India: Supreme Court Ruling: Only Expenses Proportionate To Taxable Income Deductible

  • Dominant purpose or intention behind borrowing funds irrelevant under Section 14A of the Income Tax Act, 1961.
  • The Supreme Court of India rules that when shares are acquired to obtain a controlling interest in a company, the rule of apportionment shall be followed.
  • In case shares are held as stock-in-trade, the income earned should be regarded as business income and any exempt income, such as dividend earned, shall be immaterial.

Recently, the Supreme Court of India (the "Supreme Court") in the case of Maxopp Investment Ltd. v. Commissioner of Income Tax, New Delhi1, laid down a bright-line test on whether interest payments made on funds borrowed to make investments into shares of company could be a deductible expense or not, particularly in the context of Section 14A of the Income Tax Act, 1961.

To sum up, according to the Supreme Court, in case a taxpayer acquires shares of an investee company to gain / retain controlling interest over the same and earns exempt income, the portion of the expenditure which may be attributable to such exempt income should be disallowed under Section 14A of the Income Tax Act, 1961 (the "ITA")2. On the contrary, if the taxpayer holds the shares as stock-in-trade, then any income earned shall be its trading profit / business income and thereby, the expenditure incurred in relation to such income shall be deductible as business expenditure, irrespective of whether exempt income is earned or not.


Maxopp Investment Limited (the "Assessee"), had claimed a deduction of the entire interest amount (payable towards the loan borrowed) against the taxable income earned which was disallowed by the Assessee under Section 14A of the ITA since it had also earned exempt income in the form of dividends. The Assessee contended that the shares of Max India were acquired to retain controlling interest over Max India and not to earn any income in the form of dividend and thus, Section 14A should not be applicable. The AO and CIT(A) ruled against the Assessee and disallowed the expenditure. On appeal before Income Tax Appellate Tribunal (the "Tribunal"), a Special Bench wherein the Assessee's appeal was tagged along with ITO v. Daga Capital Management (Pvt.) Ltd3 case, also disallowed the expenditure. On further appeal by the Assessee, the Delhi High Court ("Delhi HC") upheld the decision of the Tribunal. On the contrary, Punjab and Haryana High Court ("P&H HC"), while dealing with the issue of application of Section 14A to a banking concern, in the case of Principal Commissioner of Income Tax v. State Bank of Patiala4 held in favour of the taxpayer allowing for the deduction of entire interest expenditure incurred in relation to the investments made in the investee companies.

Therefore, the Supreme Court, considering the conflicting opinions of various High Courts on the same issue, clubbed the appeals filed in different cases by the taxpayers and the revenue authorities.


  1. Whether holding of investment in group companies representing controlling interest amounts to carrying on business?
  2. Whether dividend income received on shares held as stock-in-trade or shares purchased for acquiring / retaining controlling interest can be considered to be in the nature of business income?


The Supreme Court, to render its judgment, discussed the judgments of Delhi HC in Maxopp Investment Ltd. v. CIT, New Delhi5 and P&H HC in State Bank of Patiala6 case. While in the case of Maxopp Investment Ltd., the Delhi HC ruled that if the expenditure incurred has a relation or connection with or pertains to an exempt income, it shall be disallowed even if it otherwise qualifies under the other provisions of the ITA, in the case of PCIT v. State Bank of Patiala, the P&H HC held that since the dividend and interest income were earned out of the securities held by the taxpayer as stock-in-trade and the purpose of acquiring of such securities by the taxpayer was to earn profits by way of trading, Section 14A shall not be applicable.

With respect to the scope of Section 14A, the Supreme Court observed that the expenditure that is incurred in relation to the exempt income alone should only be disallowed. In case, expenditure incurred has no causal connection with the exempted income, then such expenditure should be treated as business expenditure.

Additionally, the Supreme Court analysed the expression "in relation to" from two perspectives / aspects, viz.,

I. Shares held to gain control over the investee company

The Supreme Court held that even though the Assessee may have acquired shares in order to gain control over the investee company, the portion of the expenditure that is attributable to the dividend income earned out of such investment should be disallowed under Section 14A. Thus, the "principle of apportionment" ought to be applied for the purposes of interpretation of the expression "in relation to" used under Section 14A.

Moreover, the Supreme Court also placed reliance on its own decision in the case of CIT v. Walfort Share and Stock Brokers (P.) Ltd.7 wherein the Supreme Court had observed "the theory of apportionment of expenditure between taxable non-taxable has, in principle, been now widened under Section 14A".

