Interest Paid On Borrowed Funds For Investment In Shares Is Hit By Sec 14A If Dividend Received On Shares Was Not Part Of Total Income: Bombay HC

The Division Bench comprising Justice K.R. Shriram and Justice Dr. Neela Gokhale observed that “the fact remains that the dividend income from the two companies is not taxable and in that scenario the expenditure incurred on interest paid on funds borrowed in respect of investment in shares of two operating companies is hit by Section 14A of the Act inasmuch as the dividend received on such shares does not form part of the total income”. (Para 8)

As per the brief facts of the case, the Assessee is a Chartered Accountant by qualification who later became a stock broker. He has a membership card of the Bombay Stock Exchange as well as the National Stock Exchange. The Assessee had borrowed capital which he invested primarily in shares of two companies controlled by him viz., MKM Shares and Stock Brokers Ltd. and MKM Finance and Investment Pvt Ltd. The Assessee had allocated an amount of Rs.36.89 lac being interest that he had paid on borrowings for the amounts invested in shares of these two companies and claimed deduction under Section 36(1)(iii). The Assessment order was passed for the AY 1998-99 disallowing the interest of Rs. 36.89 lac under Section 14A on the ground that the purpose of investment in the two companies was to earn income in the form of dividend and the same was not taxable under Section 10(33).

The Bench observed that the facts of the present case were identical to those covered by the judgment of the Apex Court in Maxopp Investment Ltd. V/s. Commissioner of Income Tax, New Delhi [(2018) 91 taxmann.com 154 (SC)] wherein the question for determination before the Apex Court was whether expenditure (including interest paid on funds borrowed) in respect of investment in shares of operating companies for acquiring and retaining a controlling interest therein was hit by Section 14A inasmuch as the dividend received on such shares did not form part of the total income.

The Apex Court while interpreting Section 14A has held that “the said provision has to be interpreted, particularly, the word 'in relation to the income' that does not form part of total income dominant purpose test for which the investment into shares is made by an assessee may not be relevant while interpreting Section 14A of the Act. The fact remains that such dividend income is non-taxable, and in that scenario, if expenditure is incurred on earning the dividend income, that much of the expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure”, added the Bench.

Hence, relying on Apex Court's judgment in Maxopp Investment, the High Court dismissed the Assessee's appeal.

Counsel for Appellant/ Assessee: Mahesh K. Mehta in person

Counsel for Respondent/ Revenue: Advocate Suresh Kumar

Case Title: Mahesh K. Mehta Vs Deputy Commissioner of Income Tax

Case Number: ITA No. 492 of 2004

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