The Assessing Officer has disallowed interest on plant under erection at a flat 12 per cent. I say I funded it out of cash accruals. Who has to prove what?
The assessee has to prove it. The Tribunal held that where the assessee says the asset was funded out of internal accruals beyond the identified borrowing, but has not supported that through its financials or documentation before any authority, the contention fails and the proviso to section 36(1)(iii) applies. It accepted, however, that where borrowed funds enter a common pool the disallowance must be computed at the average rate of interest on the assessee's borrowings, not at a rate picked by the Assessing Officer, and remanded on that footing.
Decided by the ITAT (Diva Singh, Judicial Member and Vikram Singh Yadav, Accountant Member (Chandigarh "B" Bench)) on 2022-08-02, reported as ITA Nos. 100 and 101/Chd/2020; Assessment Years 2007-08 and 2009-10; heard 20 June 2022. It bears on section 36(1)(iii), section 36(1)(iii) proviso, section 14A of the Income Tax Act 1961, in Deductions & Disallowances matters.
Practitioners rely heavily on the own-funds presumption in CIT v Reliance Utilities and Power Ltd, and this order shows where it stops. The presumption is not self-executing: it operates on evidence that interest-free funds were available, and an assertion that the balance came from cash accruals, unsupported by the financials, will not carry it. The second point is worth as much: even when the disallowance stands, the rate matters, and the average rate at which the assessee has borrowed is the logical measure, following the Punjab and Haryana High Court in CIT v Kudu Industries. Two amendment points must be carried with this entry. The proviso as it applied to these years, and as reproduced in the order, covered capital borrowed for acquisition of an asset "for extension of existing business or profession". Section 13 of the Finance Act 2015 omitted those words from the proviso with effect from 1 April 2016. From AY 2016-17 the proviso therefore reaches capital borrowed for the acquisition of any asset, for the period from borrowing until the asset is first put to use, whether or not the acquisition extends the existing business. An argument that the acquisition was not an extension of the existing business is good for AY 2015-16 and earlier and is worthless afterwards.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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For AY 2007-08 the assessee had incurred expenditure on a furnace under erection of Rs 33,03,641 in the year ending 31 March 2006 and Rs 4,21,198 in the year ending 31 March 2007, a total of Rs 37,24,839. It had taken a loan of Rs 15 lakhs from Punjab National Bank on 19 January 2006 at 10.75 per cent and had itself capitalised interest of Rs 31,808 in FY 2005-06 and Rs 1,61,249 in FY 2006-07 against the furnace account, saying the balance was met from cash accruals of Rs 4,81,34,348. The Assessing Officer nonetheless computed a disallowance on the entire investment made in the preceding year at 12 per cent, and after deducting the interest already disallowed by the assessee, disallowed a further Rs 2,66,629, relying on the common pool of funds reasoning in CIT v Abhishek Industries Ltd. The Commissioner (Appeals) confirmed it, recording that the assessee had been asked to file the ledger account of machinery under construction to show that payments other than the Rs 15,00,000 came from own funds and had filed no such details, plant and machinery under erection standing at Rs 38,99,089 and not put to use. The appeal for AY 2009-10 concerned a disallowance of Rs 36,86,676 on facts the parties agreed were identical.
Both appeals were disposed of by remand. The assessee's contention that beyond the Rs 15 lakh loan all payments towards the purchase of machinery were funded through internal accruals failed, because it was not supported or demonstrated through the financials or documentation before the lower authorities or before the Tribunal and nothing was brought on record. The contention that where borrowed funds are raised and utilised they enter the common pool of funds, so that the average rate of interest should be applied rather than the rate on a particular borrowing, was accepted. The matter was remanded to the Assessing Officer to verify the average rate of interest prevailing on the borrowings of the year and to determine the disallowance under section 36(1)(iii) accordingly, with credit for interest already capitalised in the books. The same directions were applied mutatis mutandis to AY 2009-10.
The Tribunal decided the point on burden. On the own-funds question it recorded simply that nothing had been brought on record to support the assertion of funding from internal accruals, at any stage. On the rate it found merit in the contention that a borrowing, once raised and utilised, enters the common pool of funds available with the assessee, so that the average rate of interest is the logical measure rather than the rate on a particular borrowing, that being the approach of the Punjab and Haryana High Court in CIT v Kudu Industries, which had itself explained that Abhishek Industries did not deal with the rate of interest to be applied where an assessee has mixed funds (paragraphs 12 and 18; Kudu Industries appears only in the assessee's submissions as reproduced in the order and not in the Tribunal's own words, the Tribunal saying at paragraph 12 simply that it finds merit in the contention).
The assessee has contended that besides the loan of Rs 15 lacs, rest all payments towards the purchase of machinery has been funded through internal accruals however it has failed to support and demonstrate the same through its financials and/or documentation either before the lower authorities and even before us, nothing has been brought on record to support the said contention.
