No section 36(1)(iii) disallowance unless Direct Nexus between Borrowed Funds & Capital Withdrawals

Lypsa Diamonds Vs ITO (ITAT Mumbai) The issue under consideration is whether disallowance u/s 36(1)(iii) made by AO forming an opinion that interest bearing funds were withdrawn from the firm being capital withdrawn by the partners and interest free advances is justified in law? ITAT states that, it is quite evident that the firm has not provided any interest on credit balances of partners’ capital in earlier years and likewise it has also not charged the interest on debit balances during the year. The partners’ had credit balances in all earlier three years whereas debit balances have ari...