot No. 13, admeasuring 3,741.83 square yards, situated in the industrial area of Cherlapally, Hyderabad, had been purchased on 02.07.2011 for storing its inventory. During the financial year 2013-14, the land was used for storing steel rods, steel pipes, steel scrap, tools and other trading material. Considering the nature, size and weight of such goods, an open plot with basic security arrangements was sufficient for their storage and no superstructure was required for such use. It was further submitted that the plot was situated in the heart of an industrial belt and was accessible by roads on three sides, making it suitable for loading, unloading and other logistical activities. The assessee contended that the construction of an additional structure for office purposes during the financial year 2013-14 did not establish that the entire land had not been put to use. The use of a part of the land for storing trading goods was independent of the construction of the additional office structure. In support of the claimed business use, the assessee relied upon sample transport documents showing Cherlapally as the place of unloading, electricity bills relating to the property for the assessment year 2014-15 and photographs of the godown stated to have been furnished before the Assessing Officer.
14. On the source of investment, the assessee submitted that the land had been acquired out of its own funds and interest-free unsecured loans obtained from friends and family members. The statement of source and application of funds as on 31.03.2012, as furnished by the assessee, reflected interest-free loan funds of Rs.1,15,16,180/- and capital of Rs.85,96,380/-, aggregating to Rs.2,01,12,560/-, corresponding to the cost of the land of Rs.2,01,12,560/-.
15. The assessee further furnished a statement concerning the source and application of funds for its operational business activities. According to the said statement, the sources comprised capital of Rs.45,97,065/-, secured loans of Rs.3,49,17,261/- and unsecured loans of Rs.65,65,594/-, aggregating to Rs.4,60,79,920/-. The corresponding application was stated to consist of fixed assets of Rs.9,97,653/- and net current assets of Rs.4,50,82,267/-. On this basis, the assessee contended that sufficient own funds and interest-free funds were available to finance the acquisition of the land.
16. In relation to the ING Vysya Bank overdraft facility, the assessee submitted that the facility was secured against book debts and stock and was intended for financing the working-capital requirements of the business. The overdraft account was used for the assessee’s operational transactions. Partners’ contributions, secured and unsecured loans and payments from debtors were credited to the said account, while payments to creditors and capital and revenue expenditure were also routed through the same account. The assessee submitted that, according to the terms of the sanction letter, the overdraft facility could be utilised only for financing stock and debtors. Monthly statements of stock and debtors were furnished to the bank. It was, therefore, contended that it was neither possible nor commercially prudent to utilise the working-capital facility for acquiring a capital asset of substantial value, thereby exhausting the sanctioned overdraft limit and depriving the business of liquidity.
17. As regards the HDFC Bank loan, the assessee submitted that the loan had been obtained for its business and working-capital requirements and was secured against the personal properties of its partners. According to the assessee, the fact that the loan proceeds had been credited to the overdraft account maintained with ING Vysya Bank did not establish that the loan had been utilised for acquiring the land. It was argued that if the loan had been intended for acquiring the land, the assessee could have offered the land itself as security instead of the personal properties of its partners. The assessee contended that where own funds and borrowed funds formed part of a common pool and the available interest-free funds were sufficient to cover the investment, the investment should be presumed to have been made from the interest-free funds. In support of this proposition, the assessee placed reliance upon the decision of the Hon’ble jurisdictional High Court in CIT v. Reliance Utilities and Power Ltd., 313 ITR 340 (Bom), the decision of the Mumbai Bench of the Tribunal in Metro Exporters Ltd. v. ITO, 29 SOT 531 (Mumbai), and the decision of the Bangalore Bench of the Tribunal in DCIT v. Subramanya Constructions & Development Co. Ltd., ITA No. 404/2013.
18. The assessee thus submitted that no borrowed funds had been utilised for acquiring the land and the bank borrowings had been utilised for its working-capital requirements. In the alternative, it was submitted that even if the land were presumed to have been acquired from borrowed funds, the land had already been put to use for the purposes of the assessee’s business during the relevant previous year. Accordingly, the interest expenditure was claimed to be allowable under section 36(1)(iii) of the Act.
