Mahesh K. Mehta v. Dy. CIT - Taxpublishers.in

Case Laws Analysis
REFERRED Maxopp Investment Ltd. v. CIT 2018 TaxPub(DT) 1403 (SC)
REFERRED S.A. Builders Ltd. v. CIT (Appeals) & Anr. 2007 TaxPub(DT) 0833 (SC)

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The Tax Publishers2024 TaxPub(DT) 1203 (Bom-HC) 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. ORAL JUDGMENT *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 : 3.3. Apart from this, section 14A also 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. By virtue of provisions of section 10(33), the dividend income is not includable in the total income. Hence, if 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). 3.4.As regards the claim of the assessee that this interest should be allowed u/s 36(1)(iii), the shares which are generally held as stock-in-trade by the assessee are in the nature of business assets and the profit arising on purchase and sale of shares is treated as business profit. The activity of purchase and sale of shares is a business activity and any profit or loss on purchase and sale of such shares is normally treated as business profit or loss. This being the case, interest paid on loan for acquiring shares is allowable as business expenditure under section 36(1)(iii). But in the instant case, shares of a private limited company in which the assessee has invested have been held as investment and not as stock-in-trade. Another most important feature is that a shares of a private limited company cannot be traded in the open market and thus these shares held by the assessee cannot be treated as stock-in-trade. Hence, the question of allowing the interest paid on the loan for acquiring the shares which is not stock-in- trade of the assessee as business expenditure under section 36(1) (ii) does not arise. Hence, the disallowance of interest amounting to Rs. 36,86,866 is confirmed. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2024 TaxPub(DT) 1203 (Bom-HC)

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.

ORAL JUDGMENT

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 :

3.3. Apart from this, section 14A also 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. By virtue of provisions of section 10(33), the dividend income is not includable in the total income. Hence, if 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).

3.4.As regards the claim of the assessee that this interest should be allowed u/s 36(1)(iii), the shares which are generally held as stock-in-trade by the assessee are in the nature of business assets and the profit arising on purchase and sale of shares is treated as business profit. The activity of purchase and sale of shares is a business activity and any profit or loss on purchase and sale of such shares is normally treated as business profit or loss. This being the case, interest paid on loan for acquiring shares is allowable as business expenditure under section 36(1)(iii). But in the instant case, shares of a private limited company in which the assessee has invested have been held as investment and not as stock-in-trade. Another most important feature is that a shares of a private limited company cannot be traded in the open market and thus these shares held by the assessee cannot be treated as stock-in-trade. Hence, the question of allowing the interest paid on the loan for acquiring the shares which is not stock-in- trade of the assessee as business expenditure under section 36(1) (ii) does not arise. Hence, the disallowance of interest amounting to Rs. 36,86,866 is confirmed.