L.K. Trust Vs CIT & Anr. (Supreme Court of India)
SC: Interest on Borrowed Funds Allowed Even for Investment Through Group Concerns – Commercial Expediency Prevails
The Supreme Court in held that interest paid on borrowed capital is allowable under Section 36(1)(iii) where the borrowing was for business purposes, even if the funds ultimately moved through a group concern for acquisition of shares.
The assessee-trust had borrowed ₹3.80 crore from Corporation Bank for purchase of shares of Shaw Wallace & Co. Ltd. The Revenue disallowed interest deduction of ₹21.74 lakh on the ground that the money was transferred to a group company, which in turn advanced funds for share acquisition, alleging it was merely a colourable device.
Reversing the Karnataka High Court, the Supreme Court approved the ITAT’s view that Section 36(1)(iii) only requires satisfaction of three conditions – borrowing of capital, use for business purposes, and payment of interest. The Court emphasized that the assessee carried on a composite business with interlocking funds and common management, including investment activities.
The Court reiterated that the expression “for the purpose of business” is of wide amplitude and commercial expediency must be examined from a businessman’s perspective, not merely from the angle of direct profit generation. Relying on S.A. Builders and Sharp Business Systems, the Court held that investment of borrowed funds in sister/group concerns for acquiring strategic or controlling interest can still qualify for deduction.
Accordingly, the Supreme Court restored the ITAT order and held that the assessee was entitled to deduction of the entire interest paid on the borrowed funds under Section 36(1)(iii).
FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER
