I borrowed from a bank to buy shares, but the money passed through a group company before the shares were bought. The department says the borrowing was not for my business. Can it disallow my interest under s.36(1)(iii)?
No, not on the reasoning the High Court gave. The Supreme Court set aside a Karnataka High Court order that had disallowed interest because the borrowed money was ultimately used for the benefit of the assessee's subsidiary rather than for the assessee's own business, and held that the borrowed funds must be looked at from the point of view of commercial expediency. It declared the assessee entitled to deduct the interest paid on the capital of Rs 3,80,00,000 borrowed from the Corporation Bank, and agreed with the Tribunal's interpretation of s.36(1)(iii).
Decided by the Supreme Court (Supreme Court of India - J.B. Pardiwala J and Ujjal Bhuyan J (the order is signed by both and does not say who authored it)) on 2026-05-07, reported as Civil Appeal No. 527 of 2012 (Reportable); the order carries no neutral citation and no reporter citation.. It bears on section 36(1)(iii), section 2(28A), section 57(iii) of the Income Tax Act 1961, in Deductions & Disallowances and How Tax Law Is Read matters.
The department's standard disallowance in a group-funding case is built on tracing: the loan came into your books, went out to a group company, and the asset ended up somewhere else, so the capital was not borrowed 'for the purposes of the business' of the borrower. This order rejects that route at the Supreme Court level, holding that the correct enquiry is commercial expediency and not whether the borrower itself earned a profit from the advance, and that s.36(1)(iii) is wider in its reach than s.57(iii). It also gives a practitioner a short statement of what the clause covers - interest on money borrowed, not on a debt incurred, and capital meaning money and not an asset bought on credit - which is useful when the department stretches the clause in either direction.
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The assessee, a trust, borrowed Rs 3,80,00,000 from the Corporation Bank to purchase shares of Shaw Wallace and Company Limited under an agreement dated 19 November 1987, by which the company had committed to sell 7.80 lakh shares for that consideration. Its return of income for the year 1989-90 declared total income of Rs 7,55,67,530; the return was processed under s.143(1)(a) and a notice followed under s.143(2). Passing the assessment order in 1992, the Assessing Officer noted that the borrowed amount had been transferred to M/s Gayatri Holdings Private Limited, a group company, through the purchase of its shares, and that Gayatri Holdings had in turn transferred the amount to one Shri G. Venkateshwaran for the purchase of the Shaw Wallace shares; he disallowed the interest of Rs 21,74,234 under s.36(1)(iii). The Commissioner (Appeals) confirmed the disallowance. The Tribunal reversed, finding that the assessee had more than one source of business income - money-lending, speculation, film distribution and investment in shares - kept a single common set of books with complete interlocking of funds under the trustees' management, and so carried on a composite business, and that the three conditions of s.36(1)(iii) drawn from Madhav Prasad Jatia were satisfied. On the Revenue's appeal the Karnataka High Court, by its judgment dated 1 March 2010 in Income Tax Appeal No. 175 of 2001, answered two substantial questions of law in favour of the Revenue and allowed the appeal. The assessee appealed to the Supreme Court.
The appeal was allowed, the High Court's judgment and order set aside, and it was declared that the assessee is entitled to seek deduction of the interest paid in respect of the capital of Rs 3,80,00,000 borrowed for the purposes of the business. The Supreme Court said in terms that the High Court fell in error in holding that the business of the subsidiary company could not in law be the business of the assessee and that the Tribunal's finding of commercial expediency was not correct, and recorded its complete agreement with the Tribunal's line of reasoning on the interpretation of s.36(1)(iii).
The Court took the clause apart into its three working elements - interest, borrowed, and for the purpose of business or profession (para 13). On 'interest' it noted that although s.2(28A) defines interest as payable in respect of moneys borrowed or debt incurred, for s.36(1)(iii) it is restricted to interest on money borrowed and not on a debt incurred, the essence of interest being compensation to a creditor deprived of the use of his money (para 14). On 'borrowed' it held, on Bombay Steam Navigation Co. Pr. Ltd. v. CIT, 56 ITR 52 (SC), that the clause concerns capital borrowed and not other debts or liabilities - every debt does not involve a loan - and that capital in this context means money and not another asset purchased on credit (para 15). On 'for the purpose of business' it took from Madhav Prasad Jatia v. CIT, (SC) 118 ITR 200 that the expression in s.36(1)(iii) is wider in scope than 'for the purpose of making or earning income' in s.57(iii), so the scope for deduction under the former is much wider (para 16). Against that, it read the impugned order as holding that the business of the subsidiary cannot in law be the business of the assessee, that the Tribunal's commercial-expediency finding was not correct, and that the borrowed amount was ultimately used for the benefit of the subsidiary and not for the assessee's business (para 17), and said the High Court fell in error in taking that view (para 18). It then relied on Sharp Business System v. CIT, 2025 SCC OnLine SC 2892, where one of the questions was whether interest on borrowed funds invested in a sister concern and in directors is allowable business expenditure (para 19); that decision, after referring to S.A. Builders v. CIT, 288 ITR(1), had opined that the transfer of borrowed funds is to be examined from the point of view of commercial expediency and not from the point of view of whether the amount was advanced for earning profits (para 20), and had allowed the interest on funds invested in a sister concern to acquire a controlling interest (para 21). The Court expressed complete agreement with the Tribunal's line of reasoning on the interpretation of s.36(1)(iii) (para 22) and allowed the appeal (paras 23-25).
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.
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Handle my notice → Ask a CA on WhatsAppNo, not on the reasoning the High Court gave. The Supreme Court set aside a Karnataka High Court order that had disallowed interest because the borrowed money was ultimately used for the benefit of the assessee's subsidiary rather than for the assessee's own business, and held that the borrowed funds must be looked at from the point of view of commercial expediency. It declared the assessee entitled to deduct the interest paid on the capital of Rs 3,80,00,000 borrowed from the Corporation Bank, and agreed with the Tribunal's interpretation of s.36(1)(iii). This was decided by the Supreme Court (Supreme Court of India - J.B. Pardiwala J and Ujjal Bhuyan J (the order is signed by both and does not say who authored it)) and bears on section 36(1)(iii), section 2(28A), section 57(iii) of the Income Tax Act 1961. It is reported as Civil Appeal No. 527 of 2012 (Reportable); the order carries no neutral citation and no reporter citation.. The department's standard disallowance in a group-funding case is built on tracing: the loan came into your books, went out to a group company, and the asset ended up somewhere else, so the capital was not borrowed 'for the purposes of the business' of the borrower. This order rejects that route at the Supreme Court level, holding that the correct enquiry is commercial expediency and not whether the borrower itself earned a profit from the advance, and that s.36(1)(iii) is wider in its reach than s.57(iii). It also gives a practitioner a short statement of what the clause covers - interest on money borrowed, not on a debt incurred, and capital meaning money and not an asset bought on credit - which is useful when the department stretches the clause in either direction. If it applies to you, the first step is this: Frame the defence as commercial expediency, not as tracing. The order (paras 20-21) approves examining the transfer of borrowed funds from the point of view of commercial expediency rather than whether the amount was advanced to earn profits, so build the record around why the group placement served the borrower's business.
