Apex Court discuss scope of ‘commercial expediency’ to allow deduction of interest to Hero Cycles

IT : 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 to decide how much is reasonable expenditure having regard to the circumstances of the case.

Facts

(a)		Assessee-company had taken a loan at interest rate of 18% p.a. Out of such borrowed funds it had transferred certain sum to its subsidiary-company without any interest. It had claimed deduction of interest under Section 36(1)(iii).
(b)		Assessing Officer ('AO') disallowed interest on borrowed sum on the ground that such funds were not used for business purposes.
(c)		The CIT (Appeals) set aside the order of AO. Further, the ITAT also upheld the order of CIT(A). However, the appeal of revenue was allowed by the High court.

The Supreme Court held as under:

(1)		A perusal of the order passed by the High Court would reveal that the High Court had not discussed the facts which were established on record. On the other hand, the High Court had on basis of its own judgment in case of CIT v. M/s Abhishek Industries Ltd [2006] 156 TAXMAN 257 (PUNJ. & HAR.), held that when loans were taken from the banks on which interest was paid for the purposes of business, the interest thereon could not be claimed as business expenditure. Such approach was clearly faulty in law and could not be sustained.
(2)		The Court agreed with the views taken by the Delhi High Court in case of CIT v. Dalmia Cement (P.) Ltd. [2002] 121 Taxman 706 (Delhi)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 how much is reasonable expenditure having regard to the circumstances of the case.
(3)		Applying the aforesaid ratio to the facts of the instant case, it was manifest that the advance to 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 would provide additional margin to subsidiary-company to meet the working capital for meeting the cash loses.
(4)		Thus, order of High Court was to be set-aside.

 [2015] 63 taxmann.com 308 (SC)

SUPREME COURT OF INDIA

Hero Cycles (P.) Ltd.

v.

Commissioner of Income-tax (Central), Ludhiana