Hero Cycles had advanced a sum of Rs.1,16,26,128/- to its subsidiary, Hero Fibers Limited, and this advance did not carry any interest.
According to the tax authorities, Hero Cycles had borrowed the money from a banks and paid interest thereupon, and on that basis an assessment was issued where the interest paid to the bank had been disallowed.
Judgment of the Supreme Court
The Supreme court set aside the assessment of the tax authorities.
“…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 assume the role to decide how much is reasonable 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 at the matter from their own view point but that of a prudent businessman. Applying the aforesaid ratio to the facts of this case as already noted above, it is manifest that the advance to M/s. Hero Fibres Limited 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 M/s. Hero Fibres Limited to
meet the working capital for meeting any cash loses. (…)”