Interest deduction for composite business borrowing upheld where funds were commercially expedient and linked to associated share investment.

Interest on borrowed capital is deductible under Section 36(1)(iii) when the borrowing is for business purposes and satisfies commercial expediency. The Court held that funds used through a subsidiary or shareholding arrangement were still connected with the assessee's composite business, because the operations were interlinked and under common management. Deduction could not be denied merely because the borrowed money passed through an associated concern before being applied to the share transaction, and the revenue disallowance was unsustainable.

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Issues: Whether the assessee was entitled to deduction of interest paid on borrowed funds under Section 36(1)(iii) of the Income-tax Act, 1961 when the borrowed money was deployed in the assessee's composite business structure and through its associated share investment arrangement.

Analysis: Section 36(1)(iii) allows deduction of interest paid in respect of capital borrowed for the purposes of business or profession. The controlling enquiry is whether the borrowing was for business purposes, and the matter must be examined from the standpoint of commercial expediency. The Court held that the High Court erred in treating the utilisation of funds through the subsidiary/shareholding route as outside the assessee's business. The assessee carried on a composite business with interlinked operations and common management, and the borrowed funds were used in a manner connected with that business. Interest on such borrowed capital cannot be denied merely because the funds passed through an associated concern before being applied to the share transaction.

Conclusion: The assessee was entitled to deduction of the interest paid on the borrowed sum under Section 36(1)(iii), and the disallowance made by the revenue authorities was unsustainable.

Ratio Decidendi: Interest on borrowed capital is deductible under Section 36(1)(iii) when the borrowing is commercially expedient and connected with the assessee's business, including in a composite business arrangement involving associated concerns.

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