Assessee Can Claim Allowance Of Interest On Borrowed Funds Invested In Sister Concern For Acquiring Controlling Interest: Supreme Court
The Supreme Court was considering an appeal filed at the instance of the assessee against the judgment of the Karnataka High Court.
While declaring that the assessee was entitled to seek a deduction of the amount of the interest paid in respect of the capital borrowed to the tune of Rs 3.8 crore for the purpose of carrying business, the Supreme Court has upheld the view that an assessee can claim allowance of interest on the borrowed funds invested in a sister concern for acquiring a controlling interest.
The Apex Court was considering an appeal filed at the instance of the assessee against the judgment of the Karnataka High Court by which the appeal preferred by the Revenue against the order passed by the Income Tax Appellate Tribunal was allowed.
The Division Bench of Justice J.B. Pardiwala and Justice Ujjal Bhuyan held, “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.”
“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”, it added.
Factual Background
The assessee had borrowed a sum of Rs 3,80,00,000 from the Corporation Bank to purchase shares of Shaw Wallace and Company Limited in pursuance of an agreement. Under the said agreement, the Company had committed to sell 7.80 lakh shares for a total consideration of Rs.3.80 crore. The assessee filed its return of income for the year 1989-90, declaring a total income of Rs.7,55,67,530. The return was processed under section 143(1)(a) of the Income Tax Act 1961, and later a 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 the purchase of its shares, which in turn transferred the amount to one G Venkateshwaran for the purchase of shares of M/s Shaw Wallace and Company Limited. The AO took the view that the assessee was not entitled to claim a deduction under Section 36(1)(iii) of the Act, and accordingly, the interest paid on the loan was disallowed.
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 and held that a sum of Rs 21,74,234 paid by the appellant-trust as interest to the Corporation Bank on borrowings of Rs.3.80 crore was eligible for deduction under Sec.36(1)(iii) of the Income-tax Act. The Revenue preferred an appeal before the High Court, which passed an order in its favour. Aggrieved thereby, the appellant approached the Apex Court.
Reasoning
The Bench explained that the provisions of Section 36(1)(iii) concern capital borrowed and not other debts or liabilities. Referring to the judgment in Bombay Steam Navigation Co. Pr. Ltd. v. CIT, the Bench affirmed that 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.
Coming to the facts of the case, the Bench noted that according to the High Court, the business of the subsidiary company could not be considered in law as the business of the assessee. 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. “We are afraid that the High Court fell in error in taking the aforesaid view”, the Bench stated.
Further reference was made to the judgment in Sharp Business System v. CIT (2025) wherein one of the questions considered by the Court was whether interest on borrowed funds invested by the assessee in its sister concern and its directors is an allowable business expenditure. It was opined therein 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 of whether the amount was advanced for earning profits.
Thus, setting aside the impugned judgment, the Bench declared that the assessee was entitled to seek a 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.
Cause Title: L.K. Trust v. Commissioner of Income Tax & Anr. (Case No.: Civil Appeal No.527/2012)