Hero Cycles (P) Ltd v. Commissioner Of Income Tax (Central), Ludhiana

HERO CYCLES (P) LTD. COMMISSIONER OF INCOME TAX (CENTRAL), LUDHIANA (Civil Appeal No. 514 of 2008) NOVEMBER 05, 2015 (A. K. SIKRI AND ROHINTON FALi NARIMAN, JJ.] Income Tax Act, 1961 - s. 31(1)(iii) - Deduction of c interest paid on borrowed sums from Banks - Claim for, by the assessee - Denied by Revenue - On the grounds that the money borrowed on which interest was paid was not for business purpose and that the advances given . by assessee-. company to its Directors at the rate of 10% interest being D much lower than the interest paid to the Banks (i.e.@ 18%), the same cannot be treated for the purposes of business of the assessee - Assessing Officer disallowed the claim for deduction-Appellate Authority as well as appellate Tribunal held that the interest was a business expenditure and hence E deductible - High Court held that the deduction was not permissible - On appeal, Held: It is evident from the facts of the case that the advance by the assessee-company to its subsidiary company became imperative as its business expediency- The loan given to the Director was not from the F borrowed funds - Therefore, the assessee was entitled to deduction of interest on borrowed sums. Allowing the appeal, the Court HELD: 1.1. "Commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. Once it is established that there is nexus between the expenditure and the purpose of business H 55 A (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having B regard to the circumstances of the case. The authorities must not look at the matter from their own view point but that of a prudent businessman. [Paras 12-13] [61-D; 62-E-G] 1.2 In the facts of the present case, it is manifest that the advance by the assessee-company to its subsidiary company became imperative as a business expediency in view of the undertaking given to the financial institutions by the assessee to the effect that it D would provide additional margin to the subsidiary company to meet the working capital for meeting any cash losses. [Para 14] [62-H; 63-A] 1.3 Subsequently, the assessee company had off- E loaded its share-holding in the subsidiary company to various other companies and at that time, the assessee company not only refunded back the entire loan given to the subsidiary company by the assessee but this was refunded with interest. In the year in which the aforesaid F interest was received, same was shown as income and offered for tax. [Para 15] [63-B-C] 2. Insofar as the loans to Directors are concerned, the assessee had a credit balance in the Bank account G when t~e said advance of Rs. 34 lakhs was given. The company had reserve/surplus to the tune of almost 15 crores and, therefore, the assessee company could in any case, utilize those funds for giving advance to its Directors. [Para 16] [63-D-E] S.A. Builders Ltd. v. Commissioneroflncome Tax TAX (CENTRAL), LUDHIANA (Appeals) and Another 2007 (288) ITR 1 (SC) -A relied on. CIT v. Dalmia Cement (B.) Ltd. 2002 (254) ITR 377 - approved. Case Law Reference 2007 (288) ITR 1 (SC) relied on Para 11 2002 (254) ITR 377 approved Para 12 . CIVILAPPELLATEJURISDICTION: CivilAppeal No. 514 C of2008 From the Judgment and Order dated 06.12.2006 of the High Court of Punjab and Haryana at Chandigarh in ITR No. 162 of 1999 S. Ganesh, Satyen Sethi, Arta Trana Panda, Rameshwar Prasad Goyal, for the Appellant. K. L. Janjani, Shweta Garg, B. V. Balaram Das, for the Respondent. The Judgment of the Court was delivered by A. K. SIKRI, J. 1. The prese~t appeal preferred by the