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Handle my notice → Ask a CA on WhatsAppThe assessee has to prove it. The Tribunal held that where the assessee says the asset was funded out of internal accruals beyond the identified borrowing, but has not supported that through its financials or documentation before any authority, the contention fails and the proviso to section 36(1)(iii) applies. It accepted, however, that where borrowed funds enter a common pool the disallowance must be computed at the average rate of interest on the assessee's borrowings, not at a rate picked by the Assessing Officer, and remanded on that footing. This was decided by the ITAT (Diva Singh, Judicial Member and Vikram Singh Yadav, Accountant Member (Chandigarh "B" Bench)) and bears on section 36(1)(iii), section 36(1)(iii) proviso, section 14A of the Income Tax Act 1961. It is reported as ITA Nos. 100 and 101/Chd/2020; Assessment Years 2007-08 and 2009-10; heard 20 June 2022. Practitioners rely heavily on the own-funds presumption in CIT v Reliance Utilities and Power Ltd, and this order shows where it stops. The presumption is not self-executing: it operates on evidence that interest-free funds were available, and an assertion that the balance came from cash accruals, unsupported by the financials, will not carry it. The second point is worth as much: even when the disallowance stands, the rate matters, and the average rate at which the assessee has borrowed is the logical measure, following the Punjab and Haryana High Court in CIT v Kudu Industries. Two amendment points must be carried with this entry. The proviso as it applied to these years, and as reproduced in the order, covered capital borrowed for acquisition of an asset "for extension of existing business or profession". Section 13 of the Finance Act 2015 omitted those words from the proviso with effect from 1 April 2016. From AY 2016-17 the proviso therefore reaches capital borrowed for the acquisition of any asset, for the period from borrowing until the asset is first put to use, whether or not the acquisition extends the existing business. An argument that the acquisition was not an extension of the existing business is good for AY 2015-16 and earlier and is worthless afterwards. If it applies to you, the first step is this: File the cash flow and the ledger of the asset under erection, tying each payment to a source, before you assert that own funds were used. An unsupported assertion loses.
For AY 2007-08 the assessee had incurred expenditure on a furnace under erection of Rs 33,03,641 in the year ending 31 March 2006 and Rs 4,21,198 in the year ending 31 March 2007, a total of Rs 37,24,839. It had taken a loan of Rs 15 lakhs from Punjab National Bank on 19 January 2006 at 10.75 per cent and had itself capitalised interest of Rs 31,808 in FY 2005-06 and Rs 1,61,249 in FY 2006-07 against the furnace account, saying the balance was met from cash accruals of Rs 4,81,34,348. The Assessing Officer nonetheless computed a disallowance on the entire investment made in the preceding year at 12 per cent, and after deducting the interest already disallowed by the assessee, disallowed a further Rs 2,66,629, relying on the common pool of funds reasoning in CIT v Abhishek Industries Ltd. The Commissioner (Appeals) confirmed it, recording that the assessee had been asked to file the ledger account of machinery under construction to show that payments other than the Rs 15,00,000 came from own funds and had filed no such details, plant and machinery under erection standing at Rs 38,99,089 and not put to use. The appeal for AY 2009-10 concerned a disallowance of Rs 36,86,676 on facts the parties agreed were identical. The matter was decided on 2022-08-02 by the ITAT (Diva Singh, Judicial Member and Vikram Singh Yadav, Accountant Member (Chandigarh "B" Bench)). On those facts the ITAT held as follows. Both appeals were disposed of by remand. The assessee's contention that beyond the Rs 15 lakh loan all payments towards the purchase of machinery were funded through internal accruals failed, because it was not supported or demonstrated through the financials or documentation before the lower authorities or before the Tribunal and nothing was brought on record. The contention that where borrowed funds are raised and utilised they enter the common pool of funds, so that the average rate of interest should be applied rather than the rate on a particular borrowing, was accepted. The matter was remanded to the Assessing Officer to verify the average rate of interest prevailing on the borrowings of the year and to determine the disallowance under section 36(1)(iii) accordingly, with credit for interest already capitalised in the books. The same directions were applied mutatis mutandis to AY 2009-10.
The Tribunal decided the point on burden. On the own-funds question it recorded simply that nothing had been brought on record to support the assertion of funding from internal accruals, at any stage. On the rate it found merit in the contention that a borrowing, once raised and utilised, enters the common pool of funds available with the assessee, so that the average rate of interest is the logical measure rather than the rate on a particular borrowing, that being the approach of the Punjab and Haryana High Court in CIT v Kudu Industries, which had itself explained that Abhishek Industries did not deal with the rate of interest to be applied where an assessee has mixed funds (paragraphs 12 and 18; Kudu Industries appears only in the assessee's submissions as reproduced in the order and not in the Tribunal's own words, the Tribunal saying at paragraph 12 simply that it finds merit in the contention). In the words reproduced by the source cited on this page: "The assessee has contended that besides the loan of Rs 15 lacs, rest all payments towards the purchase of machinery has been funded through internal accruals however it has failed to support and demonstrate the same through its financials and/or documentation either before the lower authorities and even before us, nothing has been brought on record to support the said contention." The decision followed or applied CIT v Kudu Industries [2015] 62 taxmann.com 191 (P&H) — relied on by the assessee for the average-rate contention which the Tribunal accepted; not named in the Tribunal's own reasoning; CIT v Abhishek Industries Ltd (P&H) — relied on by the Assessing Officer, distinguished on the rate question.
