Ashapura Developers Vs ACIT (ITAT Mumbai)
Section 36(1)(iii) Disallowance Deleted in Full — No Presumption of Diversion Where Interest-Free Funds Are Ample
The Mumbai Bench of the ITAT allowed the appeal of Ashapura Developers for AY 2014-15, deleting the residual disallowance of ₹7.70 lakh under section 36(1)(iii) that had been sustained by the CIT(A).
During scrutiny, the AO had made multiple additions, including disallowance of interest on the ground that the assessee diverted borrowed funds to interest-free advances. While the CIT(A) deleted the entire addition under section 68 and most of the interest disallowance, he retained a partial disallowance of ₹7.70 lakh by presuming lack of business expediency for incremental interest-free advances.
The ITAT held that this approach was internally inconsistent and legally unsustainable, noting that:
- The CIT(A) himself had recorded categorical findings that the assessee had substantial interest-free funds (₹5.86 crore) far exceeding the interest-free advances;
- No nexus was established between borrowed funds and the advances;
- A negative capital balance, by itself, cannot justify disallowance under section 36(1)(iii) without a fund-flow analysis;
- A significant portion of interest income was earned from partners, which neutralised any allegation of diversion of funds.
Once the availability of interest-free funds and absence of nexus were accepted, no part of the disallowance could survive, even on incremental advances. The Tribunal emphasised that assumptions cannot replace evidence in applying section 36(1)(iii).
Accordingly, the ITAT deleted the balance disallowance of ₹7.70 lakh and allowed the appeal in full.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal filed by the assessee is directed against the order dated 10.07.2025 passed by the learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”] under section 250 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”]for Assessment Year 2014–15, arising out of the assessment order dated 16.12.2016 passed by the Assessing Officer under section 143(3) of the Income-tax Act, 1961.
