Supreme Court permits interest deduction on borrowed funds advanced to sister concern as business expenditure

This Tax Alert summarizes a recent decision of the Supreme Court (SC) in the case of L. K. Trust (Taxpayer) v. CIT ^[1]  , on the issue of deductibility under Section (S.) 36(1)(iii) of the erstwhile Income tax Act 1961 (ITA 1961)^[2]  of interest expenditure on borrowed funds advanced to Taxpayer’s sister concern for acquisition of shares in a company. From the amount so advanced, some portion of funds were retained by the sister concern as acquisition of shares did not fructify in its entirety. 

Relying on its earlier rulings, the SC held that the meaning of the expression “for the purpose of business” as used in S. 36(1)(iii) is wider in scope than “for the purpose of making or earning income” as used in S. 57(iii) of the ITA 1961. Furthermore, it held that the use of borrowed funds for business purpose should be examined from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. In the earlier rulings, the borrowed funds advanced by holding company on interest-free basis to subsidiary company where it had deep interest, for use by subsidiary in its own business or borrowed funds used for investment in subsidiary for acquiring controlling interest were held to meet the test of commercial expediency. Applying the ratio of past SC rulings, the SC held that even in the facts of the present case, the test of commercial expediency was met even though the borrowed funds were utilized for business of sister concern. Accordingly, the SC held in taxpayer’s favor.

¹ [TS-678-SC-2026]
² Corresponding to s.32(b) of current Income tax Act 2025