Full Judgment Text
'REPORTABLE'
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 514 OF 2008
HERO CYCLES (P) LTD. ... Appellant
VERSUS
COMMISSIONER OF INCOME TAX (CENTRAL),
LUDHIANA ... Respondent
J U D G M E N T
A. K. SIKRI, J.
The present appeal preferred by the assessee pertains
to the Assessment Year 1988-1989. In the income tax return
filed by the assessee for the aforesaid 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 disallowed by the
Assessing Officer vide his Assesssment Order dated
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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 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 to M/s. Hero
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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.
(2) In addition, the assessee had also given advances 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
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 assessee cannot be treated for the purposes of
business of the assessee.
We may note here that the assessee had claimed
deduction of interest in the sum of Rs.20,53,120/-. The
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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/-.
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
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claimed, on the facts of this case, was for business
purposes and, therefore, the entire interest paid by the
assessee should have been allowed as business expenditure.
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 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 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
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financial 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.
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.
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Insofar as the loan given to its own Directors is
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 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 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 own
which the assessee could have advanced and it was for the
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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.
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
aforesaid view of the CIT(Appeal) and thus, dismissed the
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appeal preferred by the Revenue.
Further appeal of the Revenue before the High Court
filed under Section 260A of the Income Tax Act, however, has
been allowed by the High Court vide impugned judgment dated
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.
A perusal of the order passed by the High Court would
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 loans given to its own Directors at
interest at the rate of 10 per cent.
On the other hand, the High Court has simply quoted
from its own judgment in the case of ' Commissioner of Income
Tax-I, Ludhiana v. M/s. Abhishek Industries Limited,
Ludhiana' [ITA No. 110/2005 decided on 04.08.2006]. On that
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basis, it has held that when loans were taken from the banks
at which interest was paid for the purposes of business, the
interest thereon could not be claimed as business
expenditure.
We are of the opinion that such an approach is clearly
faulty in law and cannot be countenanced.
Insofar as loans to the sister concern / subsidiary
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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 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 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.
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 36(1)(iii) of the Act. 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 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 (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.
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29. In the present case, neither the High Court nor
the 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 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
(SC)], etc.”
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In the process, the Court also agreed that the view
taken by the Delhi High Court in ' CIT v. Dalmia Cement (B.)
Ltd.' [2002 (254) ITR 377] wherein the High Court had held
that once it is established that there is nexus between the
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 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 at the matter from their own view
point but that of a prudent businessman.
Applying the aforesaid ratio to the facts of this case
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as already noted above, it is manifest that the advance to
M/s. Hero Fibres Limited became imperative as a business
expediency in view of the undertaking given to the financial
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.
It would also be significant to mention at this stage
that, subsequently, the assessee company had off-loaded its
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share holding in the said 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 M/s. Hero Fibres Limited by the assessee but this
was refunded with interest. In the year in which the
aforesaid interest was received, same was shown as income
and offered for tax.
Insofar as the loans to Directors are concerned, it
could not be disputed by the Revenue that the assessee had 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
advance to its Directors.
On the basis of aforesaid discussion, the present
appeal is allowed, thereby setting aside the order of the
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High Court and restoring that of the Income Tax Appellate
Tribunal.
......................., J.
[ A.K. SIKRI ]
......................., J.
[ ROHINTON FALI NARIMAN ]
New Delhi;
November 05, 2015.
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