The Delhi High Court permits the actual interest expense to be offset against the interest income

CIT Vs RRPR Holding Pvt Ltd (Delhi High Court)

Facts:

1. The appeal pertains to the Assessment Year 2009-10.
2. The appellant (revenue) challenges the order dated 18.08.2021 by the Income Tax Appellate Tribunal (ITAT).
3. Three questions of law are proposed:
   • (i) Whether ITAT wrongly restricted the addition under Section 14A of the Income Tax Act to the exempt income?
   • (ii) Whether ITAT erred by relying on a different case, Joint Investment Pvt. Ltd.?
   • (iii) Whether ITAT was wrong in directing to offset interest income not related to interest expenditure for earning exempt income?

Observations:

4. Questions (i) and (ii) are acknowledged by the appellant to be covered against them by the decision in Joint Investments (P) Ltd. vs. CIT.

5. Exempt income earned by the respondent/assessee during the period was Rs.37,93,374/-
6. The Assessing Officer disallowed Rs.66,51,45,652/- invoking Section 14A read with Rule 8D of the Income Tax Rules, 1962.
7. The court clarifies that disallowance under Section 14A cannot exceed the exempt income, citing Joint Investments (P.) Ltd.
8. Proposed question no.(iii) pertains to adjusting interest income against interest expenditure. The AO adjusted interest expended towards 90% of the income, quantifying it at Rs.11,27,234.
9. The Tribunal disagreed, stating that actual interest expenditure should be adjusted against the income earned by way of interest, resulting in the deletion of the addition.

Conclusion:

10. The court supports the Tribunal’s decision, stating that the disallowance under Section 14A cannot exceed the exempt income.

11. Regarding question no.(iii), the court agrees with the Tribunal’s approach of netting off interest income against interest expenditure.
12. No legal questions remain for consideration, and the appeal is closed.
13. Pending applications are also closed.

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