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5. L.K. Trust vs. Commissioner of Income Tax and Ors.- SC
Civil Appeal No. 527/2012 decided on 07.05.2026
Deduction – Interest – Section 36(1)(iii) - The provisions of Section 36(1)(iii) concern capital borrowed and not other debts or liabilities – for determining the allowability, the court should examine the transfer of borrowed funds from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits.
The Assessee borrowed a sum of Rs.3.80 crore from Corporation Bank to purchase shares of Shaw Wallace and Company Limited in pursuance of an Agreement dated 19-11-1987. Under the said Agreement, the Company had committed to sell 7.80 lakh shares for a total consideration of Rs.3.8 crore.
The Assessee filed its return of income for the Assessment year 1989-90 declaring total income of Rs.7,55,67,530/-. The return was processed under Section 143(1)(a) of the Act, and later a notice was issued under Section 143(2). While passing the Assessment Order in 1992, the Assessing Officer noted that the Assessee had availed a loan of Rs.3,80,00,000/- from 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
