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Income Tax Act

L.K. Trust v. Commissioner of Income Tax 2026 INSC 474- Income Tax Act - Deduction - Interest

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Income-tax Act, 1961 - Section 36(1)(iii) - In this case, High Court disallowed the deduction on the footing that the borrowing benefitted a subsidiary/group concern and was not for the assessee’s own business. The Supreme Court held that interest on capital borrowed for the purposes of the assessee’s business—including investment in a subsidiary for business purposes—was allowable - he 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.

L.K. Trust v. Commissioner of Income Tax - Income Tax Act - Deduction - Interest
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Case Info

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Case details


Case name: L.K. Trust v. Commissioner of Income Tax & Anr

  • Hon’ble Mr. Justice J.B. Pardiwala
  • Hon’ble Mr. Justice Ujjal Bhuyan

Judgment date: 7 May 2026 (NEW DELHI; 7TH MAY, 2026.)


Caselaws and citations referred

  1. Madhav Prasad Jatia v. CIT, 118 ITR 200 (SC)– Relied on for the three pre‑requisites for deduction of interest under the predecessor provision to section 36(1)(iii), and for comparing the scope of “for the purpose of business” in section 36(1)(iii) with section 57(iii).
  2. CIT v. Associated Fibre and Rubber Industries (P) Ltd., (1999) 236 ITR 471 (SC)– Cited for the principle that where assets purchased out of borrowed funds are treated as business assets, interest on such borrowings is allowable.
  3. Veecumsees v. CIT, (1996) 220 ITR 185 (SC)– Quoted to hold that interest on loans obtained for business purposes remains deductible even if the particular business/branch for which the loan was raised is later closed or transferred, so long as the loans were originally for the assessee’s business.
  4. Bombay Steam Navigation Co. (P) Ltd. v. CIT, 56 ITR 52 (SC)– Referred for explaining that section 36(1)(iii) concerns “capital borrowed”, meaning money borrowed as capital, not any and every debt or liability.
  5. Sharp Business System v. CIT, 2025 SCC OnLine SC 2892– Relied on to reaffirm that allowability of interest on borrowed funds advanced to a sister concern must be examined from the standpoint of commercial expediency, not merely whether the advance directly earns profits.
  6. S.A. Builders v. CIT, 288 ITR 1 (SC)– Mentioned (via Sharp Business System) for the test of “commercial expediency” in allowing interest on borrowed funds advanced to related concerns.

Statutes / provisions referred

  1. Income-tax Act, 1961
    • Section 28 – Income from profits and gains of business or profession (referred to as the head under which the deductions are computed).
    • Section 36(1)(iii) – Deduction of “the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession”, including its proviso dealing with interest on capital borrowed for acquisition of an asset for extension of existing business.
    • Section 37(1) – General deduction; referred to for comparison of the phrase “for the purpose of the business”.
    • Section 57(iii) – Deduction for expenditure “laid out or expended wholly and exclusively for the purpose of making or earning such income”; referred to contrast the narrower wording “for the purpose of making or earning income” with the broader “for the purpose of business” in section 36(1)(iii).
    • Section 143(1)(a) and Section 143(2) – Procedure for processing and scrutiny of returns (mentioned in the facts).
  3. Income-tax Act, 1922
    • Section 10(2)(iii) – The earlier provision analogous to section 36(1)(iii) of the 1961 Act, discussed via Madhav Prasad Jatia.
  5. Section 2(28A), Income-tax Act, 1961
    • Definition of “interest” – “interest payable in any manner in respect of any moneys borrowed or debt incurred”, used to clarify that section 36(1)(iii) is confined to interest on capital borrowed (money) rather than all debts.

Brief summary (three sentences)


The assessee–trust borrowed Rs. 3.8 crores from Corporation Bank and paid interest of Rs. 21,74,234/-, claiming it as a deduction under section 36(1)(iii) in respect of funds ultimately used, through a group company, to acquire shares of Shaw Wallace & Co. Ltd. While the Assessing Officer, CIT(A), and later the High Court disallowed the deduction on the footing that the borrowing benefitted a subsidiary/group concern and was not for the assessee’s own business, the ITAT allowed the claim based on commercial expediency and the composite nature of the assessee’s business. The Supreme Court, relying on precedents such as S.A. Builders, Veecumsees, Sharp Business System, and Madhav Prasad Jatia, held that interest on capital borrowed for the purposes of the assessee’s business—including investment in a subsidiary for business purposes—was allowable, set aside the High Court’s judgment, and declared the interest of Rs. 21,74,234/- deductible under section 36(1)(iii).