01Facts
The appellant-assessee borrowed ₹3.80 crores from Corporation Bank to purchase shares of Shaw Wallace and Company Ltd.
pp. 1-2The funds were transferred to a group company, M/s Gayatri Holdings Private Limited, which then utilized them to purchase the shares
p. 2The assessee claimed a deduction of ₹21,74,234/- for interest paid on this loan under Section 36(1)(iii) of the Income Tax Act, 1961
p. 2The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) disallowed the deduction, reasoning that the funds were utilized for a subsidiary/group company rather than the assessee’s own business
p. 2The Income Tax Appellate Tribunal (ITAT) reversed this, finding the business to be "composite" and the expenditure justified by "commercial expediency"
pp. 3-4However, the High Court of Karnataka set aside the ITAT order, holding that the subsidiary's business could not be considered the assessee's business
p. 502Issues
i.1. Whether the appellant-assessee is entitled to a deduction of interest paid on borrowed capital under Section 36(1)(iii) of the Income Tax Act, 1961, when the funds were utilized for a group company
p. 2ii.2. Whether the transaction involving the transfer of funds to a group company for the purchase of shares constituted a colourable device to seek undue interest allowance
p. 503Law Applied
The court applied Section 36(1)(iii) of the Income Tax Act, 1961, which allows deductions for interest paid on capital borrowed for the "purposes of the business or profession"
p. 6It relied on Madhav Prasad Jatia v. CIT (118 ITR 200), which established three prerequisites for deduction: (i) money must be borrowed, (ii) it must be for business purposes, and (iii) interest must be paid
p. 3, 7Further, the court applied the doctrine of "commercial expediency" as established in S.A. Builders v. CIT (288 ITR 1) and reaffirmed in Sharp Business System v. CIT (2025 SCC OnLine SC 2892), which mandates that courts examine borrowed fund transfers from the perspective of business necessity rather than direct profit-earning
p. 8Provisions in the judgment · 7
Income Tax Act, 1961 Section 2Section 28Section 36Section 37Section 57Section 143
Income Tax Act, 1922 Section 10
04Reasoning
The Supreme Court observed that Section 36(1)(iii) is wider in scope than Section 57(iii) and does not require the borrowed capital to result in immediate profit, only that it be used for business purposes
p. 7The Court found that the High Court erred in concluding that the business of a subsidiary cannot be considered for the interest of the parent company
p. 7Following Sharp Business System, the Court emphasized that as long as there is "commercial expediency" in advancing funds to a sister concern (such as acquiring controlling interest or maintaining group business integrity), the interest paid on those borrowings is an allowable deduction
p. 8The Court upheld the ITAT’s factual finding that the assessee’s business was composite and that the interlocking of funds between the trust and its subsidiaries met the criteria for business purpose
pp. 3-4, 805Holding
The Supreme Court allowed the appeal and set aside the High Court’s judgment
p. 8It held that the assessee is entitled to a deduction of ₹21,74,234/- under Section 36(1)(iii) as the capital was borrowed for business purposes
p. 8The Court declared that interest paid on funds utilized for a subsidiary is deductible if supported by commercial expediency
pp. 8-9Original Court PDF
L.K. TrustvsCommissioner Of Income Tax
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