HERO CYCLES (P) LTD.versusCOMMISSIONER OF INCOME TAX (CENTRAL), LUDHIANA

                   (2015] 12 S.C.R. 55


                 HERO CYCLES (P) LTD.                       A
                            v.
     COMMISSIONER OF INCOME TAX (CENTRAL),
                  LUDHIANA
              (Civil Appeal No. 514 of 2008)                B

                  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
                                                            G
     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
56       SUPREME COURT REPORTS               [2015] 12 S.C.R.


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]

C      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]
H
       S.A. Builders Ltd. v. Commissioneroflncome Tax
HERO CYCLES (P) LTD. v. COMMISSIONER OF INCOME                 57
          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                          B
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
                                                               D
     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.                                                    E

     The Judgment of the Court was delivered by

      A. K. SIKRI, J. 1. The prese~t appeal preferred by the
assessee pertains to the Assessment Year 1988-1989. In the
income tax return filed by the assessee for the aforesaid F
Assessment year, the assessee, inter alia, claimed deduction
of interest paid on borrowed sums from Bank under the
provisions of Section 36(1 )(iii) of the Income Tax Act
(hereinafter referred to as 'Act'). The aforesaid deduction was G
disallowed by the Assessing Officer vide his Assesssment
Order dated 26. 03.1991 on the following two points: -

     (1) The assessee had advanced a sum of
     Rs.1, 16,26, 128/-to its subsidiary company known as M/
     s. Hero Fibers Limited and this advance did not carry H
58         SUPREME COURT REPORTS                   [2015) 12 S.C.R.


A          any interest. According to the Assessing Officer, the
           assessee had borrowed the money from the banks and
           paid interest thereupon. Deduction was claimed as
           business expenditure but substantial money out of the
           loans taken from the Bank was diverted by giving advance
B          to M/s. Hero Fibres Limited on which no interest was
           charged by the assessee. Therefore, he concluded that
           money borrowed on which interest was paid was not for
           business purposes and no deduction could be allowed.
c          (2) In addition, the assessee had also given advan.ces
           to its own directors in the sum of Rs. 34 lakhs on which
           the assessee charged from those directors interest at
           the rate of 10 per cent, whereas interest payable on the
           money taken by way of loans by the assessee from the
D          Banks carried interest at the rate of 18 per cent. On that
           basis, the Assessing Officer held that charging of interest
           at the rate of 10 per cent from the above mentioned
           persons and paying interest at much more rate, i.e., at
           the rate of 18 per cent on the money borrowed by the
E          assessee cannot be treated for the purposes of business
           of the assessee.

            2. We may note here that the assessee had claimed
     deduction of interest in the sum of Rs.20,53,120/-. The
F    Assessing Officer, after recording the aforesaid reasons, did
     not allow the deduction of the entire amount and re-calculated
     the figures, thereby disallowed the aforesaid claim to the extent
     of Rs.16,39,010/-.

G       3. The assessee carried the matter in appeal before the
  Commissioner of Income Tax (Appeals). The CIT (Appeals)
  set aside the order of the Assessing Officer holding that the
  interest paid by the assessee of which deduction was claimed,
  on the facts of this case, was for business purposes and,
H therefore, the entire interest paid by the assessee should have
HERO CYCLES (P) LTD. v. COMMISSIONER OF INCOME                    59
     TAX (CENTRAL), LUDHIANA [A. K. SIKRI, J.]

been allowed as business expenditure.                             A
      4. It would be pertinent to mention that insofar as the
advance given to M/s. Hero Fibres Limited is concerned, the
case put up by the assessee even before the Assessing Officer
was that it had given an undertaking to the financial institutions B
to provide M/s. Hero Fibres Limited the additional margin to
meet the working capital for meeting any cash loses. It was
further explained that the assessee company was promotor of
M/s. Hero Fibres Limited and since it had the controlling share
in the said company that necessitated giving of such an C
undertaking to the financial institutions. The amount was, thus,
advanced in compliance of the stipulation laid down by the
three financial institutions under a loan agreement which was
entered into between M/s. Hero Fibres Limited and the said
financial institutions and it became possible for the financial D
institutions to advance that loan to M/s. Hero Fibres Limited
because of the aforesaid undertaking given by the assessee.
It was also mentioned that no interest was to be paid on this
loan unless dividend is paid by that company.
                                                                   E
      5. On that basis, it was argued that the amount was
advanced by way of business expediency. CIT (Appeals)
accepted the aforesaid plea of the assessee.

      6. Insofar as the loan given to its own Directors is F
concerned at the rate of 10 per cent is concerned, the
explanation of the assessee was that this loan was never given
out of any borrowed funds. The assessee had demonstrated
that on the date when the loan was given that is on 25.03.1987
to these directors, there was a credit balance in the account of G
the assessee from where the loan was given. It was
demonstrated that even after the encashment of the cheques
of Rs. 34 lakhs in favour of those directors by way of loan,
there was a credit balance of Rs.4,95,670/- in the said bank
account. The aforesaid explanation was also accepted by the H
60        SUPREME COURT REPORTS                  [2015] 12 S.C.R.


A CIT (Appeal) arriving at a finding of fact that the loan given to
   the Directors was not from the borrowed funds. Therefore,
   interest liability of the assessee towards the Bank on the
  ·borrowing which was taken by the assessee had no bearings
   because otherwise, the assessee had sufficient funds of its
B own which the assessee could have advanced and it was for
   the Assessing Officer to establish the nexus between the
   borrowings and advancing to prove that expenditure was for
   non-business purposes which the Assessing Officer failed to
   do.
c
         7. The Department/ Revenue challenged the order of the
  CIT(Appeal) before the Income Tax Appellate Tribunal
  (hereinafter referred to as 'ITAT'). The ITAT upheld the
  <:iforesaid view of the CIT(Appeal) and thus, dismissed the
D Cl:lppeal preferred by the Revenue.

