Whether dominant purpose for which investment is made is relevant for application of section 14A?

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Short note of today's case law for quick reference:

[2024] 471 ITR 237 (Bom)

[In The Bombay High Court]

Mahesh К. Мehta

v.

Deputy Commissioner of Income-Tax And Another

K. R. Shriram and DR. MS. Neela Gokhale JJ.

March 1, 2024           

1) The assessee was a chartered accountant by qualification and decided to change his profession to become a stock broker.

2) Therefore, in 1987 he acquired membership of the Bombay Stock Exchange.

3) He had borrowed capital which he invested primarily in shares of his own two companies.

4) The Assessing Officer disallowed deduction of the interest on borrowed capital which was upheld by the Tribunal.

5) On further appeal it was held that the fact remained that the dividend income from the 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 the two operating companies was hit by section 14A of the Act inasmuch as the dividend received on such shares did not form part of the total income.

6) The Supreme Court in Maxopp Investment Ltd. v. CIT [2018] 402 ITR 640 (SC); held that according to section 14A(1) of the Income-tax Act, 1961, deduction of that expenditure is not to be allowed which has been incurred by the assessee in relation to income which does not form part of the total income.

7) The Supreme Court held that the dominant purpose test for which the investment in shares is made by an assessee may not be relevant while interpreting section 14A of the Act.

8) The fact remains that such dividend income is not 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.