ITAT Ahmedabad on Disallowance of Interest for Advances Without Business Nexus

Background of the Appeal

The case of Harish Pursottamdas Morwani Vs ITO (ITAT Ahmedabad) concerns disallowance of interest and bank charges on borrowed funds under Section 36(1)(iii) read with Section 37(1) of the Income Tax Act 1961. The assessee approached the ITAT Ahmedabad against the order dated 20-02-2026 passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC) under Section 250 for Assessment Year 2018-19.

The appeal arose from an addition made by the Assessing Officer (AO) on the footing that interest-bearing funds obtained by way of a cash credit facility were diverted to a third party without establishing that such diversion was for business purposes.

Grounds Raised Before the Tribunal

The assessee challenged the order of the CIT(A) broadly on the following lines:

  • The CIT(A) was alleged to have erred in confirming the disallowance of Rs. 2,86,654 towards bank interest and bank charges.
  • The assessee contended that the AO wrongly compared income and expenditure and assumed there were free loans or advances, whereas the assessee maintained that:
    • there were no interest-free advances,
    • the income had been duly offered to tax for the relevant period, and
    • the purpose of the transaction had been explained during assessment proceedings.
  • The assessee requested deletion of the impugned disallowance of Rs. 2,86,654.
  • A general ground was also taken seeking liberty to modify, add or delete any grounds at the time of hearing.

Facts Considered by the Authorities

Business Activity and Return Filing

  • The assessee was engaged in trading activity.
  • Return of income for Assessment Year 2018-19 was filed on 25-10-2018, declaring a total income of Rs. 8,24,320.

Cash Credit Facility and Advance to Third Party

During the scrutiny proceedings, the AO recorded the following facts:

  • The assessee had obtained a cash credit facility of Rs. 2 crores from SBI during February 2018.
  • Out of this interest-bearing cash credit, the assessee granted an unsecured loan of Rs. 80 lakhs to Shri Bhavesh Bhandari, M/s. Simandhar Corporation.
  • This advance was made on 16-02-2018.

Interest Income and Finance Cost

The AO further noticed:

  • The assessee earned interest income of only Rs. 47,671 during the year.
  • At the same time, the assessee incurred:
    • bank charges of Rs. 1,00,775, and
    • interest on loan of Rs. 2,33,550.

On this basis, the AO computed disallowance as under:

  • Total finance cost: Rs. 2,33,550 + Rs. 1,00,775 = Rs. 3,34,325
  • Less: Interest income: Rs. 47,671
  • Disallowance made: Rs. 2,86,654

The AO treated this amount as disallowable interest and bank charges on the reasoning that interest-bearing funds were diverted for non-business purposes.

Findings of the CIT(A)

The CIT(A) examined the matter and upheld the disallowance of Rs. 2,86,654 under:

  • Section 36(1)(iii) – interest on capital borrowed for the purposes of business or profession, and
  • Section 37(1) – general deduction for business expenditure not covered by specific provisions.

The CIT(A) essentially agreed with the AO that the assessee had not demonstrated that the borrowed funds were utilized wholly and exclusively for business purposes, particularly in respect of the advance of Rs. 80 lakhs made to the third party.

Submissions on Behalf of the Assessee Before ITAT