19. The learned CIT(A) observed that the assessee had failed to conclusively establish that the borrowed funds were not utilised for acquiring the land and that the land had been put to use for business purposes during the relevant previous year. According to the learned CIT(A), the selective transport documents, electricity bills and general explanations furnished by the assessee did not satisfactorily demonstrate the continuous and exclusive business use of the land, particularly when a part of the property was admittedly under construction. The learned CIT(A) further observed that the assessee had not furnished a cogent fund-flow or cash-flow statement demonstrating that the investment in the land was made entirely out of interest-free funds. This was considered material because the assessee had admitted that all receipts and payments were routed through a common overdraft account. The learned CIT(A) also recorded that further opportunities had been granted to the assessee however, the assessee did not comply with these notices and did not adduce substantial evidence in support of its claim.
20. In view of the aforesaid findings, the learned CIT(A) held that the Assessing Officer was justified in invoking section 36(1)(iii) of the Act and, accordingly, sustained the disallowance of interest expenditure. The related ground raised before the learned CIT(A) was, therefore, dismissed.
21. Before us, the learned Authorised Representative (AR) reiterated the facts and submissions advanced before the lower authorities. He submitted that the issue under consideration is recurring in nature and identical additions were made by the Assessing Officer for the assessment years 2012-13, 2013-14, 2014-15 and 2015-16. The common issue in all these years concerns the disallowance of interest expenditure under section 36(1)(iii) of the Act on the allegation that interest-bearing borrowed funds were utilised for purchasing land which had not been put to use for the purposes of the assessee’s business.
22. The learned AR submitted that the addition was initially made in the assessment year 2012-13, which constitutes the foundational year of the dispute, and the same reasoning was thereafter consistently followed by the Assessing Officer in the succeeding assessment years. It was stated that the appeals for the assessment years 2012-13 and 2013-14 are pending before the learned CIT(A), whereas the present appeal relates to the assessment year 2014-15.
23. The learned AR submitted that the assessee had furnished all the relevant supporting documents before the learned CIT(A) in each of the four assessment years and that the said documents had also been compiled in the paper book filed before the Tribunal. It was contended that the documents forming part of the paper book for the assessment year 2015-16 had already been furnished before the learned CIT(A) in the earlier assessment years. For the assessment year 2015-16, the assessee had filed detailed submissions and supporting documents through online mode on 15.01.2021, 16.07.2025 and 02.12.2025. According to the learned AR, the facts, evidence and submissions for the assessment year 2015-16 were identical to those already placed on record for the year under consideration.
24. On merits, the learned AR submitted that the land was acquired and actually put to use as a storage yard for the assessee’s stock-in-trade consisting of iron, steel, pipes and scrap. Such use, according to him, formed an integral part of the assessee’s trading operations. It was contended that the assessee’s business required a large open storage yard for stacking long steel rods and pipes and for facilitating the movement of forklifts and the loading and unloading of trucks.
25. The learned AR submitted that section 36(1)(iii) of the Act permits deduction of interest paid in respect of capital borrowed for the purposes of the business or profession. He acknowledged that the proviso to section 36(1)(iii) restricts the deduction of interest for the period commencing from the date of borrowing until the date on which the acquired asset is first put to use. However, once the asset is put to use for the purposes of the business, the restriction contained in the proviso ceases to apply and the interest thereafter becomes allowable as revenue expenditure.
26. The learned AR argued that the determining factor was not whether the asset acquired was land, but whether the borrowing was for the purposes of the business and whether the asset had been put to use. In the present case, the land was used as a storage yard for the assessee’s stock-in-trade and directly facilitated the carrying on of its business. Therefore, the fact that the acquired asset was land did not, by itself, justify the disallowance of interest expenditure. The learned AR further submitted that the assessee had sufficient interest-free funds available at the time of acquiring the land. Thus, the disallowance was not sustainable on either of the two grounds adopted by the lower authorities, namely, the alleged utilisation of borrowed funds for the acquisition of the land and the alleged non-use of the land for business purposes. In support of the aforesaid contentions, the learned AR placed reliance upon the order of the Co-ordinate Bench in the assessee’s own case for the assessment year 2015-16 in Komal Enterprises v. Income Tax Officer-41(3)(1), ITA No. 753/Mum/2026. He submitted that, on identical facts and in relation to the same land, the Tribunal had deleted the disallowance made under section 36(1)(iii) of the Act.
27. The learned AR accordingly submitted that the issue involved in the present appeal is squarely covered by the decision of the Co-ordinate Bench in the assessee’s own case concerning the same land and an identical disallowance in the immediately succeeding assessment year. He, therefore, prayed that the disallowance of interest expenditure sustained by the learned CIT(A) be deleted.
28. Per contra, the learned Departmental Representative relied upon the assessment order and supported the disallowance made by the Assessing Officer. He specifically invited our attention to paragraph 5.6(ii) of the assessment order and submitted that the schedule of fixed assets showed that construction of the godown on the Cherlapally land was still in progress during the year under consideration. The assessee had itself disclosed the expenditure relating to the property as capital work-in-progress. Thus, according to the learned DR, the godown had not been completed and the asset had not been put to use for the purposes of the assessee’s business. The interest incurred for acquiring the asset up to the date on which it was first put to use was, therefore, not allowable as revenue expenditure in view of the proviso to section 36(1)(iii) of the Act. He further submitted that the assessee’s contention that the land had not been purchased out of borrowed funds had already been considered and rejected in the assessment order for the assessment year 2012-13.
29. The learned DR further sought to distinguish the order dated 07.07.2026 passed by the Co-ordinate Bench in the assessee’s own case for the assessment year 2015-16 in ITA No. 753/Mum/2026. He submitted that the Co-ordinate Bench had principally examined whether the land was used as a storage yard for the assessee’s business and whether sufficient interest-free funds were available. According to him, the specific question arising in the year under consideration, namely, whether the interest attributable to the construction of the godown shown as capital work-in-progress was capital or revenue in nature, had not been adjudicated in the said order. He, therefore, contended that the decision for the assessment year 2015-16 did not conclude this distinct aspect of the controversy and that the disallowance was required to be examined in the light of the proviso to section 36(1)(iii) of the Act.
30. The learned DR accordingly urged that the disallowance sustained by the learned CIT(A) be upheld.
31. We have considered the rival submissions and perused the material available on record, including the orders of the lower authorities, the documents referred to by the parties and the order dated 07.07.2026 passed by the Co-ordinate Bench in the assessee’s own case for the assessment year 2015-16 in ITA No. 753/Mum/2026. The controversy is whether the interest expenditure of Rs.23,05,452/-, comprising interest of Rs.15,12,841/- paid to HDFC Bank and interest of Rs.7,92,611/- attributable to the overdraft facility, is liable to be disallowed under section 36(1)(iii) of the Act.
32. Under section 36(1)(iii), interest paid in respect of capital borrowed for the purposes of the business or profession is allowable as a deduction, subject to the proviso concerning interest for the period up to the date on which the acquired asset is first put to use. Thus, the material questions are whether the borrowed capital was utilised for acquiring the asset and, if so, whether the asset had been put to use for the purposes of the assessee’s business during the relevant previous year.
33. The Assessing Officer disallowed the interest on two grounds. First, he relied upon the finding recorded in the assessment order for the assessment year 2012-13 that the HDFC Bank loan and a part of the overdraft facility were utilised for purchasing the Cherlapally land. Secondly, he observed from the fixed asset schedule that construction of the godown was in progress and was shown as capital work-in-progress. On this basis, he concluded that the land had not been put to use and that the interest was required to be capitalised until completion of the godown.
34. The material placed on record, however, indicates that the assessee’s case was not that the godown under construction had been completed and put to use. Its specific case was that the open land itself was being used as a storage yard for iron and steel rods, pipes, scrap and other bulky trading material. The assessee supported this contention by referring to transport documents showing delivery and unloading of goods at Cherlapally, electricity bills and photographs of the premises. The nature of the assessee’s trading activity and the necessity of an open yard for stacking such bulky goods have not been disputed by the Assessing Officer.
35. The construction of an additional structure on a part of the land does not, by itself, establish that the remaining land was not being used as a storage yard. The land and the structure under construction are capable of being separately used and separately examined. Disclosure of the expenditure incurred on the incomplete structure as capital work-in-progress may be relevant for determining the treatment of the cost and interest directly attributable to the construction of that structure. It cannot, without anything further, lead to the conclusion that the land itself was not already being used for the assessee’s trading operations.
36. Significantly, the Assessing Officer has not identified any particular borrowing utilised for the construction of the godown, nor has he quantified any interest directly attributable to such construction activity. The impugned disallowance consists of the interest on the HDFC Bank loan and the amount attributed to the overdraft facility on the premise that those funds had been utilised for purchasing the land. Thus, the disallowance made is relatable to the acquisition of the land and not to any separately established borrowing for construction of the godown. In the absence of such nexus, the disclosure of the structure as capital work-in-progress cannot sustain the disallowance of the entire interest expenditure in question.
