Interest Allowable Despite Lower Rates on Loan Given Than Loan Taken

Girishbhai Vadilal Shah Vs DCIT (ITAT Ahmedabad)

ITAT Ahmedabad allows Interest expenses even if interest rate charged by the assessee on loans given was lower than the rate paid on loans taken, thus disallowing the excess interest paid. Tribunal held that the only requirement for claiming expenses under Section 57(iii) is that they must be incurred wholly and exclusively for the purpose of earning income from other sources. 

The case of Girishbhai Vadilal Shah vs. DCIT (ITAT Ahmedabad) revolves around the disallowance of interest expenses claimed by the assessee under Section 57(iii) of the Income Tax Act, 1961, amounting to Rs. 54,32,948 for the Assessment Year 2013-14. The Assessing Officer disallowed a portion of the claimed interest expenses, asserting that the interest rate charged by the assessee on loans given was lower than the rate paid on loans taken, thus disallowing the excess interest paid.

However, the Tribunal found this disallowance unsustainable. It reasoned that the Assessing Officer had already accepted the usage of interest-bearing funds for earning interest income by allowing a portion of the interest expense in parity with the interest charged by the assessee on loans/advances given. Thus, the Tribunal held that the only requirement for claiming expenses under Section 57(iii) is that they must be incurred wholly and exclusively for the purpose of earning income from other sources. The quantum of expenditure incurred is irrelevant as long as there is a clear nexus between the expenditure and the income sought to be earned.

The Tribunal also pointed out that the Assessing Officer’s interpretation of Section 57(iii), stating that expenses can only be allowed if income is earned from the incurrence of the said expense, was incorrect. The Tribunal clarified that the term “income” in this context does not necessarily mean profit earned, but rather any income earned, including interest income. Since the assessee had indeed earned interest income, the disallowance of expenses was unwarranted.

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