2016 (3) TMI 182 - HC - Income Tax

Apportionment of expenses between the taxable and exempted income - disallowance u/s 14A - expenses incurred by the assessee on salary paid to the Company Secretary and other expenses for maintaining its very corporate existence - Held that - In our opinion the CIT(Appeals) and the Tribunal committed no error. The fact that virtually entire income of the assessee was exempt is not in dispute. The fact that the assessee paid salary of Rs. 2.91 lacs to the Company Secretary so engaged by the company is also not in dispute. Merely because under the relevant provision of the Companies Act it was compulsory for the company to engage a Company Secretary would not in any manner change the fundamental facts. The salary paid to the Company Secretary was for running the business of the company which principally comprised of investment in shares and agricultural operations. It is not necessary that the Company Secretary should himself have directly contributed to any of the tasks relatable to the earning of income. Expression used in subsection( 1) of section 14A of the Act is in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income . Therefore merely because it was compulsory in law to engage the Company Secretary would not in any manner change this position. The fact of the matter is that the company did engage a Company Secretary and incurred expenditure of Rs. 2.91 lacs by way of salary. The act of engagement of Company Secretary was clearly for the purpose of carrying on activities of the company in absence of which the company would be breaching the legal requirement. That being the position the expenditure had to be apportioned between the taxable income and the exempt income. - Decided against assessee

Summary

Issues:
1. Allowability of expenses incurred by the assessee on salary paid to the Company Secretary and other expenses for maintaining its corporate existence.

Analysis:
1. The appeal raised a substantial question of law regarding the Income Tax Appellate Tribunal's decision on the allowance of expenses incurred by the assessee. The company claimed a loss for the assessment year 2001-2002, primarily due to salary paid to the Company Secretary and other miscellaneous expenses. The Assessing Officer disallowed the expenditure, stating it primarily resulted in income exempt under section 10 of the Income Tax Act. The Commissioner(Appeals) allowed a limited apportionment of the expenditure between taxable and exempt income, which the Tribunal confirmed based on previous judgments emphasizing the apportionment of expenditure.

2. The High Court analyzed the engagement of the Company Secretary and the nature of the expenses incurred. The court noted that the engagement of the Company Secretary was mandatory under the Companies Act, but the salary paid was for running the company's business activities, including investments and agricultural operations. The court highlighted the applicability of Section 14A of the Act, which disallows deductions for expenditure related to income not forming part of the total income. The court agreed with the lower authorities that the expenditure needed to be apportioned between taxable and exempt income.

3. The court rejected the assessee's argument that the salary paid to the Company Secretary was solely for maintaining the company's status. The court emphasized that the engagement of the Company Secretary was essential for the company's operations to comply with legal requirements. The court also distinguished previous judgments cited by the assessee, stating they did not conflict with the current conclusion. The court highlighted the importance of apportioning expenses based on taxable and exempt income, affirming the decisions of the lower authorities and dismissing the tax appeal.