Ruling on business expenditure

Interest paid by a company on borrowings from banks to advance money to its own subsidiary is 'business expenditure' on which tax deduction can be claimed, the Supreme Court has ruled in its judgment, Hero Cycles Ltd vs CIT. In this case, the company which was the promoter of Hero Fibres Ltd, took loans and paid interest on it. The money was paid to the sister concern due to business expediency in view of an undertaking given to financial institutions that it would provide additional margin to meet working capital for meeting any cash losses. When the company claimed deduction on it as business expenditure, the revenue authorities denied it. The company moved the Punjab and Haryana High Court but it dismissed the appeal maintaining that when loans were taken from banks at which interest was paid for purposes of business, the interest component could not be claimed as business expenditure. The company moved the Supreme Court. Allowing its appeal, the apex court gave a wider meaning to the phrase business expenditure. The judgment explained that the advance given to the sister concern was imperative. "The revenue authorities cannot put themselves 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. The authorities cannot decide how a prudent businessman would act," the judgment said.

Article referred: http://www.business-standard.com/article/opinion/family-accord-prevails-over-law-suits-115120600838_1.html