No disallowance can be made u/s 36(1)(iii) in respect of interest if assessee has sufficient interest free funds:

AO found that the assessee had certain capital work-in-progress. He further observed that assessee’s total loss and miscellaneous expenses were far more than assessee’s share capital and accordingly, assessee’s net worth was negative. He therefore took a view that secured and unsecured loans might have been used for making payments for acquisition of assets. Accordingly, he made proportionate disallowance of interest u/s 36(1)(iii). Hon’ble ITAT observed that AO had disallowed interest u/s 36(1)(iii) without ascertaining the fact as to whether capital was borrowed for capital assets or not. Revenue also failed to prove the onus of establishing the nexus that interest bearing funds had been used for acquiring such capital assets. Further, such investment was made in preceding year when the assessee had interest free funds. Following the ratio laid down in the case of “Reliance Utilities and Power Ltd. – 313 ITR 340 (Mum)”, CIT(A) had held that the presumption will go in favour of the assessee that such investments were made out of interest free funds and accordingly, deleted the said disallowance. Revenue couldn’t controvert such findings of CIT(A) and accordingly, Hon’ble ITAT also upheld the order passed by CIT(A).

[ITO Vs. RAVIRAJ FOILS LTD. – ITA No. 2945/Ahd/2011]