Case Law Details
Mahesh K. Mehta Vs DCIT (Bombay High Court)
Bombay High Court held that as per section 14A of the Income Tax Act any expenditure incurred in relation to any income which is not included in total income would not be allowed as expenditure. Thus, interest on borrowed funds used to earn dividend which is exempt from tax cannot be allowed as expenditure.
Facts- Appellant borrowed capital and invested primarily in shares of two companies, viz., MKM Shares and Stock Brokers 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.
AO 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. AO 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. Both, CIT(A) and tribunal dismissed the appeal.
Conclusion- Apex court in Maxopp Investment Ltd. has held that normally, interest paid on the loan would be expenditure incurred for earning dividend income. Such an interest would not be allowed as deduction as it is an expenditure incurred in relation to dividend income which itself is spared from tax net.
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