37. The learned CIT(A) observed that the documents furnished by the assessee did not establish continuous and exclusive business use of the land. Section 36(1)(iii), however, requires the borrowing to be for the purposes of the business. There is no allegation that the land was used for any personal or non-business purpose. Further, neither of the lower authorities conducted any verification of the transport documents, electricity bills or photographs, nor did they bring any contrary evidence on record to show that the goods were not delivered to or stored at the Cherlapally premises. The material produced by the assessee could not, therefore, have been rejected merely by describing it as selective or insufficient, without pointing out any specific defect or contradiction therein.
38. We also find that the assessee had disclosed interest-free loan funds of Rs.1,15,16,180/- and capital of Rs.85,96,380/-, aggregating to Rs.2,01,12,560/-, which was equivalent to the stated cost of the land. The learned CIT(A) rejected this contention principally because all the funds were routed through a common overdraft account and no further fund-flow statement was furnished. However, where sufficient interest-free funds and borrowed funds are available in a common pool, the presumption recognised by the Hon’ble jurisdictional High Court in CIT v. Reliance Utilities and Power Ltd., 313 ITR 340 (Bom), operates in favour of the assessee. The relevant extract reads:
“If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. (para 10)”
39. The Hon’ble High Court held that, in such circumstances, the investment is presumed to have been made from the interest-free funds available with the assessee. No direct nexus between the impugned interest-bearing funds and the acquisition of the land has been established by the lower authorities in the year under consideration.
40. The source of acquisition of the land is a historical fact arising from the transaction entered into during the financial year 2011-12. The very same fund position, namely, capital of Rs.85,96,380/- and interest-free loans of Rs.1,15,16,180/-, was examined by the Co-ordinate Bench in the assessee’s own case for the assessment year 2015-16. After considering the bank documents, financial statements, loan sanction letters and the documents evidencing the use of the land, the Co-ordinate Bench recorded a categorical finding that the assessee had sufficient interest-free funds and that the land was used as a storage yard for its business.
41. We have also considered the contention of the learned DR that the Co-ordinate Bench did not adjudicate whether the impugned interest was capital or revenue in nature. On examination of the order for the assessment year 2015-16, we are unable to accept this distinction. In paragraph 11 of that order, the Co-ordinate Bench expressly examined the legal proposition under section 36(1)(iii) and recorded as under:
“interest can be disallowed only where the borrowed funds are used for non-business purposes or where the capital asset has not yet been put to use.”
42. Thereafter, the Co-ordinate Bench found that the land was actively used as a storage area, that sufficient interest-free funds were available and that the disallowance made under section 36(1)(iii) was untenable. Thus, the allowability of the interest expenditure and the effect of the asset having been put to use were expressly considered. The decision cannot be said to have proceeded without examining the revenue deductibility of the interest.
43. The contention of the learned DR concerning capital work-in-progress also does not constitute a material distinguishing feature. The Co-ordinate Bench considered the same land, the same acquisition, substantially the same bank borrowings and the same business use. The Revenue has not demonstrated that the impugned interest in the present year was incurred on any fresh borrowing specifically utilised for constructing the incomplete godown. In the absence of such a factual nexus, no part of the disallowance can be sustained merely because an additional structure was under construction on the land.
44. The learned CIT(A) also referred to the assessee’s failure to comply with the notices dated 09.12.2025 and 23.12.2025. Nevertheless, the impugned order itself records those written submissions and supporting documents had been furnished and proceeds to decide the issue on merits. The assessee has also placed an affidavit stating that the relevant documents had already been filed before the learned CIT(A) and had been consistently relied upon in the connected assessment years. Mere non-compliance with the subsequent notices cannot substitute an examination of the evidence already available on record or render such evidence non-existent.
45. In view of the above, we find that the assessee had established that the Cherlapally land was put to use as a storage yard for its trading business. The construction of an additional godown or office structure on a part of the land did not negate such existing business use. Further, sufficient interest-free funds were shown to be available and no direct nexus was established between the interest-bearing funds and the acquisition or construction in question. The decision of the Co-ordinate Bench in the assessee’s own case for the assessment year 2015-16 squarely covers the material aspects of the controversy, and no material factual distinction has been demonstrated by the Revenue.
46. Accordingly, the disallowance of Rs.23,05,452/- made by the Assessing Officer and sustained by the learned CIT(A) under section 36(1)(iii) of the Act is directed to be deleted. Ground No. 2 raised by the assessee is allowed. Ground Nos. 1 and 3 are general in nature and do not require separate adjudication.
47. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 08.09.2026.
