MAXOPP INVESTMENT LTD. versus COMMISSIONER OF INCOME TAX, NEW DELHI

Citation: [2018] 2 S.C.R. 783 · Decided: 12-02-2018 · Supreme Court of India · Bench: A.K. SIKRI · Disposal: Disposed off

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Judgment (excerpt)

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MAXOPP INVESTMENT LTD.
v.
COMMISSIONER OF INCOME TAX, NEW DELHI
(Civil Appeal Nos. 104-109 of 2015)
FEBRUARY 12, 2018
[A. K. SIKRI AND ASHOK BHUSHAN, JJ.]
Income Tax Act, 1961:
s. 14A – Applicability of – To dividend income – In cases
where dominant purpose of investment was to retain controlling
interest in a Company/group of companies or where dominant
purpose was to have stock-in-trade – Whether dominant purpose
test or theory of apportionment to be applied for interpreting the
provision – Held: For interpreting s. 14A, dominant purpose for
which investment into shares is made by an assessee, may not be
relevant – Principle of appointment comes into play as that is the
principle which is engrained in s. 14A – s. 14A is applicable to the
dividend income irrespective of whether the shares are held to gain
control or as stock-in-trade – However, where shares are held as
stock-in-trade, the expenditure incurred in acquiring those shares
have to be apportioned – Only that expenditure which is “in relation
to” earning dividends can be disallowed u/s. 14A and s. 8D –
Assessing Officer needs to record satisfaction having regard to the
kind of assessee why the claim of assessee as to the quantum of suo
motu disallowance u/s. 14A was not correct – Income Tax Rules,
1962 – r. 8D.
Disposing of the appeals, the Court
HELD: 1. As per Section 14A(1) of the Income Tax Act,
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 under this Act”. Axiomatically, it is
that expenditure alone which has been incurred in relation to the
income which is includible in total income that has to be
disallowed. If an expenditure incurred has no causal connection
with the exempted income, then such an expenditure would
obviously be treated as not related to the income that is exempted
  [2018] 2 S.C.R. 783
              783
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SUPREME COURT REPORTS
[2018] 2 S.C.R.
from tax, and such expenditure would be allowed as business
expenditure. Such expenditure would then be considered as
incurred in respect of other income which is to be treated as part
of the total income. [Para 32][808-A-C]
2. For interpreting Section 14A of the Act, the dominant
purpose for which the investment into shares is made by an
assessee, may not be relevant. No doubt, the assessee may have
made the investment in order to gain control of the investee
company. However, that does not appear to be a relevant factor
in determining the issue at hand. Fact remains that such dividend
income is non-taxable. In this 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. Keeping this
objective behind Section14A of the Act in mind, the said provision
has to be interpreted, particularly, the word ‘in relation to the
income’ that does not form part of total income. Considered in
this hue, the principle of apportionment of expenses comes into
play as that is the principle which is engrained in Section 14A of
the Act. [Para 34][808-F-H; 809-A-B]
3. Delhi High Court, therefore, correctly observed that prior
to introduction of Section 14A of the Act, the law was that when
an assessee had a composite and indivisible business which had
elements of both taxable and non-taxable income, the entire
expenditure in respect of said business was deductible and, in
such a case, the principle of apportionment of the expenditure
relating to the non-taxable income did not apply. The principle of
apportionment was made available only where the business was
divisible. It is to find a cure to the aforesaid problem that the
Legislature has not only inserted Section 14A by the Finance
(Amendment) Act, 2001 but also made it retrospective, i.e., 1962
when the Income Tax Act itself came into force. The aforesaid
intent was expressed loudly and clearly in the Memorandum
explaining the provisions of the Finance Bill, 2001. The opinion
of Punjab & Haryana High Court which went by dominant purpose
theory, is not acceptable. The aforesaid reasoning would be
applicable in cases where shares are held as investment in the
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investee company, may be for the purpose of having controlling
interest therein. [Para 35][809-E-H; 810-A]
4. In the cases, where shares are held as stock-in-trade,
the main purpose is to tra

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