Interest on Borrowings for Acquiring Control Deductible | SC

Case Details: L.K. Trust vs. Commissioner of Income-tax [2026] 186 taxmann.com 594 (SC)

Judiciary and Counsel Details

• J.B. Pardiwala and Ujjal Bhuyan, JJ.
• Naveen Kumar, AOR for the Appellant. Arijit Prasad
• Mrs. Alka Aggarwal, Ms. Shraddha Deshmukh, Advs., Ishaan Sharma, Digvijay Dam & Sudarshan Lamba, Aor for the Respondent.

Facts of the Case

The assessee borrowed a sum of Rs. 3,80,00,000 from the Corporation Bank to purchase shares of Shaw Wallace and Company Limited pursuant to an Agreement. Under the said Agreement, the Company had committed to sell 7.80 lakh shares for a total consideration of Rs. 3,80,00,000. The assessee filed its return of income declaring a total income of Rs. 7,55,67,530.
The return was processed under section 143(1)(a), and later a notice was issued under Section 143(2). While passing the Assessment Order, the Assessing Officer (AO) noted that the assessee had availed a loan of Rs. 3,80,00,000 from the Corporation Bank and had paid interest of Rs. 21,74,234. However, the AO further noted that the amount had been transferred to Gayatri Holdings Private Limited, a group company, through the purchase of its shares, which in turn transferred the amount to one Shri G Venkateshwaran for the purchase of shares of Shaw Wallace and Company Limited.
In such circumstances, the AO took the view that the assessee was not entitled to claim a deduction under Section 36(1)(iii). Accordingly, the interest paid on the loan was disallowed. The matter reached the Supreme Court of India.

Supreme Court Held

The Apex Court held that the provisions of Section 36(1)(iii) concern capital borrowed and not other debts or liabilities. A loan of money undoubtedly results in a debt, but not every debt involves a loan. Liability to pay a debt may arise from diverse sources, and a loan is one of such sources. The legislature has, under this clause, permitted as an allowance interest paid on capital borrowed for the purposes of the business; and the capital, in this context, means money and not any other asset purchased on credit.
The High Court took the view that the finding of the tribunal based on commercial expediency is incorrect. The High Court observed that the amount borrowed was ultimately utilised for the benefit of the subsidiary company of the assessee and not for the business of the assessee as such. The subsidiary company’s business cannot be considered, in law, the assessee’s business.

The High Court fell into error in taking the aforesaid view. The assessee had more than one source of income under the head ‘business’, as it derived income from moneylending, speculation, film distribution, and investment in shares. It is an admitted fact that the assessee trust has maintained only one common set of books of account, in which entries pertaining to the businesses of film distribution, moneylending, investments, speculation, etc., are incorporated. The management of the entire set of operations is vested in the trustees, as evidenced by the trust deed discussed earlier, and there is complete intermingling of funds.
To emphasise, it is the view that the assessee’s business is also a composite one, inasmuch as it carries on several businesses, including investing in shares through its subsidiaries. Therefore, the assessee was eligible to claim a deduction in respect of the interest expenses under the aforesaid section.

List of Cases Reviewed

• Sharp Business System v. CIT [2025] 181 taxmann.com 657/[2026] 484 ITR 509/308 Taxman 285 (SC) (para 19)
• S.A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1/158 Taxman 74 (SC) (para 20)
• followed Order of the High Court of Karnataka in IT Appeal No. 175 of 2001, dated 1-3-2010 (para 24), set aside

List of Cases Referred to

• Bombay Steam Navigation Co. (P.) Ltd. v. CIT [1965] 56 ITR 52 (SC) (para 15)
• Madhav Prasad Jatia v. CIT [1979] 1 Taxman 477 / 118 ITR 200 (SC) (para 16)
• Sharp Business System v. CIT [2025] 181 taxmann.com 657/[2026] 484 ITR 509/308 Taxman 285 (SC) (para 19)
• S.A. Builders Ltd. v. CIT (Appeals) [2007] 158 Taxman 74 (SC)/[2007] 288 ITR 1 (SC) (para 20).