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

Citation: [2015] 12 S.C.R. 55 · Decided: 05-11-2015 · Supreme Court of India · Bench: A.K. SIKRI · Disposal: Appeal(s) allowed

Judgment (excerpt)

(2015] 12 S.C.R. 55 
HERO CYCLES (P) LTD. 
v. 
COMMISSIONER OF INCOME TAX (CENTRAL), 
LUDHIANA 
(Civil Appeal No. 514 of 2008) 
NOVEMBER 05, 2015 
(A. K. SIKRI AND ROHINTON FALi NARIMAN, JJ.] 
A 
B 
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 
G 
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 
2007 (288) ITR 1 (SC) 
2002 (254) ITR 377 
relied on 
approved 
Para 11 
Para 12 
B 
. 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 
D 
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. 

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