Interest expenses cannot be disallowed if there are substantial interest free funds as against interest free advances:

AO found that the assessee had charged interest on advances from only two parties and hence, he disallowed interest expenses on the count that assessee failed to charge interest on rest of the advances. The said addition came to be deleted by CIT(A). on Revenue’s appeal, Hon’ble ITAT found that the assessee had substantial interest free funds in the form of partners’ capital and the amount of concerned advances was less than such interest free funds. Hon’ble ITAT, following the decision in the case of “CIT vs. Raghuvir Synthetics Ltd. – (2013) 217 Taxman 178 (Guj), held that where huge funds were available without any interest liability with the assessee and there was no evidence to hold that borrowed money was utilized for the purpose of such advances, disallowance of interest was unwarranted. Accordingly, CIT(A)’s order was upheld and revenue’s appeal was dismissed.

[ACIT vs. Gopal Fabrics – ITA No.3338/Ahd/2010 and 463/Ahd/2013]