The assessee, a trust, borrowed Rs 3,80,00,000 from the Corporation Bank to purchase shares of Shaw Wallace and Company Limited under an agreement dated 19 November 1987, by which the company had committed to sell 7.80 lakh shares for that consideration. Its return of income for the year 1989-90 declared total income of Rs 7,55,67,530; the return was processed under s.143(1)(a) and a notice followed under s.143(2). Passing the assessment order in 1992, the Assessing Officer noted that the borrowed amount had been transferred to M/s Gayatri Holdings Private Limited, a group company, through the purchase of its shares, and that Gayatri Holdings had in turn transferred the amount to one Shri G. Venkateshwaran for the purchase of the Shaw Wallace shares; he disallowed the interest of Rs 21,74,234 under s.36(1)(iii). The Commissioner (Appeals) confirmed the disallowance. The Tribunal reversed, finding that the assessee had more than one source of business income - money-lending, speculation, film distribution and investment in shares - kept a single common set of books with complete interlocking of funds under the trustees' management, and so carried on a composite business, and that the three conditions of s.36(1)(iii) drawn from Madhav Prasad Jatia were satisfied. On the Revenue's appeal the Karnataka High Court, by its judgment dated 1 March 2010 in Income Tax Appeal No. 175 of 2001, answered two substantial questions of law in favour of the Revenue and allowed the appeal. The assessee appealed to the Supreme Court. The matter was decided on 2026-05-07 by the Supreme Court (Supreme Court of India - J.B. Pardiwala J and Ujjal Bhuyan J (the order is signed by both and does not say who authored it)). On those facts the Supreme Court held as follows. The appeal was allowed, the High Court's judgment and order set aside, and it was declared that the assessee is entitled to seek deduction of the interest paid in respect of the capital of Rs 3,80,00,000 borrowed for the purposes of the business. The Supreme Court said in terms that the High Court fell in error in holding that the business of the subsidiary company could not in law be the business of the assessee and that the Tribunal's finding of commercial expediency was not correct, and recorded its complete agreement with the Tribunal's line of reasoning on the interpretation of s.36(1)(iii).
The Court took the clause apart into its three working elements - interest, borrowed, and for the purpose of business or profession (para 13). On 'interest' it noted that although s.2(28A) defines interest as payable in respect of moneys borrowed or debt incurred, for s.36(1)(iii) it is restricted to interest on money borrowed and not on a debt incurred, the essence of interest being compensation to a creditor deprived of the use of his money (para 14). On 'borrowed' it held, on Bombay Steam Navigation Co. Pr. Ltd. v. CIT, 56 ITR 52 (SC), that the clause concerns capital borrowed and not other debts or liabilities - every debt does not involve a loan - and that capital in this context means money and not another asset purchased on credit (para 15). On 'for the purpose of business' it took from Madhav Prasad Jatia v. CIT, (SC) 118 ITR 200 that the expression in s.36(1)(iii) is wider in scope than 'for the purpose of making or earning income' in s.57(iii), so the scope for deduction under the former is much wider (para 16). Against that, it read the impugned order as holding that the business of the subsidiary cannot in law be the business of the assessee, that the Tribunal's commercial-expediency finding was not correct, and that the borrowed amount was ultimately used for the benefit of the subsidiary and not for the assessee's business (para 17), and said the High Court fell in error in taking that view (para 18). It then relied on Sharp Business System v. CIT, 2025 SCC OnLine SC 2892, where one of the questions was whether interest on borrowed funds invested in a sister concern and in directors is allowable business expenditure (para 19); that decision, after referring to S.A. Builders v. CIT, 288 ITR(1), had opined that the transfer of borrowed funds is to be examined from the point of view of commercial expediency and not from the point of view of whether the amount was advanced for earning profits (para 20), and had allowed the interest on funds invested in a sister concern to acquire a controlling interest (para 21). The Court expressed complete agreement with the Tribunal's line of reasoning on the interpretation of s.36(1)(iii) (para 22) and allowed the appeal (paras 23-25). In the words reproduced by the source cited on this page: "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." The decision followed or applied Sharp Business System v. CIT, 2025 SCC OnLine SC 2892 - relied on for the commercial-expediency test and for the allowance of interest on borrowed funds invested in a sister concern (paras 19-21); S.A. Builders v. CIT, 288 ITR(1) - referred to at para 20 as the decision on which Sharp Business System drew; the order gives the citation in that truncated form; Madhav Prasad Jatia v. CIT, (SC) 118 ITR 200 - relied on for the proposition that the expression in s.36(1)(iii) is wider than that in s.57(iii) (para 16); the Tribunal had drawn its three pre-requisites from the same case; Bombay Steam Navigation Co. Pr. Ltd. v. CIT, 56 ITR 52 (SC) - relied on for the meaning of capital borrowed (para 15).
It was decided by the Supreme Court on 2026-05-07 and is reported as Civil Appeal No. 527 of 2012 (Reportable); the order carries no neutral citation and no reporter citation.. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 36(1)(iii), section 2(28A), section 57(iii), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was allowed, the High Court's judgment and order set aside, and it was declared that the assessee is entitled to seek deduction of the interest paid in respect of the capital of Rs 3,80,00,000 borrowed for the purposes of the business. The Supreme Court said in terms that the High Court fell in error in holding that the business of the subsidiary company could not in law be the business of the assessee and that the Tribunal's finding of commercial expediency was not correct, and recorded its complete agreement with the Tribunal's line of reasoning on the interpretation of s.36(1)(iii). It arises in Deductions & Disallowances and How Tax Law Is Read matters, on section 36(1)(iii), section 2(28A), section 57(iii) of the Income Tax Act 1961, and was decided by Supreme Court of India - J.B. Pardiwala J and Ujjal Bhuyan J (the order is signed by both and does not say who authored it). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Put the composite nature of the business on record before the Assessing Officer, as the Tribunal did here - one common set of books, interlocking funds, several lines of business under common management - because the Supreme Court agreed with the Tribunal's reasoning rather than substituting findings of its own. Where the borrowing funds a subsidiary or sister concern, cite Sharp Business System v. CIT, 2025 SCC OnLine SC 2892 alongside this order; para 21 records that in that case interest on borrowed funds invested in a sister concern for acquiring controlling interest was allowed. Keep the s.36(1)(iii) argument separate from a s.57(iii) argument. Para 16 records that the expression in s.36(1)(iii) is wider than the one in s.57(iii), so a decision under the latter is not a ceiling on the former. Do not read this order as an answer to a colourable-device allegation. The High Court had admitted a second substantial question in those terms and this order does not address it, so a s.36(1)(iii) claim attacked as a sham still has to be defended on its own facts.
Still good law. This is a Supreme Court order of 7 May 2026 and it is recent. No later treatment of it has been looked for and none is reported here: the entry should not be read as carrying a completed check of later citation, and a reader putting it at the head of an argument should make that check for himself. What would displace it is a larger Bench taking a different view of the commercial-expediency test, or a doubting of Sharp Business System v. CIT, 2025 SCC OnLine SC 2892, on which paragraphs 19 to 21 rest. An amendment to s.36(1)(iii) or to its successor provision would displace it prospectively; the order construes the 1961 Act clause and says nothing about any successor. Two limits go to how much the order decides, and they matter more than the absence of later treatment. It sets the High Court's judgment aside without separately answering the second substantial question the High Court had admitted - whether the routing of the borrowed money through a group company was a colourable device - so it is not authority that the arrangement was genuine, only that the reasoning actually given for the disallowance was wrong. And at paragraph 22 it records agreement with the Tribunal's line of reasoning expressly 'insofar as the interpretation of Section 36(1)(iii) of the Act 1961 is concerned', which leaves the Tribunal's composite-business and interlocking-funds findings unendorsed in terms. So the order is good law on what it decides: that the enquiry under s.36(1)(iii) is one of commercial expediency and not of tracing, and that the expression 'for the purpose of business' in that clause is wider than 'for the purpose of making or earning income' in s.57(iii). That finding was checked against a published source, which is linked on this page, on 2026-09-05. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
WHERE THIS ENTRY COMES FROM. It is written from the full text of the order and from nothing else - no digest and no reporter's note. The order carries no neutral citation and no reporter citation, so 'reported' carries only the appeal number and the year the return relates to, and a reader who needs a citable reference will have to take one from a reporter. TWO THINGS IN THE TEXT THAT DESERVE CAUTION. First, paragraph 2 identifies the deduction in issue as Rs 21,74,234 of interest, but the declaration at paragraph 25 is framed as an entitlement to deduct 'the amount of the interest paid in respect of the capital borrowed to the tune of Rs.3,80,00,000/-'. The operative paragraph names the principal, not the interest figure, and the two are not reconciled anywhere in the order. Second, the passage from the High Court's judgment reproduced at paragraph 9 reads as though the Assessing Officer had granted relief on the shares actually transferred to the assessee, whereas paragraph 5 records that he disallowed the interest. The reproduced passage is internally awkward and this entry does not attempt to reconcile it. TWO THINGS THE ORDER DOES NOT STATE. It does not state an assessment year in terms - paragraph 4 says the assessee 'filed its return of income for the year 1989-90'. And it does not say which of the two judges wrote it; the order is signed by both. ON THE PROVISO. The proviso to s.36(1)(iii), on capital borrowed for acquiring an asset for extension of an existing business, is reproduced at paragraph 12 but is not applied or discussed anywhere in the order. Do not read the reproduction as a ruling on it. WHAT THE ORDER IS ACTUALLY USEFUL FOR. Paragraphs 13 to 16 take s.36(1)(iii) apart into its three working elements. On 'interest', although s.2(28A) defines it as payable in respect of moneys borrowed or debt incurred, for s.36(1)(iii) it is confined to interest on money borrowed and not on a debt incurred. On 'borrowed', following Bombay Steam Navigation Co. Pr. Ltd. v. CIT, 56 ITR 52 (SC), the clause concerns capital borrowed and not other debts or liabilities - every debt does not involve a loan - and capital here means money and not another asset purchased on credit. On 'for the purpose of business', following Madhav Prasad Jatia v. CIT, 118 ITR 200 (SC), the expression is wider than the one in s.57(iii). Those three sentences are worth having when the Department stretches the clause in either direction. It does not decide the second substantial question the High Court had admitted - whether the routing of Rs 3,80,00,000 through M/s Gayathri Holdings Private Limited to G. Venkateswaran, to buy shares on his behalf and on behalf of four named film companies, was a colourable device to obtain the interest allowance. The order sets the High Court's judgment aside without separately answering that question, so it is not authority that the arrangement was genuine, only that the reasoning actually given for the disallowance was wrong. It does not identify what part, if any, of the Tribunal's factual findings it adopts: para 22 records agreement with the Tribunal's line of reasoning expressly 'insofar as the interpretation of Section 36(1)(iii) of the Act 1961 is concerned', which leaves the composite-business and interlocking-funds findings unendorsed in terms. It does not say what makes an advance to a group company commercially expedient - the test is named but not applied to the facts in any worked way - and it does not deal with the position where only part of the borrowing serves a business purpose, or with any apportionment of interest. It does not touch the proviso to s.36(1)(iii) on capital borrowed for acquiring an asset for extension of an existing business, though the proviso is reproduced at para 12. It says nothing about s.14A or about disallowance of interest referable to shares yielding exempt income, nothing about the assessee's status as a trust or any provision specific to trusts, and nothing about how the interest figure of Rs 21,74,234 relates to the declaration in para 25, which is framed by reference to the borrowed principal. Because the order carries no neutral citation and no reporter citation, a reader wanting a citable reference will have to take it from a reporter. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was allowed, the High Court's judgment and order set aside, and it was declared that the assessee is entitled to seek deduction of the interest paid in respect of the capital of Rs 3,80,00,000 borrowed for the purposes of the business. The Supreme Court said in terms that the High Court fell in error in holding that the business of the subsidiary company could not in law be the business of the assessee and that the Tribunal's finding of commercial expediency was not correct, and recorded its complete agreement with the Tribunal's line of reasoning on the interpretation of s.36(1)(iii).
TaxSphere, “L.K. Trust v CIT”, https://taxnotice.vittsphere.com/caselaw/case/lk-trust-v-cit-interest-on-borrowed-capital-routed-through-group-company/ (validity last checked 2026-09-05)
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