It was decided by the ITAT on 2022-08-02 and is reported as ITA Nos. 100 and 101/Chd/2020; Assessment Years 2007-08 and 2009-10; heard 20 June 2022. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 36(1)(iii), section 36(1)(iii) proviso, section 14A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Both appeals were disposed of by remand. The assessee's contention that beyond the Rs 15 lakh loan all payments towards the purchase of machinery were funded through internal accruals failed, because it was not supported or demonstrated through the financials or documentation before the lower authorities or before the Tribunal and nothing was brought on record. The contention that where borrowed funds are raised and utilised they enter the common pool of funds, so that the average rate of interest should be applied rather than the rate on a particular borrowing, was accepted. The matter was remanded to the Assessing Officer to verify the average rate of interest prevailing on the borrowings of the year and to determine the disallowance under section 36(1)(iii) accordingly, with credit for interest already capitalised in the books. The same directions were applied mutatis mutandis to AY 2009-10. It arises in Deductions & Disallowances matters, on section 36(1)(iii), section 36(1)(iii) proviso, section 14A of the Income Tax Act 1961, and was decided by Diva Singh, Judicial Member and Vikram Singh Yadav, Accountant Member (Chandigarh "B" Bench). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Give the Assessing Officer credit workings for interest already capitalised in the books; the Tribunal directed that credit be given and this is routinely missed. If a disallowance under the proviso is unavoidable, fight the rate. Ask for the average rate on the year's borrowings and cite CIT v Kudu Industries [2015] 62 taxmann.com 191 (P&H). Check the assessment year before running an argument that the asset was not acquired for extension of the existing business — those words were omitted from the proviso with effect from 1 April 2016. Keep the common pool point and the commercial expediency point separate; the Tribunal noted that the common pool reasoning applies where business funds are put to non-business use, and that investments yielding exempt income belong under section 14A.
Searched for later treatment; none was found. That is not the same as a source affirming it. The citator returns one document, Nokha Agro Services Pvt Ltd v ACIT, Bikaner (ITAT Jodhpur, 21 May 2026); it was opened, and the reference is a single line in the Bench's recital of counsel's authorities - 'The Coordinate Bench in the case of Osho Forge Ltd. Vs. DCIT and Ashwin Babulal Shah Vs. JCIT has also reiterated this principle in the context of Section 80IB deductions' - cited for the principle of consistency on a section 80IB claim, not for section 36(1)(iii) or the presumption about own funds. A name search returns 38 documents; the two Punjab & Haryana High Court decisions involving this company are from 27 April 2018 and so pre-date the order. No later Bench has applied the reasoning on the proviso to section 36(1)(iii), the burden of showing own funds or the average rate. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Much of the retrieved text is the Tribunal reproducing the assessee's written submissions and the Commissioner (Appeals) findings; the Tribunal's own reasoning is at paragraphs 12, 13, 18 and 19 and it is short. There is a plain slip at paragraph 10, which records the PNB loan as taken "on 19.01.2016" where the assessee's submission as reproduced elsewhere in the order gives 'Loan of Rs.15.00 lacs was received from PNB on 19.01.2006 @10.75% p.a.'; paragraph 9 is a one-line statement of Ground No.2 and carries none of the submission, so the paragraph locator in an earlier draft of this entry was wrong and the years in issue are FY 2005-06 and FY 2006-07; read it as 2006. The Tribunal's operative direction is at paragraph 12 but paragraph 18 refers back to "Para 11 supra". The proviso is reproduced in the assessee's submission with the words "for extension of existing business or profession" enclosed in square brackets, reflecting the pre-Finance Act 2015 text applicable to these years; the omission of those words with effect from 1 April 2016 is taken from section 13 of the Finance Act 2015 and not from the order. "favours" is recorded as mixed because the assessee lost on the own-funds contention and succeeded on the rate, the ground being allowed for statistical purposes. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Both appeals were disposed of by remand. The assessee's contention that beyond the Rs 15 lakh loan all payments towards the purchase of machinery were funded through internal accruals failed, because it was not supported or demonstrated through the financials or documentation before the lower authorities or before the Tribunal and nothing was brought on record. The contention that where borrowed funds are raised and utilised they enter the common pool of funds, so that the average rate of interest should be applied rather than the rate on a particular borrowing, was accepted. The matter was remanded to the Assessing Officer to verify the average rate of interest prevailing on the borrowings of the year and to determine the disallowance under section 36(1)(iii) accordingly, with credit for interest already capitalised in the books. The same directions were applied mutatis mutandis to AY 2009-10.
TaxSphere, “Osho Forge Ltd v DCIT”, https://taxnotice.vittsphere.com/caselaw/case/osho-forge-36-1-iii-proviso-own-funds-burden-and-average-rate/ (validity last checked 2026-09-08)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
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