I borrowed on overdraft to honour a personal donation rather than sell my shares. Can I deduct the interest as it protected my income-earning assets?
No. The Supreme Court held that interest on money borrowed to meet a personal obligation is not deductible, either as interest on capital borrowed for the purpose of business or as business expenditure. The borrowing here was completely unrelated to the purpose of the business and was actually used for making charity. The argument that the overdraft was drawn on to avoid selling shares did not make the borrowing a business borrowing. The Court also refused a deduction for interest credited on the unpaid part of the donation, since no trust in favour of the college had come into existence. The appeals were dismissed with costs.
Decided by the Supreme Court (Supreme Court of India - P.N. Bhagwati and V.D. Tulzapurkar, JJ (judgment by Tulzapurkar, J)) on 1979-04-17, reported as AIR 1979 SC 1291; (1979) 3 SCC 634; (1979) 118 ITR 200; (1979) 1 Taxman 477; 1979 SCR (3) 745. It bears on section 36(1)(iii), section 37(1), section 57 of the Income Tax Act 1961, in Deductions & Disallowances matters.
This is the case that states the conditions for an interest deduction in the form practitioners still use: the money must have been borrowed by the assessee, borrowed for the purpose of the business, and interest must have been paid on it and claimed. The parallel conditions for a general business expense are set out beside it. It also fixes the relationship between two phrases, applying Malayalam Plantations - for the purpose of business is wider than for the purpose of earning income, profits or gains, so the field of deduction under the business head is larger than under the residuary head. Against that generous reading it holds firmly that an obligation of the proprietor is not an obligation of the business, however the borrowing is routed.
Binding on every court and authority in India.
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The assessee carried on money-lending and other businesses and had income from shares, property and business. She had promised Rs 10 lakh to set up an engineering college in memory of her late husband. Of that, Rs 5.5 lakh was made over by depositing it in a joint account opened in the names of the District Magistrate, Bulandshahr and the assessee for the college; the balance of Rs 4.5 lakh was left with her as a debt to the institution, carrying interest at 6 per cent from 21 October 1955 which was to be deposited in the technical institute account. Her books debited Rs 10 lakh to her capital account on 21 November 1955 with a corresponding credit to the institute, but the Rs 5.5 lakh was actually paid on 7 January 1956 out of an overdraft account with the Central Bank of India, Aligarh. For assessment years 1957-58, 1958-59 and 1959-60 she claimed the interest paid to the bank on that overdraft - Rs 20,107, Rs 25,470 and Rs 18,445 - saying she had drawn on the overdraft rather than sell her shares. She also claimed the interest credited on the Rs 4.5 lakh. The authorities, the Tribunal and the High Court all rejected the claims.
The appeals were dismissed with costs and the High Court's answers against the assessee were affirmed. Three conditions must be satisfied for a deduction of interest on borrowed capital: the money must have been borrowed by the assessee, it must have been borrowed for the purpose of the business, and the assessee must have paid interest on it and claimed it as a deduction. For a general business expenditure the conditions are that it must not be an allowance of the kinds specifically provided for, must not be capital expenditure or the personal expenses of the assessee, and must have been laid out wholly and exclusively for the purpose of the business. The borrowing of Rs 5.5 lakh had been made to meet the assessee's personal obligation and not an obligation of her business; it was completely unrelated to the purpose of the business and was actually used for making charity, so the interest was deductible under neither provision. As to the Rs 4.5 lakh, beyond entries in her own books there was nothing to show that the amount was made over to the college or accepted by it, so it remained her own funds within her power of disposition and the interest credited on it remained hers.
The Court began by setting out the conditions under each provision and then identified which one failed. It accepted, applying Malayalam Plantations, that the expression for the purpose of business in both provisions is wider than for the purpose of earning income, profits or gains in the residuary provision, so that the field of allowance under the business head is larger. But width does not dispense with the requirement of connection. The obligation the assessee discharged with the overdraft was her own promise of charity, not an obligation of her business, and the money went to the college. Nothing in that use touched the business, so the second condition was not met, and the same failure defeated the claim under the general expenditure provision. The argument that she borrowed to avoid selling her shares was met by the finding that there was no material to show she would necessarily have had to sell them, and by the settled position that the motive with which a borrowing is made is irrelevant and that the availability of the assessee's own resources is not a relevant consideration either way. Kishinchand Chellaram was distinguished as a banking case where the Tribunal had found there was no borrowing at all, only deposits received in the course of business. On the second claim the Court treated the question as one of completed gift: the certificate of the District Magistrate recited only a promise and the arrangement for a loan carrying interest, and book entries alone could not show the money had been made over and accepted. The plea of promissory estoppel failed because no material showed the college had incurred expenditure or acted to its prejudice in the relevant years, though the Court left later years open.
The borrowing was completely unrelated to the purpose of the business and was actually used for making charity.
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Handle my notice → Ask a CA on WhatsAppNo. The Supreme Court held that interest on money borrowed to meet a personal obligation is not deductible, either as interest on capital borrowed for the purpose of business or as business expenditure. The borrowing here was completely unrelated to the purpose of the business and was actually used for making charity. The argument that the overdraft was drawn on to avoid selling shares did not make the borrowing a business borrowing. The Court also refused a deduction for interest credited on the unpaid part of the donation, since no trust in favour of the college had come into existence. The appeals were dismissed with costs. This was decided by the Supreme Court (Supreme Court of India - P.N. Bhagwati and V.D. Tulzapurkar, JJ (judgment by Tulzapurkar, J)) and bears on section 36(1)(iii), section 37(1), section 57 of the Income Tax Act 1961. It is reported as AIR 1979 SC 1291; (1979) 3 SCC 634; (1979) 118 ITR 200; (1979) 1 Taxman 477; 1979 SCR (3) 745. This is the case that states the conditions for an interest deduction in the form practitioners still use: the money must have been borrowed by the assessee, borrowed for the purpose of the business, and interest must have been paid on it and claimed. The parallel conditions for a general business expense are set out beside it. It also fixes the relationship between two phrases, applying Malayalam Plantations - for the purpose of business is wider than for the purpose of earning income, profits or gains, so the field of deduction under the business head is larger than under the residuary head. Against that generous reading it holds firmly that an obligation of the proprietor is not an obligation of the business, however the borrowing is routed. If it applies to you, the first step is this: Trace the use of the borrowing to a business purpose and document it; the deduction fails at that condition, not at any question of quantum or reasonableness.
The assessee carried on money-lending and other businesses and had income from shares, property and business. She had promised Rs 10 lakh to set up an engineering college in memory of her late husband. Of that, Rs 5.5 lakh was made over by depositing it in a joint account opened in the names of the District Magistrate, Bulandshahr and the assessee for the college; the balance of Rs 4.5 lakh was left with her as a debt to the institution, carrying interest at 6 per cent from 21 October 1955 which was to be deposited in the technical institute account. Her books debited Rs 10 lakh to her capital account on 21 November 1955 with a corresponding credit to the institute, but the Rs 5.5 lakh was actually paid on 7 January 1956 out of an overdraft account with the Central Bank of India, Aligarh. For assessment years 1957-58, 1958-59 and 1959-60 she claimed the interest paid to the bank on that overdraft - Rs 20,107, Rs 25,470 and Rs 18,445 - saying she had drawn on the overdraft rather than sell her shares. She also claimed the interest credited on the Rs 4.5 lakh. The authorities, the Tribunal and the High Court all rejected the claims. The matter was decided on 1979-04-17 by the Supreme Court (Supreme Court of India - P.N. Bhagwati and V.D. Tulzapurkar, JJ (judgment by Tulzapurkar, J)). On those facts the Supreme Court held as follows. The appeals were dismissed with costs and the High Court's answers against the assessee were affirmed. Three conditions must be satisfied for a deduction of interest on borrowed capital: the money must have been borrowed by the assessee, it must have been borrowed for the purpose of the business, and the assessee must have paid interest on it and claimed it as a deduction. For a general business expenditure the conditions are that it must not be an allowance of the kinds specifically provided for, must not be capital expenditure or the personal expenses of the assessee, and must have been laid out wholly and exclusively for the purpose of the business. The borrowing of Rs 5.5 lakh had been made to meet the assessee's personal obligation and not an obligation of her business; it was completely unrelated to the purpose of the business and was actually used for making charity, so the interest was deductible under neither provision. As to the Rs 4.5 lakh, beyond entries in her own books there was nothing to show that the amount was made over to the college or accepted by it, so it remained her own funds within her power of disposition and the interest credited on it remained hers.
The Court began by setting out the conditions under each provision and then identified which one failed. It accepted, applying Malayalam Plantations, that the expression for the purpose of business in both provisions is wider than for the purpose of earning income, profits or gains in the residuary provision, so that the field of allowance under the business head is larger. But width does not dispense with the requirement of connection. The obligation the assessee discharged with the overdraft was her own promise of charity, not an obligation of her business, and the money went to the college. Nothing in that use touched the business, so the second condition was not met, and the same failure defeated the claim under the general expenditure provision. The argument that she borrowed to avoid selling her shares was met by the finding that there was no material to show she would necessarily have had to sell them, and by the settled position that the motive with which a borrowing is made is irrelevant and that the availability of the assessee's own resources is not a relevant consideration either way. Kishinchand Chellaram was distinguished as a banking case where the Tribunal had found there was no borrowing at all, only deposits received in the course of business. On the second claim the Court treated the question as one of completed gift: the certificate of the District Magistrate recited only a promise and the arrangement for a loan carrying interest, and book entries alone could not show the money had been made over and accepted. The plea of promissory estoppel failed because no material showed the college had incurred expenditure or acted to its prejudice in the relevant years, though the Court left later years open. In the words reproduced by the source cited on this page: "The borrowing was completely unrelated to the purpose of the business and was actually used for making charity."
