Hero Cycle P. Ltd. vs. CIT (2015) 379 ITR 347( SC)
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 privisions of section 36(1)(iii) (hereinafter referred to as “the Act”). The aforesaid deduction was disallowed by the Assessing Officer, vide his assessment order dated March 26, 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 Fibres Ltd. 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 Fibres Ltd. on which no interest was charged by the assessee. Therefore, he concluded that the 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 directors in the sum of Rs. 34 lakh on which the assessee charged from those directors interest at the rate of 10%, whereas interest payable on the money taken by way of loans by the assessee from the banks carried interest at the rate of 18%. On that basis, the Assessing Officer held that charging of interest at the rate of 10% from the abovementioned persons and paying interest at much more rate, i.e., at the rate of 18% on the money borrowed by the assessee could not be treated for the purposes of business of the assessee.
The assessee had claimed deduction of interest in the sum of Rs. 20,53,120. The 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).
In so far as the advance given to M/s. Hero Fibres Ltd. was 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 Ltd. the additional margin to meet the working capital for meeting any cash losses. It was further explained that the assessee-company was the promoter of M/s. Hero Fibres Ltd. 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 with the stipulation laid down by the three financial institutions under a loan agreement which was entered into between M/s. Hero Fibres Ltd. and the said financial institutions and it became possible for the financial institutions to advance that loan to M/s. Hero Fibres Ltd., because of the aforesaid undertaking given by the assessee. No interest was to be paid on this loan unless dividend was paid by that company.
On that basis, it was argued that the amount was advanced by way of business expediency. The Commissioner of Income-tax (Appeals) accepted the aforesaid plea of the assessee.
In so far as the loan given to its own directors at the rate of 10 % was 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 March 25,1987, 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 lakh 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 Commissioner of Income-tax (Appeals) arriving at a finding of fact that the loan given to the directors was not from the borrowed funds. Therefore, the 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 assesse could have advanced and it was for the Assessing Officer to establish the nexus between the borrowings and advancing to prove that the expenditure was for non-business purposes which the Assessing Officer failed to do.
The Revenue challenged the order of the Commissioner of Income-tax (Appeals) before the Income-tax Appellate Tribunal. The Income-tax Appellate Tribunal upheld the aforesaid view of the Commissioner of Income-tax (Appeals) and, thus, dismissed the appeal preferred by the Revenue.
The appeal of the Revenue before the High Court filed u/s. 260A of the Income-tax Act, however, was allowed by the High Court, by simply following its own judgment in the case of CIT vs. Abhishek Industries Ltd. (286 ITR 1).
The Supreme court applying the ratio of its decision in S. A. Builders vs. CIT (288 ITR 1) to the facts of this case and referring to the decision of the Delhi High Court in CIT vs. Dalmia Cement (B) Ltd. (254 ITR 377) which was approved in S. A. Builders (supra), held that it was manifest that the advance to M/s. Hero Fibres Ltd. 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 meet working capital for cash losses.
The Supreme Court noted that, subsequently, the assessee-company had off-loaded its shareholding in the said M/s. Hero Fibres Ltd. to various companies of the Oswal group and at that time, the assessee-company not only got the back the entire loan given to M/s. Hero Fibres Ltd. but this was refunded with interest. In the year in which the aforesaid interest was received, the same was shown as income and offered to tax.
In so far as the loans to the directors was concerned, the Supreme Court observed that 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 lakh was given. Further, as observed by the Commissioner of Income-tax (Appeals) in his order, the company had reserve/surplus to the tune of almost 15 crore and, therefore, the assessee-company could in any case, utilise those funds for giving advance to its directors.
In view of above, the Supreme Court allowed the appeal thereby setting aside the order of the High Court and restoring that of the Income-tax Appellate Tribunal.
Note:- The judgment of the Apex Court in the case of S. A. Builders was analysed in the column ‘ Closements’ of BCAJ in the month of February, 2007.
