L.K. TRUSTversusCOMMISSIONER OF INCOME TAX & ANR.

           [2026] 5 S.C.R. 567 : 2026 INSC 474

                    L.K. Trust
                         v.
          Commissioner of Income Tax & Anr.
                 (Civil Appeal No. 527 of 2012)
                           07 May 2026
         [J.B. Pardiwala and Ujjal Bhuyan, JJ.]


                     Issue for Consideration
Issue arose whether the appellant - assessee is entitled to a
deduction of Rs.21,74,234/- being the interest paid by it in respect
of the loan availed from the Corporation Bank u/s.36(1)(iii) of the
Income Tax Act 1961.

                            Headnotes†
Income Tax Act 1961 – s.36(1)(iii) – Deduction in respect of
amount of the interest paid in respect of capital borrowed
for the purposes of business or profession – Assessee,
if eligible for deduction of interest paid to the bank
u/s.36(1)(iii) – Assessee borrowed loan from the Bank and paid
interest in order to invest the same in its share business –
Said sum transferred to a group company by the assessee,
who in turn advanced it to one to purchase shares of a
company on his behalf – Assessing Officer took the view that
the assessee not entitled to claim deduction u/s.36(1)(iii) and
the interest paid on the loan was disallowed – In appeal, the
deduction was disallowed – However, the ITAT allowed the
deduction – Thereagainst, appeal by the Revenue, allowed by
the High Court upholding the order passed by the Assessing
Officer that the assessee not entitled to claim deduction
u/s.36(1)(iii) and disallowed the interest paid on the loan –
Correctness:
Held: Assessee entitled to seek deduction of the amount of the
interest paid in respect of the capital borrowed for the purposes
of the business – For s.36(1)(iii), “interest” is restricted to that on
money borrowed and not on debt incurred – Essence of interest
is that it is a payment which becomes due because the creditor
has not had his money at his disposal – It may be regarded either
as representing the profit he might have made if he had had the
568                                                                      [2026] 5 S.C.R.

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       use of his money, or conversely, the loss he suffered because he
       had not that use – Legislature has, u/s.36(1)(iii) 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 – It appears on a plain
       reading of the impugned order that according to the High Court,
       the business of the subsidiary company cannot be considered in
       law as the business of the assessee – High Court took the view
       that the finding of the tribunal based on commercial expediency
       not correct, and 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 – High Court erred in
       taking the said view – Impugned judgment and order passed by
       the High Court set aside. [Paras 14-18, 20, 22-24]

                                    Case Law Cited
       Bombay Steam Navigation Co. Pr. Ltd. v. CIT, 56 ITR 52 (SC);
       Madhav Prasad Jatia v. CIT (SC), 118 ITR 200; Sharp Business
       System v. CIT, 2025 INSC 1481 : 2025 SCC OnLine SC
       2892 – referred to.

                                       List of Acts
       Income Tax Act, 1961.

                                   List of Keywords
       Interest; Deduction of the interest paid in respect of capital borrowed
       for the purposes of business or profession; Loan; Assessee, if
       eligible for deduction of interest paid to the bank u/s. 36(1)(iii);
       Invest in share business.

                                  Case Arising From
       C I V I L A P P E L L AT E J U R I S D I C T I O N : C i v i l A p p e a l N o .
       527 of 2012
       From the Judgment and Order dated 01.03.2010 of the High Court
       of Karnataka at Bengaluru in ITA No. 175 of 2001.

                              Appearances for Parties
       Adv. for the Appellant(s):
       Naveen Kumar.
[2026] 5 S.C.R.                                                       569

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


     Advs. for the Respondent(s):
     Arijit Prasad, Sr. Adv., Mrs. Alka Aggarwal, Ms. Shraddha
     Deshmukh, Ishaan Sharma, Digvijay Dam, Sudarshan Lamba.

