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Issues Involved:
1. Sustenance of disallowance of Rs. 1,31,701 on account of claim of deduction towards payment of interest. Summary: Issue 1: Sustenance of disallowance of Rs. 1,31,701 on account of claim of deduction towards payment of interest The assessee-company claimed a deduction for interest paid on loans amounting to Rs. 3,61,034. The Assessing Officer (AO) disallowed Rs. 1,31,701 of this amount, reasoning that the assessee had not charged interest on certain debit balances while paying interest on borrowed funds. The AO referenced decisions from Karnataka High Court and Madras High Court to support the disallowance. In appeal, the assessee argued that the loans were utilized for business purposes within its Rubber Division and that no fresh advances were made during the assessment year. The CIT(A) upheld the disallowance, citing a lack of commercial expediency and referencing the Allahabad High Court decision in CIT v. H.R. Sugar Factory Pvt. Ltd. 187 ITR 363. Before the ITAT, the assessee reiterated that no new loans were advanced during the year and that interest-free loans were taken from others. The assessee cited several cases, including ITO v. Naresh Fabrics and CIT v. Dalmia Cement (B) Ltd., to argue against the disallowance. The ITAT noted that the CIT(A) did not address whether the borrowed funds were diverted for non-business purposes or if the assessee had sufficient non-interest-bearing funds. The ITAT emphasized that the burden of proof lies with the assessee to show that borrowed funds were used for business purposes. The ITAT referenced multiple cases, including Calico Dyeing & Printing Works v. CIT and Madhav Prasad Jatia v. CIT, to outline the conditions under section 36(1)(iii) of the Act for allowing interest deductions. The ITAT concluded that non-charging of interest on loans given by the assessee cannot alone justify disallowing interest paid on borrowed funds unless a clear nexus is established between the borrowed funds and interest-free advances. The ITAT directed the AO to verify the assessee's claim that interest-free advances were made from interest-free funds and not from borrowed capital. If verified, the assessee's claim for deduction should be allowed. Conclusion: The ITAT remanded the issue to the AO for verification of the assessee's claim regarding the source of interest-free advances. If the assessee's claim is verified, the deduction for interest paid should be allowed.
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