HERO CYCLES (P) LTD. vs. COMMISSIONER OF INCOME TAX (CENTRAL)

C.A. No.-000514-000514 - 2008Supreme Court05 November 20158 pages
For Petitioner: RAMESHWAR PRASAD GOYALFor Respondent: B. V. BALARAM DAS
AI SummaryAllowed

What did the Supreme Court hold?

The Supreme Court held that advances made to a subsidiary for business expediency, even if interest-free, are deductible. Similarly, loans to directors from the company's own funds, even if the company has borrowed funds, do not automatically disallow interest deduction.

What were the facts?

The assessee claimed deduction for interest paid on borrowed funds, which was disallowed by the Assessing Officer. The disallowance was based on advances made to a subsidiary and directors without charging sufficient interest. The CIT(Appeals) and ITAT ruled in favor of the assessee, but the High Court reversed this decision.

What were the issues?

Whether interest paid on borrowed funds is deductible when such funds are advanced to a subsidiary or directors without adequate interest. Whether advances are for business purposes or commercial expediency.

Which sections of the Income-tax Act were involved?

Section 36(1)(iii)

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Cause title — parties, addresses and appearances
Page 1 JUDGMENT '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 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 th

The order continues below.

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