Legal Analysis: L.K. Trust vs. Commissioner of Income Tax & Anr

Citation: 2026 INSC 474
Court: Supreme Court of India
Bench: Justice J.B. Pardiwala and Justice Ujjal Bhuyan (Division Bench)
Date of Decision: May 7, 2026
Nature of Judgment: Civil Appeal under Article 136 of the Constitution of India against the judgment of the Karnataka High Court in an Income Tax Appeal.

Synopsis of the Judgment

The assessee (L.K. Trust) borrowed ₹3.80 crores from a bank to purchase shares of Shaw Wallace and Company Limited. The borrowed amount was transferred to a subsidiary company (Gayatri Holdings Pvt. Ltd.), which in turn advanced it to another individual for purchasing the shares. The Assessing Officer disallowed the interest paid on the loan (₹21.74 lakhs) under Section 36(1)(iii) of the Income Tax Act, 1961, holding that the funds were not used for the assessee’s own business. The ITAT allowed the deduction, applying the principle of commercial expediency and composite nature of business. The High Court reversed. The Supreme Court restored the ITAT’s order, holding that interest on borrowed capital is allowable if the borrowing is for the purpose of business, even if the funds are routed through a subsidiary or sister concern, as long as the transaction is borne out of commercial expediency. The Court relied on S.A. Builders Ltd. v. CIT and Sharp Business System v. CIT.

1. Basic Information of the Judgment

• Case Title: L.K. Trust vs. Commissioner of Income Tax & Anr.

• Civil Appeal No.: 527 of 2012

• Bench: Justice J.B. Pardiwala and Justice Ujjal Bhuyan (Division Bench)

• Date of Decision: May 7, 2026

• Citation: Not specified in the extract (the judgment is from 2026)

• Appeal From: Judgment and order dated 01.03.2010 of the Karnataka High Court in Income Tax Appeal No. 175 of 2001

2. Legal Framework

Laws and Provisions Involved

• Income Tax Act, 1961: Section 36(1)(iii) (deduction for interest on capital borrowed for business purposes), Section 2(28A) (definition of interest), Section 37(1) (general business expenditure), Section 57(iii) (expenditure for earning income from other sources)

• Income Tax Act, 1922: Section 10(2)(iii) (predecessor provision) – referred to in Madhav Prasad Jatia.

Key Precedents Cited

1. Madhav Prasad Jatia v. CIT (1

... Upgrade to a Premium Plan to view the full judgment.