Interest paid on borrowed Funds for Investment in Shares hit by Section 14A of Income Tax Act if Dividend received on Shares not part of total Income: Bombay HC [Read Order]

In a recent ruling the Bombay High Court held that the interest paid on borrowed funds for investment in shares hit by Section 14A of the Income Tax Act, 1961 if the dividend received on shares not part of total income.

Assessee, i.e., appellant, is a Chartered Accountant by qualification and decided to switch profession to become a stock broker. 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. 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 ITAT dismissed the appeal, which is impugned in the present appeal, by holding that the borrowed capital was invested primarily in shares of assessee’s own group companies from which assessee did not receive any income and there is nothing on record to indicate how such investment was subservient to the business of assessee and that assessee failed to demonstrate how the borrowed funds were utilised for the purposes of business.

It was submitted that appellant started as individual stock broker who wanted to expand as a corporate entity and it is this business expenditure made it essential for him to use borrowed funds in the two companies. Appellant submitted that loans taken in personal name were duly utilised in acquiring equity shares in two closely held companies fully under his control and effectively the interest was paid on the borrowed utilised in his corporatized business under a clear commercial expediency.

A Division Bench of Justices Dr Neela Gokhale and KR Shriram observed that “Therefore, 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 Income Tax Act inasmuch as the dividend received on such shares does not form part of the total income.”

To Read the full text of the Order CLICK HERE

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