By TIOL News Service

AHMEDABAD, MAR 07, 2016: THE issue is - Whether expenditure incurred for making salary payment to the Company Secreatry had to be apportioned between the taxable income and the exempt income, and it is not neccesary that such Company Secretary should himself have directly contributed to any of the tasks relatable to the earning of income. NO is the verdict.

Facts of the case

The assessee company had filed its return declaring loss of Rs.2.67 lacs. The return was taken up for scrutiny, wherein the AO noticed that the company during the A.Y 2001-2002, had shown a total income of Rs.73.75 lacs, out of which only sum of Rs. 39,900/- was liable to income tax. Remaining income was exempt u/s 10 being either dividend income or agricultural income. Against the taxable income of Rs. 39,900/-, the assessee had claimed expenditure of Rs. 3.07 lacs which comprised of salary paid to the Company Secretary of Rs.2.91 lacs and other miscellaneous expenses of Rs.16,000/- and that was how the company claimed loss of Rs.2.67 lacs. The AO asked the assessee to justify the loss to which the assessee contended that the loss pertains primarily to the salary paid to the Company Secretary and the same should therefore, be allowed. The Company Secretary was engaged not for earning exempt income but to maintain the status of the company since it was under the statute compulsory to engage a Company Secretary. The AO however, did not accept such a contention. He was of the opinion that the expenses incurred by the company had primarily resulted in income which was exempt u/s 10 and, therefore, would not be allowable in terms of section 14A. The AO therefore, totally disallowed the expenditure and the corresponding loss. The CIT(A) allowed the appeal to a limited extent of apportionment of the expenditure between taxable and exempt income.

Having heard the parties, the High Court held that,

++ 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 u/s 14A(1) 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;

++ the issue can be looked from a slightly different angle. The claim of the expenditure of Rs.2.91 lacs towards the taxable income of Rs.39,900/- would be incongruent with the assessee's stand that such expenditure was not for earning income but was by way of salary to engage an officer which was statutorily compulsory for the company to do. For whatever reason, once the company engaged a Company Secretary and the salary payable to the Company Secretary if it is claimed by way of expenditure for earning taxable income, we do not see how the company can argue that the same had no relation to operations of the company insofar as the activity of earning exempt income is concerned. If therefore, such expenditure even if compulsorily expended by the company is part of the company's expenditure for earning taxable income, we fail to see how when it comes to question of reckoning the exempt income, the character of the expenditure would change. In case of Walfort Share & Stock Brokers P Ltd., the Supreme Court while interpreting provisions of section 14A as they stood prior to 1.4.2002 amendment, held that the pay back does not constitute expenditure in terms of section 14A. It was held that profits have to be computed after deducting losses and expenses incurred for business. A deduction for expenditure or loss which is not within the prohibition must be allowed if it is on the facts of the case a proper debit item to be charged against the Incomings of the business in ascertaining the true profits. A return of investment or a payback is not such a debit item and therefore, is not expenditure incurred in terms of section 14A. The said decision therefore, was rendered in a completely different facts and the observations made by the Supreme Court on the import of section 14A of the Act cannot be applied.

(See 2016-TIOL-411-HC-AHM-IT)