Recently, Gujarat High Court held that if there were funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments and therefore, interest would not be disallowed U/S 36(1)(iii). Facts of the case: The assessee company was engaged in the business of manufacturing of electrical laminations, job work of stamping. In the return of income filed for the assessment year 2004-05, it claimed deduction of interest expenditure. The Assessing Officer disallowed the interest expenditure under section 36(1)(iii). He held that the assessee failed to establish that investments in mutual funds had been made out of own interest free funds. On appeal, the Commissioner (Appeals) confirmed the disallowance made by the Assessing Officer. It was held that: From the audited Balance Sheet as on 31.03.2004 placed on record it is seen that as on 31.03.2004 the investments of the Assessee are to the tune of Rs. 5.82 crore as compared to Rs. 46,000/- in the immediately preceding financial year meaning thereby that the investments to the extent of Rs. 5,82,28,953/- have been made during the year. It is also seen from the Balance Sheet that the interest free funds in the form of share capital, reserves and surplus and unsecured loans as on 31.03.2004 was to the extent of Rs. 22.92 crore as against Rs.2.79 crore as on 31.03.2004 meaning thereby that there was an increase of Rs. 20.13 crore in interest free funds. Thus it is seen that the interest free funds as on the date of Balance Sheet were far in excess of investments as on 31st March, 2004. In the case of Reliance Utilities (supra) the Hon. Bombay H.C. has held as under: “Held that if there were funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments”. In the case of Reliance Utilities & Power Ltd. (supra), the Bombay High Court has held that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments and therefore, interest was deductible. Similar view has been taken by the Division Bench of this Court in the case of CIT v. Gujarat State Fertilizers & Chemicals Ltd..Applying the ratio/law laid down by the Bombay High Court in the case of Reliance Utilities & Power Ltd. (supra) as well as Division Bench of this Court in the case of Gujarat State Fertilizers & Chemicals Ltd. (supra) to the facts of the case on hand and when it has been found that the assessee was having interest-free funds far in excess of investments and therefore, it can be said that the investments are made out of interest-free funds and therefore, the AO was not justified in making  additions and/or making disallowance under section 36(1)(iii) of the IT Act. Under the circumstances, no error and/or illegality has been committed by the learned ITAT in deleting the disallowance made by the AO under section 36(1)(iii) of the IT Act. No question of law much less substantial question of law arise with respect to deletion of the disallowance made by the AO under section 36(1)(iii) of the IT Act.   ITR filing for F/Y 2013-14 has started. Please click here to check out ITR filing page.