ITAT Deletes Rs 75.61 Lakh Interest Disallowance for Interest-Free Business Advances

ITAT deleted the interest disallowance of Rs. 75,61,721, holding that the interest-free business loans and advances were part of regular transactions and not proven to be funded from borrowed money.

The present appeal has been filed by Ms. Ruchi Jain against the Assessing Officer, Panipat in the ITAT, New Delhi, challenging the order dated August 07, 2025, passed by CIT(A)/NFAC, New Delhi for AY 2012-13.

The assessee had filed her income tax return for the year 2012-13 showing income of Rs. 1,52,44,610 from her handloom manufacturing and export business. Initially, the tax department increased her income by making some additions, but after she appealed, her income was reduced by the appellate authority. Later, the tax officer reopened the case because the assessee had given a Rs 7,34,84,005 of money to to another firm M/s Jainsons Exports, without charging any interest, which was reduced to Rs 6,30,14,348, while at the same time she was paying Rs. 1,88,21,742 interest to banks on borrowed funds. The AO felt that since borrowed money was being used interest-free, part of the interest paid to banks should not be allowed as a deduction and therefore disallowed about Rs. 75,61,721.

After reviewing the explanation given by the assessee, the AO did not accept part of it and disallowed interest expenses of Rs. 75,61,721 u/s 36(1)(iii) of the Income Tax Act. Based on this, the AO reassessed the income and passed a revised assessment order on November 29, 2019, determining the total income at Rs. 2,61,23,261.

The assessee then filed an appeal before the CIT(A). However, the CIT(A) dismissed her appeal, stating that she could not prove that she had sufficient own funds to give interest-free advances.

Being Aggrieved with this decision, the assessee then approached the Tribunal. After considering all the facts, the tribunal noted that from the account statements of M/s Jainsons Exports, it was clear that there was already a large outstanding balance from earlier years, and many normal business transactions continued during the year.

The AO had already disallowed Rs. 3,63,781 of interest earlier for money used for non-business purposes. Since the tax department could not prove that any extra money was given to M/s Jainsons Exports, specifically from bank loans, there was no valid reason to disallow more interest. Therefore, the Tribunal removed the additional interest disallowance of Rs. 75,61,721 under section 36(1)(iii) of the Act. As a result, the tribunal allowed the appeal.