Whether disallowance u/s 36(1)(iii) is justified when assessee has sufficient interest free funds?

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Whether disallowance u/s 36(1)(iii) is justified when assessee has sufficient interest free funds?

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Short note of today's case law for quick reference:

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[2024] 114 ITR (Trib) 324 (ITAT[Raipur])

[BEFORE THE INCOME-TAX APPELLATE TRIBUNAL — RAIPUR BENCH]

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DEPUTY COMMISSIONER OF INCOME-TAX

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AVINASH BUILDERS

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RAVISH SOOD (Judicial Member) and ARUN KHODPIA (Accountant Member)

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May 15, 2024.

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1. The assessee is a partnership engaged in the business of real estate.

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2. For A.Y. 2018-19, the A.O. being of the opinion that interest bearing funds were overdrawn by the partners of the assessee firm, which failed to prove the commercial expediency for the loan or that the withdrawal by the partners were wholly and exclusively for the purpose of business of the business, disallowed the interest attributable towards the overdrawn capital u/s 36(1)(iii).

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3. The CIT(A) upheld in favour of the assessee

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4. ITAT dismissing the appeal of the revenue held that:

A perusal of the records including the assessee’s audited accounts showed that the assessee had interest free funds in excess of the amount overdrawn by the partners.

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5. The observation of the CIT(A) was supported by corroborative evidence.

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6. According to the Tribunal, in the assessee’s own case for an earlier assessment year, it was a settled position of law that if there was sufficient interest free funds available with the assessee and such funds were advanced without charging any interest, the disallowance u/s 36(1)(iii) on account of notional interest was unjustified.

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7. As the assessee’s interest free funds were adequate to cover amounts overdrawn by the partners, the addition made by the A.O. u/s 36(1)(iii) was unjustified.