In a recent significant ruling in L.K. Trust vs Commissioner of Income Tax, the Supreme Court reaffirmed an important business principle: when a company borrows funds and deploys them for the benefit of its subsidiary based on commercial expediency, the related interest can qualify as a deductible business expenditure under Section 36(1)(iii) of the Income Tax Act.
What this means in real terms
Many business groups support subsidiaries through funding, guarantees, or strategic investments to strengthen the overall enterprise. Tax authorities have often questioned the deductibility of interest expenses where borrowed funds were used for the benefit of another group entity.
The Supreme Court has reinforced that business decisions cannot always be viewed in isolation. If the funding serves a genuine business purpose and is driven by commercial considerations, the related interest cost may remain deductible.
Why the ruling matters
The business reality affirmed by the Court is that tax outcomes should follow business realities. Sound commercial judgement, when properly documented and supported, deserves recognition.
For founders, promoters, and growing business groups, this ruling offers greater confidence while structuring intra-group financial support and long-term growth initiatives.
Strategic decisions often require strategic capital. When business purpose is clear, the law can support growth rather than stand in its way.
Organizations should document the commercial rationale for financing decisions, preserve board-level approvals, and keep the connection between capital deployment and business purpose clear before scrutiny begins.