                Judgment / Order of the Supreme Court

                                  Order

1.   This appeal is at the instance of the assessee and is directed against
     the Judgment and Order passed by the High Court of Karnataka
     dated 1-3-2010 in Income Tax Appeal No. 175 of 2001 by which the
     appeal preferred by the Revenue against the Order passed by the
     Income Tax Appellate Tribunal came to be allowed.
2.   The short point that falls for our consideration is whether the
     appellant- assessee is entitled to a deduction of Rs.21,74,234/-
     (Rupees Twenty One Lakh, Seventy Four Thousand, Two Hundred
     and Thirty Four only) being the interest paid by it in respect of the
     loan availed from the Corporation Bank under Section 36(1)(iii) of
     the Income Tax Act 1961 (for short, “the Act 1961”).
3.   It appears from the materials on record that the assessee borrowed
     a sum of Rs.3,80,00,000/- (Rupees Three Crore and Eighty Lakh
     only) from the Corporation Bank to purchase shares of Shaw Wallace
     and Company Limited in pursuance of an Agreement dated 19-11-
     1987. Under the said Agreement, the Company had committed to
     sell 7.80 lakh shares for a total consideration of Rs.3,80,00,000/-.
4.   The assessee filed its return of income for the year 1989-90
     declaring total income of Rs.7,55,67,530/- (Rupees Seven Crore,
     Fifty Five Lakh, Sixty Seven Thousand Five Hundred and Thirty
     only). The return was processed under section 143(1)(a) of the Act
     and later Notice was issued under Section 143(2). While passing the
     Assessment Order way back in 1992, the Assessing Officer noted
     that the assessee had availed a loan of rupees 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 M/s Gayatri Holdings Private Limited, a group company, through
     purchase of its shares, who in turn transferred the amount to one
     Shri G Venkateshwaran for the purchase of shares of M/s Shaw
     Wallace and Company Limited.
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5.     In such circumstances referred to above, the AO took the view that
       the assessee was not entitled to claim deduction under Section
       36(1)(iii) of the Act and accordingly the interest paid on the loan
       was disallowed.
6.     The assessee went in appeal before the CIT(A). The CIT(A) also
       disallowed the deduction. The matter went in appeal before the ITAT.
       The ITAT allowed the appeal preferred by the assessee holding as
       under:-
            “13. Now coming to the second leg of issue i.e., whether
            or not the appellant is eligible for deduction of interest
            paid to the bank under Sec.36(1) (iii) of Income-tax Act.
            Section 36(1)(iii) is reproduced below:-
            (1) “The deductions provided for in the following clauses
            shall be allowed in respect of the matters dealt with therein,
            in computing the income referred to in section 28
            (iii) the amount of the interest paid in respect of capital
            borrowed for the purposes of the business or profession.”
            A plain reading of said section reveals that three principles
            are relevant to establish the allowability or otherwise of the
            interest expenses. We may mention here that the Hon’ble
            Supreme Court in the case of Madhav Prasad Jatia Vs. CIT.,
            reported at 118 ITR 200 while dealing with Sec.10(2)(iii) of
            1922Act (which was akin to the present section 36(1)(iii)
            in Income-tax Act, 1961) laid down three pre-requisites to
            be complied with before allowing the deduction for interest
            expenses. The three pre-requisites which would enable
            the appellant to claim deduction in respect of the interest
            expenses under the aforesaid section can be illustrated as:-
            Firstly, the loan must have been borrowed by the appellant;
            secondly, it must have been borrowed for the purpose of
            appellant’s business; and thirdly, appellant must have paid
            interest on the loan and claimed deduction for the same.
            14. The first condition, namely, the assessee must have
            borrowed the monies, is fully satisfied in the instant case.
            The second condition is also satisfied in our view on the
            basis of detailed discussion in the foregoing paragraphs,
[2026] 5 S.C.R.                                                           571

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


           wherein it has been concluded that the money has been
           raised and utilized for the purposes which are integral to
           the business of the appellant. Thirdly, the assessee has
           paid the entire interest of Rs.21,74,234/- to the bank on the
           borrowings made by it and has claimed the said amount
           as deduction by way of charge to P&L A/c.
           15. Before we conclude on this, we may mention that it
           is observed that the appellant has more than one source
           of income under the head ‘business’ as it is deriving
           income from businesses of money-lending, speculation
           business, film distribution and also investment in shares. It
           is an admitted fact that the appellant-trust has maintained
           only one common set of books of account in which are
           incorporated entries pertaining to these business of film
           distribution, money lending, investments, speculation etc.
           The management of the entire set of operations is vested
           in the trustees as can -be observed from the trust deed
           discussed earlier and there is complete interlocking of
           funds. To emphasize, it is our view that the business of
           the appellant is also a composite one in as much as it
           carries on several businesses including the business of
           investment in shares through its subsidiaries.
           16. The Hon’ble Supreme Court of India in the case of
           CIT Vs. Associated Fibre and Rubber Industries (P) Ltd.
           (1999) 236 ITR 4 71 has opined that as long as the assets
           purchased from borrowings have been treated as business
           assets the interest outgo on such borrowings is allowable.
           Also, the Apex Court in Vecumsees (supra) has taken the
           view that so long as the loans have been obtained for the
           purposes of business the fact that he particular part of the
           business for which the loans have been obtained were
           closed or transferred subsequently did not alter the fact
           that the loans had, when raised, been for the purpose of
           assessee’s business; and, that the interest paid on such
           loan cannot be denied as the management is common
           though the line or branch of business for which loan was
           raised is closed down. The relevant observation of Hon’ble
           Supreme Court as appearing at page 189 of 220 ITR 185
           is reproduced below:-
572                                                    [2026] 5 S.C.R.

