HERO CYCLES (P) LTD. versus COMMISSIONER OF INCOME TAX (CENTRAL),  LUDHIANA
[2015] 12 S.C.R. 55, Supreme Court of India, 2015
Outcome: Appeal(s) allowed (Granted)
Segment: Facts
(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. 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. 
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. 
E 
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. 
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 
B 
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. 
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 
E 
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 
A 
B 
c 
D 
SUPREME COURT REPORTS 
[2015] 12 S.C.R. 
(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 
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 tSC)], etc." 
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.