Interest Disallowance on Group Investments & Partners’ Withdrawals: ITAT Jaipur Stresses Evidence of Commercial Expediency and Daily Interest Working

1. Overview of the Ruling

The Jaipur Bench of the ITAT in TW Ventures LLP Vs DCIT (ITAT Jaipur) has examined when interest on borrowed funds can be disallowed under Section 36(1)(iii) where:

The assessee has made investments in unlisted shares of group entities; and
Partners’ capital accounts remained in debit for a significant part of the year, despite the LLP paying interest on unsecured loans and bank borrowings.

The Tribunal upheld the principle of interest disallowance on both:

Investments in unlisted group-company shares, and
Interest-free withdrawals by partners resulting in debit balances,

but remanded the quantum of the disallowance back to the AO for fresh computation on a daily balance basis, after granting proper opportunity of hearing.

2. Facts and Assessment Background

2.1 Business and Return Filing

The assessee, TW Ventures LLP (earlier Truworth Stone Care LLP), is engaged in the business of floor maintenance for hotels.
For A.Y. 2016-17, the assessee filed its return of income on 16.10.2016 declaring total income of Rs 66,02,230.
The case was picked up for limited scrutiny.

2.2 Interest Cost, Investments and Partners’ Balances

During assessment under Section 143(3) dated 01.11.2018, the AO noticed:

Interest paid on unsecured loans of Rs 47,22,517, and
Interest paid to banks of Rs 2,53,596.

At the same time, the balance sheet reflected:

Investments of Rs 1,69,50,000 in unlisted shares of group concerns which did not yield any income in the year; and
Debit balances in the capital accounts of partners for most of the year.

The assessee contended that:

Investments in group entities were made to expand business and acquire controlling interest in concerns operating in a similar line;
Funds for these investments and partner withdrawals were sourced from partners’ capital and business profits; and
The transactions were commercially expedient, relying on S.A. Builders Ltd. v. CIT(A) [2007] 288 ITR 1 (SC).

The AO did not accept this explanation.

2.3 AO’s Disallowance of Interest

Observing that the assessee was bearing interest cost while allowing interest-free investments and partner withdrawals, the AO remarked:

“No prudent businessman will take loans on interest and give loans as interest free or made investments for no benefit. Therefore, it can be construed that the assessee has failed to prove business necessity as well as expediency of interest free advances to the partners on loans / advances given and investments in unlisted companies.”

Given that interest rates on borrowings ranged between 12% and 18%, the AO adopted 12% as a uniform rate and computed disallowance as under:

Interest on partners’ debit balances – Rs 16,23,125
Interest on investments in unlisted shares – Rs 6,37,700

Total interest disallowance: Rs 22,60,825

This amount was added to the returned income.

2.4 Appeal Before CIT(A)

The assessee challenged the disallowance before the CIT(A) (Addl/JCIT(A)-1, Bengaluru).

The CIT(A), vide order dated 30.12.2025, upheld the AO’s action, noting:

“In the present case, the pattern of continuous debit balances of partners, lack of any business transactions with sister concerns, and absence of demonstrable benefit clearly indicate diversion of interest-bearing funds for non-business purposes. The Assessing Officer has also adopted a reasonable rate of 12% for computing proportionate disallowance, which is conservative and justified considering the actual interest rates ranged between 12% and 18%.”

Aggrieved, the assessee filed an appeal before the ITAT Jaipur in ITA No: 378/JPR/2026.

3. Grounds Raised Before ITAT

The assessee challenged:

Disallowance of Rs 6,37,700 on the ground that investments of Rs 1,69,50,000 in unlisted shares of sister concerns were for business purposes / acquisition of controlling interest.
Disallowance of Rs 16,23,125 alleging that interest-free advances to partners were commercially expedient.
In the alternative, the correctness of the AO’s quantum working of Rs 16,23,125 on partners’ accounts.

The assessee also reserved the right to add, amend or withdraw grounds.

4. Assessee’s Submissions Before ITAT

The learned Authorised Representative submitted written arguments and produced:

Investment ledger,
Partners’ capital accounts with interest workings,
Audited financials for F.Y. 2014-15 and F.Y. 2015-16,
Assessment order for A.Y. 2015-16.

Key planks of the assessee’s arguments were:

No fresh significant borrowing:
- Unsecured loans increased only from Rs 2,63,67,781.97 to Rs 2,73,31,891.09 (about Rs 10 lakh), and no fresh substantial loan was allegedly taken to fund investments or partners’ withdrawals.
Investments funded by capital and profit:
- Investments of Rs 1,39,50,000 during 11.01.2016–03.03.2016 were claimed to be financed by:
  - Net fresh partners’ capital of about Rs 60 lakh, and
  - Current year’s profit of Rs 1,13,08,734.
Commercial expediency – group entities:
- Investments were allegedly made in group companies Truworth Impex Pvt. Ltd. and Truworth Corporation Pvt. Ltd.:
  - Truworth Impex Pvt. Ltd. said to be in similar business;
  - Truworth Corporation Pvt. Ltd. described as a parent company;
- The assessee invoked commercial expediency under S.A. Builders Ltd., Munjal Sales Corporation v. CIT [2008] 298 ITR 298 (SC) and CIT v. Jugal Kishore Dangayach [2014] 265 CTR 215 (Raj.).
Consistency with prior year:
- For A.Y. 2015-16, assessment under Section 143(3) did not contain any similar disallowance despite availability of comparable facts.
- Opening credit balance of Rs 28,07,422 in the capital account of Smt. Anju Mundhra was said to be ignored by the AO, resulting in the net opening debit of partners being only around Rs 22.34 lakh.
Alternative computation:
- Without prejudice, the assessee submitted a revised computation of interest disallowance as:
  - Partners: Rs 11,02,040
  - Investments: Rs 3,84,712

5. Revenue’s Stand

The Departmental Representative supported the findings of the AO and CIT(A), arguing: