Supreme Court Allows Deduction Of Interest On Borrowed Capital Even Where Funds Benefit Subsidiary Concern
Delivering an important clarification on the scope of deduction under Section 36(1)(iii) of the Income-tax Act, the Supreme Court has held that interest expenditure on borrowed capital cannot be disallowed merely because the funds were ultimately utilised through or for the benefit of a subsidiary or group concern.
Key Observation
The Supreme Court emphasized that the expression “for the purpose of business” under Section 36(1)(iii) has a wide scope and that the test is one of commercial expediency rather than direct profit generation by the assessee.
Background Of The Dispute
The assessee had borrowed Rs. 3.80 crore from Corporation Bank for acquisition of shares of Shaw Wallace and Company Limited. Interest amounting to Rs. 21.74 lakh was paid on the said borrowing.
During assessment proceedings, the Revenue authorities noted that the borrowed amount was transferred through a group entity and was ultimately used in connection with purchase of shares through related concerns.
On this basis, the Assessing Officer disallowed deduction of interest under Section 36(1)(iii) by holding that the borrowing was not utilised for the assessee’s own business purposes.
While the CIT(A) upheld the disallowance, the ITAT allowed the assessee’s claim by observing that the assessee was carrying on composite business activities and that the borrowing was commercially connected with its business operations.
What The Supreme Court Held
The Supreme Court overturned the Karnataka High Court judgment and restored the order of the ITAT.
The Court examined the scope of Section 36(1)(iii) and analysed the significance of the expressions:
- Interest
- Capital borrowed
- For the purpose of business or profession
The Court clarified that Section 36(1)(iii) concerns interest on money borrowed for business purposes and not every form of liability or debt.
It further observed that the phrase “for the purpose of business” is wider in scope and has to be interpreted from the perspective of commercial expediency.
Reliance On Earlier Supreme Court Judgments
The Bench relied upon earlier decisions including S.A. Builders and Sharp Business System to reiterate that borrowed funds advanced to sister concerns or subsidiaries may still qualify for deduction where there exists commercial expediency.
The Supreme Court held that the High Court committed an error in treating benefit to the subsidiary concern as sufficient ground to deny deduction.
According to the Court, what is relevant is whether the borrowing was connected with the broader business interests and commercial objectives of the assessee.
Key Takeaways
- Deduction under Section 36(1)(iii) cannot be denied merely because borrowed funds indirectly benefited a subsidiary or sister concern.
- Commercial expediency remains the governing test while examining allowability of interest expenditure.
- Composite and interconnected business structures are relevant considerations for determining business purpose.
- The phrase “for the purpose of business” must receive a wider and pragmatic interpretation.
Conclusion
The ruling strengthens the jurisprudence surrounding Section 36(1)(iii) and provides significant support to businesses operating through group structures, holding companies and interconnected commercial arrangements.
The judgment is expected to be relied upon in future disputes involving inter-company funding, strategic investments and business borrowings routed through group entities.