Income Tax Act, 1961

Section 14A

Disallowance under section 14A - Expenditure against exempt income - Interest expenditure - Allowability of interest

AO disallowed interest expenses holding that no deduction was to be allowed in respect of expenditure incurred in relation to income which did not form part of total income. Assessee contended that the shares, which were generally held as stock-in-trade, were in nature of business assets and the profit arising on purchase and sale of shares was treated as business profit. Held: The facts remains that the dividend income from two companies was 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 was hit by section 14A, inasmuch as the dividend received on such shares did not form part of total income.

REFERRED :

FAVOUR : Against the assessee

A.Y. : 1998-99

IN THE BOMBAY HIGH COURT

K.R. SHRIRAM & NEELA GOKHALE, JJ.

Mahesh K. Mehta v. Dy. CIT

ITA No. 492 of 2004

1 March, 2024

Appellant by: Mahesh K. Mehta.

Respondents by: Suresh Kumar.

K.R. Shriram, J.

1. This petition relates to assessment year 1998-99. The short point in the matter is allow ability of interest of Rs. 36,88,866 paid on borrowed amount.

2. Assessee, i.e., appellant, is a Chartered Accountant by qualification and decided to switch profession to become a stock broker. Therefore, in 1987 he acquired membership card of the Bombay Stock Exchange. In 1994 appellant also acquired membership of National Stock Exchange. Appellant admittedly had also borrowed capital which he invested primarily in shares of his own two companies, viz., MKM Shares and Stockbrokers Ltd. and MKM Finance and Investment Pvt. Ltd. Assessee had allocated amount of Rs. 36,88,866 interest that he had paid on borrowings for the amounts invested in shares of these two companies.

3. The assessing officer disallowed the interest holding that no deduction is to be allowed in respect of expenditure incurred in relation to income which does not form part of the total income under the Income Tax Act, 1961 (the IT Act). The assessing officer observed that the purpose of investment was to earn income in the form of dividend from the two companies and the same was not taxable. The assessment Order dated 14-3-2001 was challenged before the Commissioner (Appeals) (CIT (A)). The Commissioner (Appeals) held that section 14A of the Act clearly says that any expenditure incurred in relation to any income which is not included in the total income would not be allowed on expenditure. Since the dividend income is not includable in the total income by virtue of section 10(33) of the Act, whether the dividend income is received or not, the expenditure claimed for such income cannot be allowed in view of provisions of section 14A and section 10(33) of the Act. Paragraphs 3.3 and 3.4 of the order of Commissioner (Appeals) read as under :

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