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2016 (3) TMI 182 - GUJARAT HIGH COURT

2016 (3) TMI 182 - GUJARAT HIGH COURT - TMI - 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 ₹ 2.91 la .....

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ctly 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 ₹ 2.91 .....

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ATE FOR THE OPPONENT : MRS MAUNA M BHATT, ADVOCATE ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. This appeal is filed by the assessee in which the following substantial question of law has been raised : Whether, in the facts and circumstances of the case the Income Tax Appellate Tribunal was right in law in holding that expenses incurred by the assessee on salary paid to the Company Secretary and other expenses for maintaining its very corporate existence cannot be allowed complete .....

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Assessing Officer, it was noticed that the company during the previous year relevant to the assessment year 20012002, had shown a total income of ₹ 73.75 lacs(rounded off). Only sum of ₹ 39,900/( rounded off) was liable to income tax. Remaining income was exempt under section 10 of the Income Tax Act, ( the Act for short) being either dividend income or agricultural income. Against the taxable income of ₹ 39,900/, the assessee had claimed expenditure of ₹ 3.07 lacs(rounde .....

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come but to maintain the status of the company since it was under the statute compulsory to engage a Company Secretary. 4. The Assessing Officer 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 under section 10 of the Act and, therefore, would not be allowable in terms of section 14A of the Act. The Assessing Officer therefore, totally disallowed the expenditure and the corresponding loss. .....

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he role and other expenses included audit fee, consultancy fee, etc as pointed out by the appellant. So far as the audit fee is concerned, I agree with the contention of the appellant that the same are required to be spent for the very existence of the company and hence audit fee can be considered as incurred for the purpose of business. However, salary paid to the employee i.e. Company Secretary, Consultancy fees, rates and taxes and other expenses had to be attributed in part for earning the e .....

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nt on salary and other expenses have to be apportioned proportionately for earning taxable income and exempted income. I therefore, hold that the A0 was not justifi ed in disallowing the entire expenses incurred on salary and other expenses. Instead he should apportioned the expenses pertaining to the earning of taxable income and exempted income. The A0 is therefore, directed to apportion these expenses proportionate to the exempted income earned and taxable income earned and accordingly amend .....

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ompany one of pertaining to exempt income and other is pertaining to taxable income. The expenditure incurred is indivisible between exempted income and taxable income. In the case of Water Fall Estates Ltd. vs..CIT 219 ITR 563 the Supreme Court has laid down the principle of apportionment of expenditure. The judgement of Hon ble Caclutta High Court in the case of CIT Vs. Ganga Properties Ltd. cites supra by the 1d. AR is distinguishable on facts as the Hon ble Court had no occasion to examine s .....

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eeping in View the object of the insertion of Sec. 14A we are of the considered view that the CIT(A) has correctly directed the Assessing Officer to portion the expenses proportionate to the exempted income earned and taxable income earned. Therefore we accordingly confirm the order of the CIT 7. The assessee thereupon preferred this appeal in which the abovenoted question of law has been framed. 8. Learned counsel for the assessee contended that the Company Secretary was engaged by the assessee .....

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reported in 2010 (326) ITR 1. 9. On the other hand, learned counsel Shri Bhatt for the Revenue opposed the appeal contending that admittedly virtually the entire income of the assessee was exempt under section 10 of the Act. The assessee had incurred expenditure by way of salary paid to the Company Secretary. Merely because it was compulsory to engage such a Company Secretary would not mean that such expenditure was not relatable to earning exempt income. 10. Having heard learned counsel for the .....

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lation to income which is exempt from payment of tax, such expenditure would not be an allowable deduction. Out of total income of ₹ 73.75 lacs of the assessee, virtually entire sum ,barring a small portion of ₹ 39,900/, came from two sources namely, dividend income and agricultural income, which was exempt under section 10 of the Act. The assessee company had engaged a Company Secretary and paid salary of ₹ 2.91 lacs during the year. This expenditure the assessee claims agains .....

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se 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 i .....

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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. 13. The issue can be looked from a slightly different angle. The claim of the expenditure of ₹ 2.91 lacs towards the taxable income of ₹ 39,900/would be incongruent with the assessee's stand that such expenditure was not for earning income but wa .....

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en case, if the assessee had only taxable income of considerable amount, would the assessee not claim the salary paid to the Company Secretary by way of expenditure on the premise that services of the Company Secretary were not engaged for the purpose of carrying out the income generating activities of the company but was compulsory on account of the statutory provision? This is not even the stand of assessee company. If therefore, such expenditure even if compulsorily expended by the company is .....

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cutta High Court in relation to claim of the assessee company for deduction of the expenditure, observed that such expenditure was incurred by the company for retaining the status. It was observed that even if the company does not carry on business but derives income from other sources, the company has to maintain its establishment for complying with statutory obligations. Expenditure incurred in the process would be deductable. We do not see that this ratio in any manner conflicts with our conc .....

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