It was decided by the Supreme Court on 1979-04-17 and is reported as AIR 1979 SC 1291; (1979) 3 SCC 634; (1979) 118 ITR 200; (1979) 1 Taxman 477; 1979 SCR (3) 745. 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 37(1), section 57, 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 department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeals were dismissed with costs and the High Court's answers against the assessee were affirmed. Three conditions must be satisfied for a deduction of interest on borrowed capital: the money must have been borrowed by the assessee, it must have been borrowed for the purpose of the business, and the assessee must have paid interest on it and claimed it as a deduction. For a general business expenditure the conditions are that it must not be an allowance of the kinds specifically provided for, must not be capital expenditure or the personal expenses of the assessee, and must have been laid out wholly and exclusively for the purpose of the business. The borrowing of Rs 5.5 lakh had been made to meet the assessee's personal obligation and not an obligation of her business; it was completely unrelated to the purpose of the business and was actually used for making charity, so the interest was deductible under neither provision. As to the Rs 4.5 lakh, beyond entries in her own books there was nothing to show that the amount was made over to the college or accepted by it, so it remained her own funds within her power of disposition and the interest credited on it remained hers. It arises in Deductions & Disallowances matters, on section 36(1)(iii), section 37(1), section 57 of the Income Tax Act 1961, and was decided by Supreme Court of India - P.N. Bhagwati and V.D. Tulzapurkar, JJ (judgment by Tulzapurkar, J). 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. Do not argue that borrowing preserved income-earning assets you would otherwise have sold - that argument was made here and rejected. Where the claim is under the residuary head instead, remember that the test there is narrower, so a borrowing that fails the business test will rarely succeed there. If you claim a deduction for interest on an unpaid donation or gift, prove that the amount was actually made over and accepted, or that a trust otherwise came into existence; book entries and a certificate reciting a promise are not enough.
Still good law. A citator search returns 278 later decisions citing this judgment. It was applied by the Hyderabad Tribunal in Gayatri Energy Ventures Private Ltd v ACIT (7 July 2025), which recorded that 'The Hon'ble Supreme Court in the case of Madhav Prasad Jatia vs. CIT (supra) has laid down certain parameters while considering the deduction for interest u/sec.36(1)(iii) of the Act', drew the three conditions for the deduction from it and tested the assessee's claim against them. The two High Court decisions previously named do not support the label. In Sun Pharmaceutical Industries Ltd v ITO (Delhi High Court, 31 January 2025) and in M/s Seven Arts Films v ACIT (Madras High Court, 7 July 2015) the judgment appears only inside passages of S.A. Builders and Hero Cycles quoted in counsel's submissions; neither Bench went to it directly, and in Seven Arts Films the reference is to its facts being distinguishable, a borrowing donated 'for some sentimental or personal reasons'. The commercial expediency test those courts applied comes to them through S.A. Builders. A second search by case name coupled with the word overruled returned 15 decisions, none adverse. No source could be cited for that finding. 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.
The judgment construes sections 10(2)(iii), 10(2)(xv) and 12(2) of the Indian Income-tax Act, 1922; I have listed the corresponding sections of the 1961 Act, but the words construed are those of the older Act. The Court expressly left open the position for later assessment years if material were placed on record to support the plea of promissory estoppel about the unpaid Rs 4.5 lakh. The harvested page carries a reporter's headnote above the judgment, which I have not used, and one paragraph of it carries a page reference that does not match the surrounding text. 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 appeals were dismissed with costs and the High Court's answers against the assessee were affirmed. Three conditions must be satisfied for a deduction of interest on borrowed capital: the money must have been borrowed by the assessee, it must have been borrowed for the purpose of the business, and the assessee must have paid interest on it and claimed it as a deduction. For a general business expenditure the conditions are that it must not be an allowance of the kinds specifically provided for, must not be capital expenditure or the personal expenses of the assessee, and must have been laid out wholly and exclusively for the purpose of the business. The borrowing of Rs 5.5 lakh had been made to meet the assessee's personal obligation and not an obligation of her business; it was completely unrelated to the purpose of the business and was actually used for making charity, so the interest was deductible under neither provision. As to the Rs 4.5 lakh, beyond entries in her own books there was nothing to show that the amount was made over to the college or accepted by it, so it remained her own funds within her power of disposition and the interest credited on it remained hers.
TaxSphere, “Madhav Prasad Jatia v CIT”, https://taxnotice.vittsphere.com/caselaw/case/madhav-prasad-jatia-v-cit/ (validity last checked 2026-08-29)
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