Therefore, the Supreme Court agreed with the Delhi HC judgment in the case of Maxopp Investment Ltd.8 and rejected P&H HC's decision in State Bank of Patiala case to the extent P&H HC had applied the "dominant intention test".

II. Shares held as stock-in-trade and not to earn dividend

The Supreme Court agreed on the view taken by P&H HC in State Bank of Patiala case to the extent it relied on the CBDT Circular, dated 02.11.20159 (the "Circular") and stated that if the motive behind purchase and sale of shares is to earn profit, then the income earned would be treated as trading profit, however, if the object is to earn dividend income, then the taxpayer would be considered to have made an investment into the investee company.

The Supreme Court ruled that where shares are held as stock-in-trade, it becomes a business activity of the taxpayer and receipt of any dividend income is immaterial. Hence, any expenditure incurred with respect to earning such business income shall be allowed for deduction.

In addition to the above, the Supreme Court also held that in case the taxpayer itself disallows certain expenditure under Section 14A and the AO finds it incorrect, it should record satisfaction to such effect before applying the theory of apportionment. Further, while recording such satisfaction, nature of loan taken by the taxpayer for purchasing the shares / making the investment in shares should be examined by the AO.


The Memorandum explaining the Provisions of the Finance Bill, 2001 (the "Memorandum") states that the provision of Section 14A is based on the fundamental principle of taxation law which states that only net income, i.e., gross income less expenditure, is taxed. Since, the ITA taxes the net income of a taxpayer, it is clearly understood that the exemptions provided with respect to certain incomes are also with respect to the net income, and hence, any expenditure incurred in relation to earning of such exempt income should be disallowed.

The Supreme Court, in the present case, referred to the Calcutta High Court ("Calcutta HC") judgment in the case of Dhanuka and Sons v. CIT10 wherein the HC observed that Section 14A was introduced into the ITA with an objective to disallow the direct and indirect expenditure incurred in relation to an exempt income and to overcome the judicial pronouncements of the Supreme Court in the cases of CIT v. Maharashtra Sugar Mills Ltd.11 and Rajasthan State Warehousing Corporation v. CIT12, wherein the Supreme Court had held that in case of an indivisible business out of which the taxpayer earns taxable as well as exempt income, the entire expenditure incurred in relation to the business should be allowed.

The Supreme Court, by rightly retaining the spirit of Section 14A and without making any distinction between a divisible and an indivisible business, has clarified that in case of shares held as stock-in-trade, any expenditure incurred shall be an allowable expenditure, since, the dividend income is merely an incidental receipt which the taxpayer may or may not receive, contingent upon the sale of shares by the taxpayer. On the other hand, in case a taxpayer subscribes to the shares of the investee company to acquire / retain control over the same, the taxpayer should be considered to be aware of the fact (at the time of acquiring such shares) that such an investment may generate dividend income which shall be earned by the taxpayer alone. Hence, in such cases, interest expenditure needs to be apportioned between the dividend income (as and when received) and the taxable income.

This rule should have a positive impact on the taxpayers, since it clarifies the position that is required to be taken by the revenue authorities regarding the application of Section 14A with respect to expenditures incurred in relation to earning of trading profits and / or capital profits.

However, it is also likely to have an impact on the pending matters before the lower courts and tax authorities wherein similar issues have been raised, wherein it may not be beneficial to the taxpayers in some cases. Further, though a logical implication suggests that the said ruling should apply to majority as well as minority shareholders of a company, there remains uncertainty regarding the application of this ruling in the case of the latter, i.e. where the shares are not subscribed with an intention to acquire / retain a controlling interest over the investee company but are nevertheless held as capital assets.

In any case the said judgment should provide the required clarity for businesses going forward in terms of the conditions that are required to me to be eligible for interest deductibility and allow them to structure transactions and commercials accordingly. It will also prevent the tax department from questioning transactions based on a nebulous intention or dominant purpose test, which would have been a subjective factual finding.


1 Civil Appeal Nos. 104-109 of 2015

2 "For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act..."

3 312 ITR (AT) 1.

4 (2017) 391 ITR 218 (P&H).

5 [2012] 347 ITR 272 (Delhi).

6 supra.

7 326 ITR 1 (SC).

8 supra.

9 CBDT Circular No. 18/2015, available at

10 (2011) 339 ITR 319 (Cal).

11 [1971] 82 ITR 452.

12 [2000] 242 ITR 450/109 Taxman 145.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
Email Address
Company Name
Confirm Password
Mondaq Newsalert
Select Topics
Select Regions
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions