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L.K. Trust v. Commissioner of Income Tax & Anr.

Civil Appeal · 2026 INSC 474Decided 7 May 2026
C.A. No.-000527-000527 - 2012
Justice J.B. Pardiwala · Justice Ujjal Bhuyan

Background

The appellant, a trust engaged in businesses including film distribution and share investment, borrowed Rs.3.80 crore from a bank to purchase shares of a company, and claimed a tax deduction of about Rs.21.74 lakh in interest paid on that loan under Section 36(1)(iii) of the Income Tax Act, 1961. The Assessing Officer disallowed the deduction because part of the borrowed funds had passed through a group company before being used to buy shares, but the Income Tax Appellate Tribunal (ITAT) allowed the deduction, reasoning that the trust ran a composite business with interlocked funds. The Karnataka High Court reversed the ITAT and ruled against the trust, holding the arrangement benefited a subsidiary rather than the assessee's own business, prompting this appeal to the Supreme Court.

Decision Breakdown

The Supreme Court held that the High Court erred in concluding that funds routed through a group company could not be treated as used for the assessee's own business. Relying on its own precedents (including Madhav Prasad Jatia v. CIT and the recent Sharp Business System v. CIT), the Court reaffirmed that whether borrowed money was used "for the purposes of business" under Section 36(1)(iii) must be judged by commercial expediency, not by strictly tracing whether profit was directly earned by the assessee itself. Since the trust's business was found to be composite in nature with common management and interlocked funds across its various activities, the interest paid on the loan was legitimately deductible. The Court set aside the High Court's judgment, restored the ITAT's view, and allowed the appeal, declaring the assessee entitled to the interest deduction.

Lesson Learnt

For tax purposes, interest on a business loan remains deductible so long as the borrowing was made for genuine commercial expediency connected to the taxpayer's overall business, even if the funds passed through a related/group entity before being put to use, rather than requiring the assessee to show the money was used directly by itself alone.

Official source (sci.gov.in)View Judgment (PDF)

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