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            “The fact that the Revenue had during the years
            when the assessee carried on the business of
            cinematographic films permitted as a deduction under
            Section 36(1)(iii) the interest on loans obtained by
            the assessee for the purpose of constructing the
            said theatre shows that at the time when the loans
            were obtained the said theatre was a part of the
            business of the assessee. It was interest on these
            loans, borrowed for the purpose of the business of
            the assessee, which was being paid in the years in
            question and the Tribunal was, in our view, right in
            concluding that such interest had to be treated as
            a deduction under section 36(1)(iii). The loans had
            been obtained for the purposes of the assessee’s
            business. The fact that the particular part of the
            business for which the loans had been obtained
            had been transferred or closed down did not alter
            the fact that the loans had, when obtained, been for
            the purpose of the assessee’s business. The test
            of “same business” appropriate for set-off of carry
            forward losses is not appreciate here.”
       An irrestible inference that can be drawn from the reading
       of the judgments of the Apex Court is that what is essential
       is the existence or otherwise of Composite nature of
       business to consider the allowability of interest on loans
       borrowed by an assessee.
       17. As has been held by us in earlier paras, the business
       of the appellant is composite and the ratio of the Hon’ble
       Supreme court squarely applies to the facts and the
       circumstances of the instant case’.
       18. In view of the aforesaid detailed discussions and
       respectfully following the judicial pronouncements, we
       conclude by holding that a sum of Rs.21, 7 4,234 /- paid
       by the appellant-trust as interest to the Corporation Bank
       on borrowings of Rs.3.80 crores is eligible for deduction
       under Sec.36(1)(iii) of Income-tax Act. Therefore, the
       assessee succeeds on this ground and the orders of the
       lower authorities are reversed.”
[2026] 5 S.C.R.                                                             573

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


7.   The Revenue, being dissatisfied with the Order passed by the ITAT,
     went before the High Court.
8.   The appeal preferred by the Revenue came to be admitted by the
     High Court on the following two substantial questions of law:
           1. Whether the assessee who is carrying on film business
           is entitled to claim deduction under Section 36(1)(iii) of
           the Act in respect of interest of Rs.21,74,234/- on amount
           borrowed from corporation bank to purchase shares of
           Shaw Wallace and Company Limited on behalf of itself
           and other film?
           2. Whether the assessee and its beneficiaries who of
           Rs.3,80,00,000/- and borrowed transferred the same to
           M/s. Gayathri Holding Private Limited who in turn advanced
           this amount to G.Venkateswaran to purchase shares on
           his behalf and on behalf of M/s. Sujatha Films Limited,
           Sujatha Productions Private Limited, Aruna International
           Private Limited and Sujatha Estate (Private) Limited,
           from Shaw Wallace and Company Limited is nothing but
           a colourable devise adopted to seek benefit of interest
           allowance under Section 36(1) (iii) of the Income Tax Act?
9.   The High Court answered the two questions of law, referred to above,
     in favour of the Revenue holding as under:-
           “That the appellant Trust has borrowed a loan from the
           Bank in order to invest the same in its share business.
           It is also not in dispute that a sum of Rs.3,80,00,000/-
           has been transferred to M/s. Gayathri Holdings Private
           Limited by the assessee. It is also not in dispute that the
           assessee has paid the interest payable to the Bank on
           the entire borrowings. It is also not in dispute that out of
           Rs.3,80,00,000/- transferred to M/s. Gayathri Holdings
           Private Limited, certain amounts of shares of Shaw Wallace
           and Company are also transferred to the name of the
           assessee. Therefore, we are of the view that the Assessing
           Officer was justified in granting the relief to the assessee in
           respect of the value of the shares purchased by it through
           M/s. Gayathri Holdings Private Limited in respect of shares
           of Shaw Wallace and Company Limited. We are also of the
           view that the Assessing Officer is justified in disallowing
574                                                         [2026] 5 S.C.R.

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          the interest paid by the assessee to the Bank in respect
          of the amount which was lying with M/s. Gayathri Holdings
          Private Limited in the account of the assessee.”
10. In such circumstances referred to above, the assessee is here before
    us with the present appeal.

       ANALYSIS
11. Having heard the learned counsel appearing for the parties and
    having gone through the materials on record, the only question that
    falls for our consideration is whether the High Court committed any
    error in passing the impugned order?
12. Section 36(1)(iii) reads as follows:
          “36(1) The deductions provided for in the following clauses
          shall be allowed in respect of the matters dealt with
          therein, in computing the income referred to in Section
          28 –(i) and (ii)
          ******
          (iii) the amount of the interest paid in respect of capital
          borrowed for the purposes of the business or profession :-
          Provided that any amount of the interest paid, in respect of
          capital borrowed for acquisition of an asset for extension
          of existing business or profession (whether capitalized in
          the books of account or not); for any period beginning from
          the date on which the capital was borrowed for acquisition
          of the asset till the date on which such asset was first put
          to use, shall not be allowed as deduction.
          Explanation. – Recurring subscriptions paid periodically by
          shareholders, or subscribers in Mutual Benefit Societies
          which fulfill such conditions as may be prescribed, shall
          be deemed to be capital borrowed within the meaning of
          this clause.”
13. The sub section has three important words or phrases, i.e., (i) Interest,
    (ii) Borrowed and, (iii) For the purpose of business or profession.
14. The definition of “interest” in Section 2(28A) means “interest payable
    in any manner in respect of any moneys borrowed or debt incurred”.
[2026] 5 S.C.R.                                                         575

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


     But for Section 36(1)(iii), “interest” is restricted to that on money
     borrowed and not on debt incurred. In other words, the essence of
     interest is that it is a payment which becomes due because the creditor
     has not had his money at his disposal. It may be regarded either as
     representing the profit he might have made if he had had the use
     of his money, or conversely, the loss he suffered because he had
     not that use. The general idea is that he is entitled to compensation
     for the deprivation.
15. The provisions of Section 36(1)(iii) concern capital borrowed and
    not other debts or liability. A loan of money undoubtedly results in a
    debt, but every debt does not involve 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 [Bombay Steam Navigation Co. Pr. Ltd. v.
    CIT, 56 ITR 52 (SC)].
16. The expression “for the purpose of business” occurs in Section
    36(1)(iii) and also in Section 37(1). A similar expression with different
    wording also occurs in Section 57(iii) which reads as “for the purpose
    of making or earning income”. This issue came up for consideration
    before this Court in the case of Madhav Prasad Jatia v. CIT reported
    in (SC) 118 ITR 200. The Court held that the expression occurring
    in Section 36(1)(iii) is wider in scope than the expression occurring
    in Section 57(iii). Thus, meaning thereby that the scope for allowing
    a deduction under Section 36(1)(iii) would be much wider than the
    one available under Section 57(iii).
17. It appears on a plain reading of the impugned order that according
    to the High Court, the business of the subsidiary company cannot be
    considered in law as the business of the assessee. The High Court
    took the view that the finding of the tribunal based on commercial
    expediency is not correct. The High Court went on to observe 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.
18. We are afraid that the High Court fell in error in taking the aforesaid
    view.
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19. In Sharp Business System v. CIT reported in 2025 SCC OnLine SC
    2892, one of the questions considered by this Court was whether
    interest on borrowed funds invested by the assessee in its sister
    concern and its directors is an allowable business expenditure.
20. In aforesaid context, this court made an analysis of Section 36 of the
    Income Tax Act, 1961, more particularly, Section 36(1)(iii) thereof.
    After referring to its earlier decision in S.A. Builders v. CIT reported
    in 288 ITR(1), it has been opined that the court should examine
    the transfer of borrowed funds from the point of view of commercial
    expediency and not from the point of view whether the amount was
    advanced for earning profits.
21. In the facts of that case, it was held that the assessee was entitled
    to claim allowance of interest on the borrowed funds invested in a
    sister concern for acquiring controlling interest.
22. We are in complete agreement with the line of reasoning assigned
    by the ITAT insofar as the interpretation of Section 36(1)(iii) of the
    Act 1961 is concerned.
23. In the result, this Appeal succeeds and is hereby allowed.
24. The impugned Judgment and Order passed by the High Court is
    set aside.
25. It is declared that the assessee is entitled to seek deduction of the
    amount of the interest paid in respect of the capital borrowed to the
    tune of Rs.3,80,00,000/- for the purposes of the business.
26. Pending applications, if any, also stand disposed of.

       Result of the case: Appeal allowed.




       †
           Headnotes prepared by: Nidhi Jain