ITAT allows interest deduction under section 36(1)(iii) when interest-free funds suffice for investments

The Income Tax Appellate Tribunal held that the availability of interest-free funds adequate to cover investments is sufficient to permit a deduction for interest under section 36(1)(iii). The tribunal stressed that the Revenue cannot dictate how an enterprise manages and deploys its financial resources. Tax provisions regarding interest deductibility often trigger disputes when businesses use a mix of borrowed and internal funds for investments.

Under established principles, if a business possesses sufficient proprietary or interest-free capital to fund its investments, a presumption applies that the investments were made out of those interest-free funds rather than borrowings. Corporate finance teams and tax advisors should compile fund-flow statements demonstrating the availability of adequate interest-free reserves during scrutiny proceedings.

Practitioners must rely on this ruling to challenge arbitrary disallowances of borrowing costs by tax authorities. Bottom line: Adequate internal reserves safeguard the tax deductibility of business borrowing costs against revenue scrutiny.