         8. Further appeal of the Revenue before the High Court
  filed under Section 260Aofthe Income Tax Act, however, has
  Qeen allowed by the High Court vide impugned judgment dated
E 06.12.2006. Challenging that judgment, special leave petition
  was filed in which leave was granted and that is how the present
  appeal comes up for hearing.

        9.Aperusal of the order passed by the High Court would
F reveal that the High Court has not at all discussed the aforesaid
  facts which were established on record pertaining to the interest
  free advance given to M/s. Hero Fibres Limited as well as
  l~ans given to its own Directors at interest at the rate of 10 per
  cent.
G
           10. On the other hand, the High Court has simply quoted
  from its own judgment in the case of' Commissioner of Income
  TCl:lx-1, Ludhiana v. M/s. Abhishek Industries Limited, Ludhiana'
  [ITA No. 110/2005 decided on 04.08.2006]. On that basis, it
H has held that when loans were taken from the banks at which
HERO CYCLES (P) LTD. v. COMMISSIONER OF INCOME                     61
    TAX (CENTRAL}, LUDHIANA [A. K. SIKRI, J.]

interest was paid for the purposes of business, the interest A
thereon could not be claimed as business expenditure.

      11. We are of the opinion that such an approach is clearly
faulty in law and cannot be countenanced.
                                                                   B
       12. Insofar as loans to the sister concern I subsidiary
company are concerned, law in this behalf is recapitulated by
this Court in the case of 'S.A. Builders Ltd. v. Commissioner
of Income Tax (Appeals} and Another' [2007 (288) ITR 1 (SC)].
After taking note of and discussing on the scope of commercial     c
expediency, the Court summed up the legal position in the
following manner: -

     "26. The expression "commercial expediency" is an
     expression of wide import and includes such expenditure
     as a prudent businessman incurs for the purpose of D
     business. The expenditure may not have been incurred
     under any legal obligation, but yet it is allowable as a
     business expenditure if it was incurred on grounds of
     commercial expediency.
                                                                  E
     27. No doubt, as held in Madhav Prasad Jatia v. ~.CIT
     [1979 (118) ITR 200 (SC)], if the borrowed amount was
     donated for some sentimental or personal reasons and
     not on the ground of commercial expediency, the interest
     thereon could not have been allowed under section F
     36(1)(iii) oftheAct. In Madhav Prasad's case [1979 (118)
     ITR 200 (SC)], the borrowed amount was donated to a
     college with a view to commemorate the memory of the
     assessee's deceased husband after whom the college
     was to be named, it was held by this court that the interest G
     on the borrowed fund in such a case could not be allowed,
     as it could not be said that it was for commercial
     expediency.
     28. Thus, the ratio of Madhav Prasad Jatia's case [1979       H
62         SUPREME COURT REPORTS                 [2015] 12 S.C.R.


A         (118) ITR 200 (SC)] is that the borrowed fund advanced
          to a third party should be for commercial expediency if it
          is sought to be allowed under section 36(1 )(iii) of the
          Act.
          29. In the present case, neither the High Court nor the
B
          Tribunal nor other authorities have examined whether the
          amount advanced to the sister concern was by way of
          commercial expediency.
          30. It has been repeatedly held by this court that the
c         expression "for the purpose of business" is wider in
          scope than the expression "for the purpose of earning
          profits" vide CIT v. Malayalam Plantations Ltd. [1964 53
          ITR 140 (SC), CIT v. Birla Cotton Spinning and Weaving
          Mills Ltd. [1971 82 ITR 166 tSC)], etc."
D
        13. In the process, the Court also agreed that the view
  taken by the Delhi High Court in 'CIT v. Dalmia Cement (8.)
  Ltd.' [2002 (254) ITR 377] wherein the High Court had held
  that once it is established that there is nexus between the
E expenditure and the purpose of business (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
F expenditure having regard to the circumstances of the case. It
  further held that no businessman can be compelled to
  maximize his profit and that the income tax authorities must
  put themselves in the shoes of the assessee and see how a
  prudent businessman would act. The authorities must not look
G at the matter from their own view point but that of a prudent
  businessman.

          14. Applying the aforesaid ratio to the facts of this case
     as already noted above, it is manifest that the advance to Mis.
H    Heto Fibres Limited became imperative as a business
HERO CYCLES (P) LTD. v. COMMISSIONER OF INCOME                    63
    TAX (CENTRAL), LUDHIANA [A. K. SIKRI, J.]

expediency in view of the undertaking given to the financial A
institutions by the assessee to the effect that it would provide
additional margin to M/s. Hero Fibres Limited to meet the
working capital for meeting any cash loses.

      15. It would also be significant to mention at this stage B
that, subsequently, the assessee company had off-loaded its
share holding in the saiq M/s. Hero Fibres Limited to various
companies of Oswal Group and at that time, the assessee
company not only refunded back the entire loan given to Mis.
Hero Fibres Limited by the assessee but this was refunded C
with interest. In the year in which the aforesaid interest was
received, same was shown as income and offered for tax.

      16. Insofar as the loans to Directors are concerned, it
could not be disputed by the Revenue that the assessee had D
a credit balance in the Bank account when the said advance
of Rs. 34 lakhs was given. Remarkably, as observed by the
CIT (Appeal) in his order, the company had reserve/surplus to
the tune of almost 15 crores and, therefore, the assessee
company could in any case, utilise those funds for giving E
advance to its Directors.

     17. On the basis of aforesaid discussion, the present
appeal is allowed, thereby setting aside the order of the High
Court and restoring that of the Income Tax Appellate Tribunal.    F

Kalpana K. Tripathy                             Appeal allowed.