Computer Age Management Services Pvt. Ltd., CHENNAI V. DCIT LTU 2 , CHENNAI

ITA 1142/CHNY/2018

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 8751 (ITAT-CHENNAI)
• Duration Of Justice: 8 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-12-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: misc
• Appeal Filed On: 03-04-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: R CLEMENT RAMESH KUMAR
• Assessee Lawyers: SANDEEP BAGMAR R
• Keywords: Capital asset; Depreciation; Business expenditure; Search and seizure; Earning of tax free income; Question of law; Revenue expenditure; Rule 8D; Set aside
• Section: 14A; 250; 27

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL, C BENCH : CHENNAI . , ! ' # ' $ . %& , ( * + [BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBE R AND SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ] ./I.T.A. NOS.1140, 1141 & 1142/CHNY/2018. / ASSESSMENT YEARS : 2012-13, 2013-14 & 2014-15. COMPUTER AGE MANAGEMENT SERVICES PVT. LTD, RAYALA TOWERS, 3 RD FLOOR, 158, ANNA SALAI, CHENNAI 600 002. VS. THE DEPUTY COMMISSIONER OF INCOME TAX, LTU-2, CHENNAI. [PAN AAACC 3035G] ( ,- / APPELLANT) ( ./,- /RESPONDENT) / APPELLANT BY : SHRI. SANDEEP BAGMAR, R. ADVOCATE /RESPONDENT BY : SHRI. R. CLEMENT RAMESH KUMAR, ADDL. CIT, /DATE OF HEARING : 05-12-2018 ! /DATE OF PRONOUNCEMENT : 14-12-2018 0 / O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER THESE ARE APPEALS FILED BY THE ASSESSEE DIRECTED AGAINST ORDERS DATED 12.01.2018 OF COMMISSIONER OF INCOM E-TAX (APPEALS) - 5, CHENNAI FOR THE IMPUGNED ASSESSMENT YEARS. ITA NOS.1140, 41 & 42 /2018 :- 2 -: 2. FOUR OF THE GROUNDS RAISED BY THE ASSESSEE IN THESE APPEALS ARE COMMON. THESE GROUNDS, AS IT APPEAR IN THE APP EAL FOR ASSESSMENT YEAR 2012-2013 IS REPRODUCED HEREUNDER:- GROUND 1 - ADDITIONAL DISALLOWANCE OF RS. 71,02,4 01 UNDER SECTION 14A READ WITH RULE 8D IS UNWARRANTED 1.1 ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS), CHENNAI ['CIT (A)'] ERRED IN CONFIRMING ADDITIONAL DISALLOWANCE OF RS. 71 ,02,401 UNDER SECTION 14A OF THE INCOME-TAX ACT, 1961 ('THE ACT') READ WITH RULE 8 D OF THE INCOME-TAX RULES, 1962 ('THE RULES'). 1.2 ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) ERRED IN CONFIRMING THE MECHANICAL APPLICATI ON OF RULE 8D OF THE RULES WITHOUT RECORDING SATISFACTION AGAINST THE CLAIM OF THE APPELLANT. 1.3 THE APPELLANT PRAYS THAT ADDITIONAL DISALLOWANC E OF RS. 71,02,401 UNDER SECTION 14A OF THE ACT BE DELETED. GROUND 2 - DEPRECIATION AT 10% ON TEMPORARY SHED AS AGAINST 100% CLAIM OF DEPRECIATION IS UNWARRANTED 2.1 ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) ERRED IN CONFIRMING THE RESTRICTION OF DEPRE CIATION AT 10% ON THE TEMPORARY SHED AS AGAINST 100% DEPRECIAT ION CLAIMED BY THE APPELLANT. 2.2 THE APPELLANT PRAYS THAT DEPRECIATION BE ALLOWE D AT 100% ON TEMPORARY SHED AS AGAINST 10% UNDER THE ACT. GROUND 3 - DEPRECIATION AT 10% ON ELECTRICAL FITTIN G AS AGAINST 15% CLAIM OF DEPRECIATION IS UNWARRANTED 3.1 ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) ERRED IN RECLASSIFYING ELECTRICAL FITTING UNDER THE BLOCK OF FURNITURE AND FITTINGS, THEREBY RESULTING IN RESTRI CTION OF DEPRECIATION AT 10% AS AGAINST 15% DEPRECIATION CLA IMED BY THE APPELLANT. 3.2 THE APPELLANT PRAYS THAT DEPRECIATION BE ALLOWE D AT 15% SINCE ELECTRICAL FITTING IS CLASSIFIABLE UNDER THE BLOCK OF PLANT AND MACHINERY UNDER THE ACT AS AGAINST 10%. GROUND 4 - DEPRECIATION AT 25% ON SOFTWARE LICENSE AS AGAINST 60% CLAIM OF DEPRECIATION IS UNWARRANTED 4.1 ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) ERRED IN RECLASSIFYING SOFTWARE LICENSE UNDER THE B LOCK OF INTANGIBLES ASSETS, THEREBY RESULTING IN RESTRICTIO N OF DEPRECIATION AT 25% ON SOFTWARE LICENSE AS AGAINST 60% ITA NOS.1140, 41 & 42 /2018 :- 3 -: DEPRECIATION CLAIMED BY THE APPELLANT. 4.2 THE APPELLANT PRAYS THAT DEPRECIATION BE ALLOWE D AT 60% ON SOFTWARE LICENSE AS AGAINST 25% UNDER THE ACT. 3. EXCEPT FOR THE QUANTUM OF ADDITIONAL DISALLOWANCE M ADE U/S.14A OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT), APPEARING IN GROUND NO.1, ALL THESE GROUNDS ARE TYPICALLY WORDED IN ALL THE APPEALS. THESE COMMON GROUNDS ARE CONSIDERED FIRST. 4. FIRST SUCH GROUND RELATES TO A DISALLOWANCE MADE U/S.14A OF THE ACT R.W.RULE 8D OF THE INCOME TAX RULES, 1962 ( IN SHORT THE RULES). 5. ASSESSEE HAD CLAIMED INCOME OF C1,84,99,463/-, C58,07,110/- AND C13,94,638/- AS EXEMPT FOR ASSESSMENT YEARS 2012- 13, 2013-14 AND 2014-15 RESPECTIVELY. AS AGAINST T HIS, ASSESSEE HAD MADE SUO-MOTU DISALLOWANCE OF C10,25,350/-, C10,56,076/- AND C35,75,240/- RESPECTIVELY FOR THESE ASSESSMENT YEAR S. LD. ASSESSING OFFICER WAS OF THE OPINION THAT ASSESSEE HAD LONG T ERM INVESTMENTS OF C40,93,66,087/- FOR ASSESSMENT YEAR 2012-13, WHICH COMPRISED OF EQUITIES WORTH C40,35,25,000/-, NHAI BONDS OF C49,4 4,000/- AND INVESTMENT IN PROPERTY C8,97,087/-. SUCH LONG TERM INVESTMENT FOR ASSESSMENT YEAR 2013-14 CAME TO C40,93,21,233/- WHI CH COMPRISED OF EQUITIES WORTH C40,35,25,100/- NHAI BONDS OF C49,44 ,000/- AND INVESTMENT IN PROPERTY C8,52,233/-. FOR ASSESSM ENT YEAR 2014-15, ITA NOS.1140, 41 & 42 /2018 :- 4 -: THE TOTAL LONG TERM INVESTMENTS AS PER LD. ASSESSIN G OFFICER CAME TO C1,76,92,78,621/- COMPRISING OF EQUITY SHARES C1,7 5,35,25,000/-, NHAI BONDS OF C49,44,000/-, PROPERTY INVESTMENT OF C8,09,621/- AND DEBT FUNDS OF C1,00,00,000/-. LD. ASSESSING OFFICER WAS OF THE OPINION THAT ASSESSEE WOULD HAVE INCURRED EXPENDITURE ON P RINTING AND STATIONERY, COMMUNICATION COST, MANPOWER COST, LEGA L PROFESSIONAL CHARGES, RENT ETC, FOR MAKING AND MANAGING SUCH I NVESTMENTS. LD. ASSESSING OFFICER PUT THE ASSESSEE ON NOTICE WHY DISALLOWANCE COULD NOT BE MADE UNDER SECTION 14A R.W.R.8D. 6. ASSESSEE REPLIED THAT IT HAD AN APPROVED INVESTMEN T POLICY FOR MINIMIZING RISK AND INVESTMENTS WERE MADE BASE D ON THE GUIDELINES RECEIVED FROM ITS INVESTMENT ADVISORS. AS PER THE ASSESSEE , APART FROM SIGNING OF THE FORMS, MANAGEMENT DID NO T SPEND ANY SIGNIFICANT TIME FOR MANAGING THE INVESTMENT PORTFO LIO. ASSESSEE ALSO POINTED OUT THAT IT HAD MADE SUO-MOTU DISALLOWANCES U/S.14A OF THE ACT FOR MEETING THE EXPENDITURE OF TWO STAFF WHO WE RE ENGAGED IN THE INVESTMENT TRANSACTIONS. 7. HOWEVER, LD. ASSESSING OFFICER WAS NOT IMPRESSED B Y THE ABOVE REPLY. ACCORDING TO HIM, ASSESSEE DID NOT MAI NTAIN ANY SEPARATE ACCOUNT FOR THE EXPENDITURE RELATING TO THE INVESTM ENTS GIVING RISE TO ITA NOS.1140, 41 & 42 /2018 :- 5 -: EXEMPT INCOME. AS PER THE LD. ASSESSING OFFICER, AS SESSEE ALSO DID NOT GIVE DETAILS OF THE RATIO APPLIED FOR COMPUTING THE SUO-MOTU DISALLOWANCES MADE BY IT. IN OTHER WORDS, AS PER L D. ASSESSING OFFICER, ASSESSEE HAD NOT GIVEN ANY BASIS HOW IT ARRIVED AT THE SUO-MOTU DISALLOWANCE FOR THE RESPECTIVE YEARS. AS PER THE L D. ASSESSING OFFICER, INVESTMENTS WHETHER IT YIELDED EXEMPT INCOME OR NO T, HAD TO BE CONSIDERED FOR COMPUTING THE DISALLOWANCE. NEVERTH ELESS, HE RESTRICTED THE DISALLOWANCE ONLY TO THE INDIRECT EX PENDITURE SPECIFIED IN CLAUSE (III) OF RULE 8D(2), APPLYING 0.5% ON AVERA GE OF THE INVESTMENTS, AFTER GIVING ALLOWANCE FOR THE SUO-M OTU DISALLOWANCES MADE BY THE ASSESSEE FOR THE RESPECTIVE ASSESSMENT YEARS. THIS RESULTED IN A FURTHER DISALLOWANCE OF C71,02,401/-, C11,92,971/- AND C30,03,694/-. ASSESSEES APPEAL BEFORE LD. COMMISS IONER OF INCOME TAX (APPEALS) DID NOT MEET WITH ANY SUCCESS. 8. NOW BEFORE US, LD. AUTHORISED REPRESENTATIVE STRONG LY ASSAILING THE ORDERS OF THE LOWER AUTHORITIES SUBMI TTED THAT INVESTMENTS IN MUTUAL FUNDS DID NOT YIELD ANY EXEMPT INCOME AND HAD TO BE EXCLUDED. FURTHER, ACCORDING TO HIM, INVESTMENTS I N SUBSIDIARIES ALSO DID NOT YIELD ANY EXEMPT INCOME. CONTENTION OF TH E LD. AUTHORISED REPRESENTATIVE WAS THAT EQUITY INVESTMENTS MADE BY THE ASSESSEE WERE IN CAMS REPOSITORY SERVICES LTD AND CAMS INVES TORS SERVICES ITA NOS.1140, 41 & 42 /2018 :- 6 -: PVT. LTD WHICH WERE SUBSIDIARIES. RELIANCE WERE PL ACED ON THE FOLLOWING DECISIONS/JUDGMENTS. (I) PCIT VS. MCDONALDS INDIA PRIVATE LIMITED (ITA NO.5094/ DEL/2012) ( DELHI HC) (II) CHETTINAD LOGISTICS (P) LTD (2018) 95 TAXMANN. COM 250 (SC) (III) WALFORT SHARE AND STOCK BROKERS (2010) 326 IT R 1 (SC) (IV) REDINGTON (INDIA) LTD. VS. ACIT (2017) 77 TAXM ANN.COM 257 (MADRAS HC) (V) APEX LABORATORIES (P) LTD VS. ACIT (2017) 80 TA XMANN.COM 236 (CHENNAI ITAT) (VI) TAFE MOTORS & TRACTORS LTD. ACIT (2017) 88 TA XMANN.COM 406 (CHENNAI ITAT) (VII) ACB INDIA LIMITED VS. ACIT (2015) 62 TAXMANN. COM 74 (DELHI HIGH COURT) (VIII) CHEMINVEST LIMITED VS. CIT (2015) 61 TAXMANN .COM 118 (DELHI HIGH COURT) (IX) FUTURE CORPORATE RESOURCE LTD. VS. DCIT, (2017 ) 85 TAXMANN.COM 190 (MUMBAI ITAT) 9. PER CONTRA, LD. DEPARTMENTAL REPRESENTATIVE SUBMIT TED THAT BY VIRTUE OF THE JUDGMENT OF HONBLE APEX COURT IN THE CASE OF MAXOPP INVESTMENT LTD. VS. CIT, 402 ITR 640 , THERE WAS NO QUESTION OF EXCLUDING ANY INVESTMENTS, WHILE COMPUTING DISALLOW ANCE U/S.14A OF THE ACT. ITA NOS.1140, 41 & 42 /2018 :- 7 -: 10. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE ORDERS OF THE AUTHORITIES BELOW. IT IS NOT DISPUTE D THAT DISALLOWANCE MADE BY THE LD. ASSESSING OFFICER WERE RESTRICTED T O WHAT WAS STIPULATED IN CLAUSE (III) OF RULE 8D(2). LD. ASSES SING OFFICER HAD CONSIDERED WHOLE OF THE INVESTMENTS MADE BY THE ASS ESSEE WHILE AVERAGING IT FOR APPLYING 0.5% THEREON. ARGUMENT OF THE ASSESSEE BEFORE US IS THAT INVESTMENTS IN MUTUAL FUNDS AND SUBSIDIARIES WHICH DID NOT EARN ANY EXEMPT INCOME HAD TO BE EXCLUDED. WE ARE AFRAID WE CANNOT ACCEPT THIS LINE OF ARGUMENT, SINCE THIS ISSUE IS NO MORE RES-INTEGRA. HONBLE APEX COURT IN THE CASE OF MAXO PP INVESTMENT LTD (SUPRA) AFTER CONSIDERING VARIOUS JUDGMENTS OF THE VARIOUS HIGH COURTS ON THIS ISSUE HAD HELD AS UNDER AT PARAS 31 TO 41 O F ITS JUDGMENT. 31. WE HAVE GIVEN OUR THOUGHTFUL CONSIDERATION TO T HE ARGUMENT OF COUNSEL FOR THE PARTIES ON BOTH SIDES, IN THE LIGHT OF VARIOUS JUDGMENTS WHICH HAVE BEEN CITE D BEFORE US, SOME OF WHICH HAVE ALREADY BEEN TAKEN NO TE OF ABOVE. 32. IN THE FIRST INSTANCE, IT NEEDS TO BE RECOGNISE D THAT AS PER SECTION 14A(1) OF THE ACT, DEDUCTION OF THAT EXPENDITURE IS NOT TO BE ALLOWED WHICH HAS BEEN INCURRED BY THE ASSESSEE 'IN RELATION TO INCOME WHI CH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS A CT'. AXIOMATICALLY, IT IS THAT EXPENDITURE ALONE WHICH H AS BEEN INCURRED IN RELATION TO THE INCOME WHICH IS INCLUDIBLE IN TOTAL INCOME THAT HAS TO BE DISALLOWE D. IF AN EXPENDITURE INCURRED HAS NO CAUSAL CONNECTION WI TH THE EXEMPTED INCOME, THEN SUCH AN EXPENDITURE WOULD OBVIOUSLY BE TREATED AS NOT RELATED TO THE INCOME T HAT IS EXEMPTED FROM TAX, AND SUCH EXPENDITURE WOULD BE ALLOWED AS BUSINESS EXPENDITURE. TO PUT IT DIFFEREN TLY, SUCH EXPENDITURE WOULD THEN BE CONSIDERED AS INCURR ED ITA NOS.1140, 41 & 42 /2018 :- 8 -: IN RESPECT OF OTHER INCOME WHICH IS TO BE TREATED A S PART OF THE TOTAL INCOME. 33. THERE IS NO QUARREL IN ASSIGNING THIS MEANING T O SECTION 14A OF THE ACT. IN FACT, ALL THE HIGH COURT S, WHETHER IT IS THE DELHI HIGH COURT ON THE ONE HAND OR THE PUNJAB AND HARYANA HIGH COURT ON THE OTHER HAND , HAVE AGREED IN PROVIDING THIS INTERPRETATION TO SEC TION 14A OF THE ACT. THE ENTIRE DISPUTE IS AS TO WHAT INTERPRETATION IS TO BE GIVEN TO THE WORDS 'IN RELA TION TO' IN THE GIVEN SCENARIO, VIZ., WHERE THE DIVIDEND INCOME ON THE SHARES IS EARNED, THOUGH THE DOMINANT PURPOSE FOR SUBSCRIBING IN THOSE SHARES OF THE INVE STEE- COMPANY WAS NOT TO EARN DIVIDEND. WE HAVE TWO SCENARIOS IN THESE SETS OF APPEALS. IN ONE GROUP OF CASES THE MAIN PURPOSE FOR INVESTING IN SHARES WAS TO GAIN CONTROL OVER THE INVESTEE-COMPANY. OTHER CASES ARE THOSE WHERE THE SHARES OF INVESTEE-COMPANY WERE HELD BY THE ASSESSEES AS STOCK-IN-TRADE (I.E. AS A BUSINESS ACTIVITY) AND NOT AS INVESTMENT TO EARN DIVIDENDS. IN THIS CONTEXT, IT IS TO BE EXAMINED AS TO WHETHER THE EXPENDITURE WAS INCURRED, IN RESPECTIVE SCENARIOS, IN RELATION TO THE DIVIDEND INCOME OR NO T. 34. HAVING CLARIFIED THE AFORESAID POSITION, THE FI RST AND FOREMOST ISSUE THAT FALLS FOR CONSIDERATION IS AS T O WHETHER THE DOMINANT PURPOSE TEST, WHICH IS PRESSED INTO SERVICE BY THE ASSESSEES WOULD APPLY WHILE INTERPRETING SECTION 14A OF THE ACT OR WE HAVE TO G O BY THE THEORY OF APPORTIONMENT. WE ARE OF THE OPINION THAT THE DOMINANT PURPOSE FOR WHICH THE INVESTMENT INTO SHARES IS MADE BY AN ASSESSEE MAY NOT BE RELEVANT. NO DOUBT, THE ASSESSEE LIKE MAXOPP INVESTMENT LIMITED MAY HAVE MADE THE INVESTMENT IN ORDER TO GAIN CONTR OL OF THE INVESTEE-COMPANY. HOWEVER, THAT DOES NOT APPEAR TO BE A RELEVANT FACTOR IN DETERMINING THE I SSUE AT HAND. THE FACT REMAINS THAT SUCH DIVIDEND INCOME IS NON-TAXABLE. IN THIS SCENARIO, IF EXPENDITURE IS IN CURRED 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 A S BUSINESS EXPENDITURE. KEEPING THIS OBJECTIVE BEHIND SECTION 14A OF THE ACT IN MIND, THE SAID PROVISION HAS TO BE INTERPRETED, PARTICULARLY, THE WORDS 'IN RELATIO N TO THE INCOME' THAT DOES NOT FORM PART OF TOTAL INCOME . CONSIDERED IN THIS HUE, THE PRINCIPLE OF APPORTIONM ENT OF EXPENSES COMES INTO PLAY AS THAT IS THE PRINCIPL E ITA NOS.1140, 41 & 42 /2018 :- 9 -: WHICH IS ENGRAINED IN SECTION 14A OF THE ACT. THIS IS SO HELD IN WALFORT SHARE AND STOCK BROKERS P. LTD., RELEVANT PASSAGE WHEREOF IS ALREADY REPRODUCED ABOV E, FOR THE SAKE OF CONTINUITY OF DISCUSSION, WE WOULD LIKE TO QUOTE THE FOLLOWING FEW LINES THEREFROM* : 'THE NEXT PHRASE IS, 'IN RELATION TO INCOME WHICH D OES NOT FORM PART OF TOTAL INCOME UNDER THE ACT'. IT ME ANS THAT IF AN INCOME DOES NOT FORM PART OF TOTAL INCOM E, THEN THE RELATED EXPENDITURE IS OUTSIDE THE AMBIT O F THE APPLICABILITY OF SECTION 14A . . . THE THEORY OF AP POR TIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON- TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER SECTION 14A.' 35. THE DELHI HIGH COURT, THEREFORE, CORRECTLY OBSE RVED THAT PRIOR TO INTRODUCTION OF SECTION 14A OF THE AC T, THE LAW WAS THAT WHEN AN ASSESSEE HAD A COMPOSITE AND INDIVISIBLE BUSINESS WHICH HAD ELEMENTS OF BOTH TAX ABLE AND NON-TAXABLE INCOME, THE ENTIRE EXPENDITURE IN RESPECT OF THE 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 LEGIS LATURE HAS NOT ONLY INSERTED SECTION 14A BY THE FINANCE (AMENDMENT) ACT, 2001 BUT ALSO MADE IT RETROSPECTIV E, I.E., 1962 WHEN THE INCOME-TAX ACT ITSELF CAME INTO FORCE. THE AFORESAID INTENT WAS EXPRESSED LOUDLY AN D CLEARLY IN THE MEMORANDUM EXPLAINING THE PROVISIONS OF THE FINANCE BILL, 2001. WE, THUS, AGREE WITH THE VI EW TAKEN BY THE DELHI HIGH COURT, AND ARE NOT INCLINED TO ACCEPT THE OPINION OF THE PUNJAB AND HARYANA HIGH COURT WHICH WENT BY DOMINANT PURPOSE THEORY. THE AFORESAID REASONING WOULD BE APPLICABLE IN CASES WH ERE SHARES ARE HELD AS INVESTMENT IN THE INVESTEE-COMPA NY, MAY BE FOR THE PURPOSE OF HAVING CONTROLLING INTERE ST THEREIN. ON THAT REASONING, APPEALS OF MAXOPP INVESTMENT LIMITED AS WELL AS SIMILAR CASES WHERE SHARES WERE PURCHASED BY THE ASSESSEES TO HAVE CONTROLLING INTEREST IN THE INVESTEE-COMPANIES HAVE TO FAIL AND ARE, THEREFORE, DISMISSED. 36. THERE IS YET ANOTHER ASPECT WHICH STILL NEEDS T O BE LOOKED INTO. WHAT HAPPENS WHEN THE SHARES ARE HELD AS 'STOCK-IN-TRADE' AND NOT AS 'INVESTMENT', PARTICULA RLY, ITA NOS.1140, 41 & 42 /2018 :- 10 -: BY THE BANKS ? ON THIS SPECIFIC ASPECT, THE CENTRAL BOARD OF DIRECT TAXES HAS ISSUED CIRCULAR NO. 18 OF 2015, DATED NOVEMBER 2, 2015. 37. THIS CIRCULAR HAS ALREADY BEEN REPRODUCED IN PA RA 19 ABOVE. THIS CIRCULAR TAKES NOTE OF THE JUDGMENT OF THIS COURT IN NAWANSHAHAR CASE WHEREIN IT IS HELD T HAT INVESTMENTS MADE BY A BANKING CONCERN ARE PART OF T HE BUSINESS OF BANKING. THEREFORE, THE INCOME ARISES F ROM SUCH INVESTMENTS IS ATTRIBUTABLE TO BUSINESS OF BAN KING FALLING UNDER THE HEAD 'PROFITS AND GAINS OF BUSINE SS AND PROFESSION'. ON THAT BASIS, THE CIRCULAR CONTAI NS THE DECISION OF THE BOARD THAT NO APPEAL WOULD BE FILED ON THIS GROUND BY THE OFFICERS OF THE DEPARTMENT AND I F THE APPEALS ARE ALREADY FILED, THEY SHOULD BE WITHDRAWN . A READING OF THIS CIRCULAR WOULD MAKE IT CLEAR THAT T HE ISSUE WAS AS TO WHETHER INCOME BY WAY OF INTEREST O N SECURITIES SHALL BE CHARGEABLE TO INCOME-TAX UNDER THE HEAD 'INCOME FROM OTHER SOURCES' OR IT IS TO FALL U NDER THE HEAD 'PROFITS AND GAINS OF BUSINESS AND PROFESS ION'. THE BOARD, GOING BY THE DECISION OF THIS COURT IN NAWANSHAHAR CASE, CLARIFIED THAT IT HAS TO BE TREAT ED AS INCOME FALLING UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS AND PROFESSION'. THE BOARD ALSO WENT TO TH E EXTENT OF SAYING THAT THIS WOULD NOT BE LIMITED ONL Y TO CO-OPERATIVE SOCIETIES/BANKS CLAIMING DEDUCTION UND ER SECTION 80P(2)(A)(I) OF THE ACT BUT WOULD ALSO BE APPLICABLE TO ALL BANKS/COMMERCIAL BANKS, TO WHICH BANKING REGULATION ACT, 1949 APPLIES. 38. FROM THIS, THE PUNJAB AND HARYANA HIGH COURT POINTED OUT THAT THIS CIRCULAR CARVES OUT A DISTINC TION BETWEEN 'STOCK-IN-TRADE' AND 'INVESTMENT' AND PROVIDES THAT IF THE MOTIVE BEHIND PURCHASE AND SAL E OF SHARES IS TO EARN PROFIT, THEN THE SAME WOULD BE TR EATED AS TRADING PROFIT AND IF THE OBJECT IS TO DERIVE IN COME BY WAY OF DIVIDEND THEN THE PROFIT WOULD BE SAID TO HA VE ACCRUED FROM INVESTMENT. TO THIS EXTENT, THE HIGH C OURT MAY BE CORRECT. AT THE SAME TIME, WE DO NOT AGREE W ITH THE TEST OF DOMINANT INTENTION APPLIED BY THE PUNJA B AND HARYANA HIGH COURT, WHICH WE HAVE ALREADY DISCARDED. IN THAT EVENT, THE QUESTION IS AS TO ON WHAT BASIS THOSE CASES ARE TO BE DECIDED WHERE THE SHARE S OF OTHER COMPANIES ARE PURCHASED BY THE ASSESSEES AS 'STOCK-IN-TRADE' AND NOT AS 'INVESTMENT'. WE PROCEE D TO DISCUSS THIS ASPECT HEREINAFTER. ITA NOS.1140, 41 & 42 /2018 :- 11 -: 39. IN THOSE CASES, WHERE SHARES ARE HELD AS STOCK- IN- TRADE, THE MAIN PURPOSE IS TO TRADE IN THOSE SHARES AND EARN PROFITS THEREFROM. HOWEVER, WE ARE NOT CONCERN ED WITH THOSE PROFITS WHICH WOULD NATURALLY BE TREATED AS 'INCOME' UNDER THE HEAD 'PROFITS AND GAINS FROM BUSINESS AND PROFESSION'. WHAT HAPPENS IS THAT, IN THE PROCESS, WHEN THE SHARES ARE HELD AS 'STOCK-IN-TRAD E', CERTAIN DIVIDEND IS ALSO EARNED, THOUGH INCIDENTALL Y, WHICH IS ALSO AN INCOME. HOWEVER, BY VIRTUE OF SECT ION 10(34) OF THE ACT, THIS DIVIDEND INCOME IS NOT TO B E INCLUDED IN THE TOTAL INCOME AND IS EXEMPT FROM TAX . THIS TRIGGERS THE APPLICABILITY OF SECTION 14A OF T HE ACT WHICH IS BASED ON THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON-TAXABLE INCOME AS HELD IN WALFORT SHARE AND STOCK BROKERS P. LTD. CASE. THEREFORE, TO THAT EXTENT, DEPENDING UPON THE FACTS OF EACH CASE, THE EXPENDITURE INCURRED IN ACQUIRING TH OSE SHARES WILL HAVE TO BE APPORTIONED. 40. WE NOTE FROM THE FACTS IN THE STATE BANK OF PAT IALA CASES THAT THE ASSESSING OFFICER, WHILE PASSING THE ASSESSMENT ORDER, HAD ALREADY RESTRICTED THE DISALLOWANCE TO THE AMOUNT WHICH WAS CLAIMED AS EXEMPT INCOME BY APPLYING THE FORMULA CONTAINED IN RULE 8D OF THE RULES AND HOLDING THAT SECTION 14A O F THE ACT WOULD BE APPLICABLE. IN SPITE OF THIS EXERCISE OF APPORTIONMENT OF EXPENDITURE CARRIED OUT BY THE ASSESSING OFFICER, THE COMMISSIONER OF INCOME-TAX (APPEALS) DISALLOWED THE ENTIRE DEDUCTION OF EXPENDITURE. THAT VIEW OF THE COMMISSIONER OF INCOM E- TAX (APPEALS) WAS CLEARLY UNTENABLE AND RIGHTLY SET ASIDE BY THE INCOME-TAX APPELLATE TRIBUNAL. THEREFO RE, ON FACTS, THE PUNJAB AND HARYANA HIGH COURT HAS ARRIVED AT A CORRECT CONCLUSION BY AFFIRMING THE VI EW OF THE INCOME-TAX APPELLATE TRIBUNAL, THOUGH WE ARE NO T SUBSCRIBING TO THE THEORY OF DOMINANT INTENTION APP LIED BY THE HIGH COURT. IT IS TO BE KEPT IN MIND THAT IN THOSE CASES WHERE SHARES ARE HELD AS 'STOCK-IN-TRADE', IT BECOMES A BUSINESS ACTIVITY OF THE ASSESSEE TO DEAL IN THOSE SHARES AS A BUSINESS PROPOSITION. WHETHER DIVIDEND IS EARNED OR NOT BECOMES IMMATERIAL. IN FA CT, IT WOULD BE A QUIRK OF FATE THAT WHEN THE INVESTEE- COMPANY DECLARED DIVIDEND, THOSE SHARES ARE HELD BY THE ASSESSEE, THOUGH THE ASSESSEE HAS TO ULTIMATELY TRADE THOSE SHARES BY SELLING THEM TO EARN PROFITS. THE SITUATION HERE IS, THEREFORE, DIFFERENT FROM THE CA SE LIKE MAXOPP INVESTMENT LTD. WHERE THE ASSESSEE WOULD ITA NOS.1140, 41 & 42 /2018 :- 12 -: CONTINUE TO HOLD THOSE SHARES AS IT WANTS TO RETAIN CONTROL OVER THE INVESTEE-COMPANY. IN THAT CASE, WHENEVER DIVIDEND IS DECLARED BY THE INVESTEE-COMPA NY THAT WOULD NECESSARILY BE EARNED BY THE ASSESSEE AN D THE ASSESSEE ALONE. THEREFORE, EVEN AT THE TIME OF INVESTING INTO THOSE SHARES, THE ASSESSEE KNOWS THA T IT MAY GENERATE DIVIDEND INCOME AS WELL AND AS AND WHE N SUCH DIVIDEND INCOME IS GENERATED THAT WOULD BE EARNED BY THE ASSESSEE. IN CONTRAST, WHERE THE SHAR ES ARE HELD AS STOCK-IN-TRADE, THIS MAY NOT BE NECESSA RILY A SITUATION. THE MAIN PURPOSE IS TO LIQUIDATE THOSE SHARES WHENEVER THE SHARE PRICE GOES UP IN ORDER TO EARN PROFITS. IN THE RESULT, THE APPEALS FILED BY T HE REVENUE CHALLENGING THE JUDGMENT OF THE PUNJAB AND HARYANA HIGH COURT IN STATE BANK OF PATIALA ALSO FA IL, THOUGH LAW IN THIS RESPECT HAS BEEN CLARIFIED HEREINABOVE. 41. HAVING REGARD TO THE LANGUAGE OF SECTION 14A(2) OF THE ACT, READ WITH RULE 8D OF THE RULES, WE ALSO MA KE IT CLEAR THAT BEFORE APPLYING THE THEORY OF APPORTIONM ENT, THE ASSESSING OFFICER NEEDS TO RECORD SATISFACTION THAT HAVING REGARD TO THE KIND OF THE ASSESSEE, SUO MOTU DISALLOWANCE UNDER SECTION 14A WAS NOT CORRECT. IT WILL BE IN THOSE CASES WHERE THE ASSESSEE IN HIS RETURN HAS HIMSELF APPORTIONED BUT THE ASSESSING OFFICER WAS N OT ACCEPTING THE SAID APPORTIONMENT. IN THAT EVENTUALI TY, IT WILL HAVE TO RECORD ITS SATISFACTION TO THIS EFFECT . FURTHER, WHILE RECORDING SUCH A SATISFACTION, THE N ATURE OF THE LOAN TAKEN BY THE ASSESSEE FOR PURCHASING TH E SHARES/ MAKING THE INVESTMENT IN SHARES IS TO BE EXAMINED BY THE ASSESSING OFFICER. EXCEPT FOR INVESTMENT MADE IN A TRADING FIELD, THER E IS NO QUESTION OF ANY EXCLUSION WHILE CALCULATING THE DISALLOWANCE U /S.14A OF THE ACT. IT IS NOT DISPUTED THAT NONE OF THE INVESTMENTS OF THE ASSESSEE WERE HELD AS STOCK IN TRADE. ACCORDINGLY, WE ARE OF THE OPINION THAT LOWER AUTHORITIES WERE JUSTIFIED IN MAKING A DISALLOWANC E U/S.14A OF THE ACT ITA NOS.1140, 41 & 42 /2018 :- 13 -: READ WITH RULE 8D(2) (III) OF THE RULES. ESPECIALL Y SO, SINCE LD. ASSESSING OFFICER HAD CLEARLY STATED THE REASONS WH Y HE WAS NOT SATISFIED WITH THE SUO-MOTU DISALLOWANCE MADE BY T HE ASSESSEE. ACCORDINGLY, GROUND NO.1 OF THE ASSESSEE FOR ALL T HE YEARS STANDS DISMISSED. 11. SECOND COMMON GROUND ON A CLAIM OF DEPRECIATION ON TEMPORARY SHEDS WHICH WAS RESTRICTED TO 10%. 12. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE SH EDS ON WHICH 100% DEPRECIATION WAS CLAIMED BY THE ASSESSE E WERE TEMPORARY IN NATURE AND MADE FOR THE PURPOSE OF SH ELTERING GENERATORS. ACCORDING TO HIM, LD. ASSESSING OFFICER TOOK A VIEW THAT THE TEMPORARY SHEDS HAVING BEEN BUILT BY USING STEE L PIPES AND IRON MESHES, COULD NOT BE CONSIDERED AS ELIGIBLE FOR 10 0% DEPRECIATION. AS PER THE LD. AUTHORISED REPRESENTATIVE, THIS VIEW WAS CONFIRMED BY THE LD. COMMISSIONER OF INCOME TAX (APPEALS). CONT ENTION OF THE LD. AUTHORISED REPRESENTATIVE WAS THAT TEMPORARY SHEDS WERE KEPT IN OPEN SPACE AND SUBJECTED TO ALL VAGARIES OF NATURE . ACCORDING TO HIM, JUST BECAUSE IT WAS MADE OF STEEL PIPES AND IRON MESHES DID NOT MAKE IT A PERMANENT STRUCTURE. 13. PER CONTRA, LD. DEPARTMENTAL REPRESENTATIVE STRONG LY SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. ITA NOS.1140, 41 & 42 /2018 :- 14 -: 14. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE ORDERS OF THE AUTHORITIES BELOW. IT IS NOT DISPUT ED THAT THE SHEDS WERE MADE BY USING STEEL PIPES AND IRON MESHES. S UCH STRUCTURES WHICH ARE BUILT IN OPEN SPACE ARE SUSCEPTIBLE TO V ERY FAST CORROSION. ESPECIALLY SO, IN A SEA SIDE AREA LIKE CHENNAI. WE CANNOT SAY THAT SUCH STRUCTURE IS HAVING AN ENDURING NATURE. WE ARE OF THE OPINION THAT ASSESSEE WAS ELIGIBLE TO CLAIM 100% DEPRECIATION ON SUCH STRUCTURES. WE SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES AN D ALLOW THE CLAIM OF THE ASSESSEE FOR 100% DEPRECIATION ON SUCH TEMPOR ARY SHEDS BUILT BY USING STEEL PIPES AND IRON MESHES. GROUND NO.2 OF THE ASSESSEE FOR ALL THE YEARS STANDS ALLOWED. 15. ALLUDING TO THE THIRD COMMON GROUND WHICH IS ON RES TRICTION OF DEPRECIATION CLAIMED ON ELECTRICAL FITTINGS, L D. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ELECTRICAL FITTINGS WER E ELIGIBLE FOR 15% DEPRECIATION, WHEREAS LOWER AUTHORITIES HAD GIVEN T HE RATES AVAILABLE FOR BUILDINGS. AS PER THE LD. AUTHORISED REPRESENTA TIVE SUCH ELECTRICAL FITTINGS WERE TO BE CONSIDERED AS PART OF PLANT AND MACHINERY AND WAS ELIGIBLE FOR 15% DEPRECIATION. 16. PER CONTRA, LD. DEPARTMENTAL REPRESENTATIVE STRONG LY SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. ITA NOS.1140, 41 & 42 /2018 :- 15 -: 17. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE ORDERS OF THE AUTHORITIES BELOW. IT IS NOT DISPUT ED THAT ELECTRICAL FITTINGS IF CONSIDERED AS PART OF BUILDING IS ELIG IBLE FOR ONLY 10% DEPRECIATION. CLAIM OF THE ASSESSEE IS THAT THESE FITTINGS WERE TO BE CONSIDERED AS PART OF PLANT AND MACHINERY. HOWEVER NOTHING HAS BEEN BROUGHT ON RECORD TO SHOW THAT ELECTRICAL WIRING, S WITCHES, SOCKETS, OTHER FITTINGS WERE PART OF ANY PLANT AND MACHINERY . ACCORDINGLY, WE ARE OF THE OPINION THAT LOWER AUTHORITIES WERE JUST IFIED IN RESTRICTING THE DEPRECIATION TO 10%. GROUND NO.3 OF THE ASSESSEE STANDS DISMISSED. 18. ARGUING ON FOURTH COMMON GROUND, WHICH IS ON RESTRI CTION OF THE CLAIM OF DEPRECIATION ON SOFTWARE, LD. AUTHOR ISED REPRESENTATIVE SUBMITTED THAT LD. ASSESSING OFFICER HAD RESTRICT ED THE DEPRECIATION TO 25% AGAINST 60% AVAILABLE FOR COMPUTER SYSTEMS. ACCORDING TO LD. AUTHORISED REPRESENTATIVE, WHAT WAS ACQUIRED WERE O NLY SOFTWARE LICENSE WHICH ENABLED THE ASSESSEE TO USE THE APPL ICATIONS. ACCORDING TO HIM, BY VIRTUE OF DEFINITION OF SOFTWARE GIVEN I N NEW APPENDIX I OF INCOME TAX RULES, COMPUTERS INCLUDING COMPUTER SOF TWARE WERE ELIGIBLE FOR 60% DEPRECIATION. 19. PER CONTRA, LD. DEPARTMENTAL REPRESENTATIVE SUBMI TTED THAT WHAT WERE ACQUIRED BY THE ASSESSEE WAS ONLY A LICEN CE AND COULD AT THE BEST BE CONSIDERED AS AN INTANGIBLE ASSET. THU S, ACCORDING TO HIM, ITA NOS.1140, 41 & 42 /2018 :- 16 -: LOWER AUTHORITIES WERE JUSTIFIED IN RESTRICTING THE DEPRECIATION CLAIM TO 25%. 20. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE ORDERS OF THE AUTHORITIES BELOW. NATURE OF ITEMS ON WHICH ASSESSEE HAD CLAIMED DEPRECIATION @60% ARE LISTED HEREUNDER :- SL.NO DESCRIPTION OF THE ASSE T 1 SCO UNIX 6.0 ENTERPRISE USER LICENSE 2 SERVER LICENSES AND CUSTOMIZATION CHARGES FOR INSURANCE PROCESS. 3 SERVER LICENSES AND CUSTOMIZATION CHARGES FOR INSURANCE PROCESS. 4 PI SQL DEVELOPER/ SINGLE USER LICENSE 5 PI SQL DEVELOPER/ SINGLE USER LICENSE 6 VFOX PRO 9.0 OFFICE STD 2010 LICENCE 7 DYNAMICS NAV FINAL MILESTONE LICENSE 8 SERVER LICENSES AND CUSTOMIZATION CHARGES FOR INSUR ANCE PROCESS 9 SERVER LICENSES AND CUSTOMIZATION CHARGES FOR INSUR ANCE PROCESS 10 CITRUS SOFTWARE LICENSE B ASIC SERVER LICENSES 1 11 SERVER LICENSES AND CUSTOMIZATION CHARGES FOR INSUR ANCE PROCESS 12 SERVER LICENSE 13 SERVER LICENSE 14 SERVER LICENSE ITA NOS.1140, 41 & 42 /2018 :- 17 -: 15 SERVER LICENSE 16 CISCO - FIREWALL LICENSE 17 WINDOW 2008 R2 STANDARD LICENSE WHAT WE FIND FROM THE ABOVE DESCRIPTION IS THAT ALL THESE WERE NOTHING BUT ITEMS IN THE NATURE SOFTWARE OR SOFTWARE APPLI CATIONS. ENTRY NO.5 COMING IN III OF PART A IN NEW APPENDIX I CLEARLY SAYS THAT COMPUTER INCLUDED COMPUTER SOFTWARE. NOTE 7 OF THE APPENDIX, DEFINES COMPUTER SOFTWARE AS ANY COMPUTER PROGRAMME RECORDED IN ANY INFORMATION STORAGE DEVICE. WE ARE THEREFORE OF THE OPINION T HAT ASSESSEE WAS ELIGIBLE TO CLAIM DEPRECIATION AT THE RATE OF 60% ON THE ABOVE ITEMS. ORDERS OF THE LOWER AUTHORITIES ON THIS ISSUE ARE S ET ASIDE AND THE CLAIM IS ALLOWED. GROUND NO.4 OF THE ASSESSEE STAND S ALLOWED. 21. THIS LEAVES US WITH ONE ANOTHER GROUND WHICH IS APP EAR IN THE APPEAL OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2014-15. THIS GROUND IS REPRODUCED HEREUNDER:- GROUND 5 - DISALLOWANCE OF PAYMENT OF NON-COMPETE FEES OF RS, 12,35,58,502 IS UNWARRANTED . 5.1 ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) ERRED IN CONFIRMING DISALLOWANCE OF RS. 12,35,58,50 2 TOWARDS NON-COMPETE FEES CLAIMED BY THE APPELLANT AS REVENU E EXPENDITURE. 5.2 ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) ERRED IN CONFIRMING THE REJECTION OF THE APPELLANT' S ALTERNATIVE CLAIM FOR ALLOWING EXPENDITURE OVER THE PERIOD OF T HE NON- COMPETE AGREEMENT (I.E. 18 MONTHS) 5.3 ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) ITA NOS.1140, 41 & 42 /2018 :- 18 -: ERRED IN CONFIRMING REJECTION OF THE APPELLANT'S AL TERNATIVE CLAIM FOR DEPRECIATION ON THE NON-COMPETE FEE UNDER THE BLOCK OF INTANGIBLE ASSET UNDER THE ACT. 5.4 THE APPELLANT PRAYS THAT DISALLOWANCE OF NON-CO MPETE FEES BE DELETED OR ALTERNATIVELY CLAIM FOR EXPENDIT URE OVER THE PERIOD OF AGREEMENT OR DEPRECIATION ON THE SAME BE ALLOWED. 22. FACTS APROPOS ARE THAT DURING THE PREVIOUS YEAR REL EVANT TO ASSESSMENT YEAR 2014-15, ASSESSEE HAD ACQUIRED THE BUSINESS OF ONE M/S. STERLING SOFTWARE PVT LTD, THROUGH A BUSINESS TRANSFER AGREEMENT (BTA) DATED 16.05.2013 WITH ONE SHRI. V. SHANKAR, WHO WAS THE PROMOTER OF THE SAID COMPANY. UNDER THE BT A, SHRI. V. SHANKAR WAS RESTRICTED FROM COMPETING WITH THE BUSI NESS OF M/S. STERLING SOFTWARE PRIVATE LTD FOR A PERIOD OF EIGH TEEN MONTHS. NON COMPETE FEE OF C12,35,58,502/- WAS PAID. AS PER TH E ASSESSEE, THIS WAS PURELY A REVENUE EXPENDITURE THOUGH IN ITS BOOK S, IT HAD TREATED THE AMOUNT AS DEFERRED REVENUE EXPENDITURE, SPREAD OVER THE PERIOD OF EIGHTEEN MONTHS, WHICH WAS THE AGREED NON-COMPE TE PERIOD. HOWEVER, LD. ASSESSING OFFICER WAS OF THE OPINION T HAT THE OBJECT OF SUCH PAYMENT WAS TO AVOID COMPETITION, AND ASSESSEE GAINED A BENEFIT OF AN ENDURING NATURE. RELYING ON THE DECI SIONS OF CO-ORDINATE BENCH IN THE CASE OF JCIT VS. HATSUNAGRO PRODUCTS LTD (ITA NO.1200/MDS/1999, DATED 27.07.2005), ACT INDIA LTD VS. CIT (ITA NO.615/MDS/1999, DATED 10.02.2006) AND THAT OF ASIA NET ITA NOS.1140, 41 & 42 /2018 :- 19 -: COMMUNICATION P. LTD VS. CIT( ITA NO.443/MDS/2004, DATED 03.01.2005 ), LD. ASSESSING OFFICER HELD THAT EXPENDITURE COUL D ONLY BE CONSIDERED AS INCURRED IN A CAPITAL FIELD. LD. A SSESSING OFFICER DISALLOWED THE CLAIM OF C12,35,58,502/-. LD. ASSESS ING OFFICER DID NOT ALLOW ANY DEPRECIATION ALSO ON SUCH NON-COMPETE FEE . ACCORDING TO HIM, THERE WAS NO ASSET OF ANY INTANGIBLE NATURE AC QUIRED ON THE PAYMENT PAID TO SHRI. V. SHANKAR, AS NON COMPETE FE E. ASSESSEES APPEAL BEFORE LD. COMMISSIONER OF INCOME TAX (APPE ALS) DID NOT MEET WITH ANY SUCCESS. 23. NOW BEFORE US, THE LD. AUTHORISED REPRESENTATIVE S TRONGLY ASSAILING THE ORDER OF THE LD. COMMISSIONER OF INCO ME TAX (APPEALS) SUBMITTED THAT THERE WAS NO ENDURING BENEFIT FOR T HE ASSESSEE NOR DID THE PAYMENT RESULT IN ANY INCREASE IN ITS PROFIT E ARNING CAPACITY. ACCORDING TO HIM, IT WAS PURELY A REVENUE EXPENDITU RE. IN ANY CASE AS PER LD. AUTHORISED REPRESENTATIVE, IF IT WAS CONSID ERED TO HAVE BEEN INCURRED IN A CAPITAL FIELD, THEN IT RESULTED IN AN INTANGIBLE ASSET ELIGIBLE FOR DEPRECIATION U/S.32 OF THE ACT. RELIANCE WERE PLACED ON THE FOLLOWING JUDGMENTS:- (I) CIT VS. COAL SHIPMENTS (P) LTD (1971) 82 ITR 9 02 (SC) (II) EMPIRE JUTE CO. LTD VS. CIT, (1980) 3 TAXMAN 6 9 (SC) (III) CARBORANDUM UNIVERSAL LTD VS. JCIT(2012) 26 T AXMANN.COM 268 (MADRAS HC) ITA NOS.1140, 41 & 42 /2018 :- 20 -: (IV) CIT VS. (LATE) GD NAIDU AND OTHERS (1986) 24 T AXMANN 255 268 (MADRAS HC) (V) ASIANET COMMUNICATIONS LTD VS. CIT(2018 ) 96 26 TAXMANN.COM 399 (MADRAS HC) (VI) HATSUN AGRO PRODUCTS LTD. VS. JCIT (2018) 99 2 6 TAXMANN.COM 220 (MADRAS HC) (VII) HIDELBERG CEMENT INDIA LTD VS. ACIT( 2015) 55 26 TAXMANN.COM 336 (MUMBAI ITAT) 24. PER CONTRA, LD. DEPARTMENTAL REPRESENTATIVE SUBMIT TED THAT EVEN THOUGH THE TENURE OF THE AGREEMENT WAS ONLY F OR EIGHTEEN MONTHS, IT HAD A LINKERING EFFECT. ACCORDING TO H IM, NON COMPETE AGREEMENT PLACED AT PAPER BOOK PAGES 273 TO 285, CL EARLY INDICATED THAT SHRI. V. SHANKAR COULD NOT EVEN RECRUIT ANY PE RSON FROM THE ASSESSEE COMPANY DURING THE TENURE OF SUCH AGREEME NT. THIS, ACCORDING TO HIM, CLEARLY GAVE RISE TO AN ENDURIN G BENEFIT. AS PER THE LD. DEPARTMENTAL REPRESENTATIVE , THE DIFFERENCE SH OULD BE SEEN WITH REFERENCE TO THE LONG LASTING BENEFIT ACCRUING TO T HE ASSESSEE DUE TO THE RESTRICTION PLACED ON SHRI. V. SHANKAR FROM WEA NING AWAY THE EMPLOYEES. HENCE, AS PER THE LD. DEPARTMENTAL REPRE SENTATIVE, EXPENDITURE WAS INCURRED IN THE CAPITAL FIELD AND R IGHTLY DISALLOWED BY THE LOWER AUTHORITIES. ITA NOS.1140, 41 & 42 /2018 :- 21 -: 25. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE ORDERS OF THE AUTHORITIES BELOW. NON COMPETE AGR EEMENT ENTERED BY THE ASSESSEE ON 16.12.2013 WITH SHRI. V.SHANKAR IS PLACED AT PAPER BOOK PAGES 273 TO 285. PARA 2 OF THE SAID AGREEMEN T WHICH STIPULATES THE NATURE OF THE RESTRICTION PLACED ON SHRI. V. SH ANKAR IS REPRODUCED HEREUNDER:- NON-COMPETITION AND NON-SOLICITATION IN VIEW OF THE TRANSACTIONS CONTEMPLATED BY THE SPA , DURING THE RESTRICTED PERIOD THE FOUNDER SHALL NOT DIRECTLY OR INDIRECTLY; 2.1.1 THROUGH HIS AFFILIATES; 2.1.2 CAUSE HIS AFFILIATES; OR 2.1.3 ASSIST ANY PERSON TO; (A) ENGAGE IN ANY BUSINESS ANYWHERE IN THE TERRITOR Y THAT CONDUCTS ANY OF THE COMPANY'S ACTIVITIES; OR (B) OW N AN INTEREST IN, MANAGE, OPERATE, JOIN, CONTROL, LEND M ONEY OR RENDER FINANCIAL OR OTHER ASSISTANCE TO OR PARTICIP ATE IN OR BE CONNECTED WITH, AS A PARTNER, STOCKHOLDER, CO-VENTURER, CONSULTANT OR OTHERWISE, ANY PERSON THAT IS ENGAGED IN THE BUSINESS OF CONDUCTIN G ANY OF THE COMPANY'S ACTIVITIES ANYWHERE IN THE TERRITO RY, PROVIDED, HOWEVER, THAT, FOR THE PURPOSES OF THIS CLAUSE 2.1: (I) OWNERSHIP BY THE FOUNDER OF SECURITIES HAVING NO MORE THAN 5% (FIVE PER CENT) OF THE OUTSTANDING VOT ING POWER OF ANY PERSON LISTED ON ANY NATIONAL SECURITI ES EXCHANGE; AND/OR (II) INVESTMENT BY THE FOUNDER IN A PERSON BY WAY OF A PORTFOLIO INVESTMENT AND NOT CONSTITUTING MORE THAN 5% (FIVE PER CENT) OF THE' EQUITY CAPITAL (CALCULATED ON A FULLY DILUTED BASIS) OF. SUCH PERSON PROVIDED SUCH INVEST MENT IS A PURELY PASSIVE INVESTMENT; SHALL BE PERMITTED AS LONG AS THE FOUNDER HAS NO OT HER CONNECTION OR RELATIONSHIP WITH SUCH PERSON AND THE FOUNDER HAS NOT, IN ANY MANNER, DIRECTLY OR INDIREC TLY ASSISTED, SUPPORTED, OR OTHERWISE BEEN INVOLVED IN THE AFFAIRS OF SUCH PERSON. 2.2 DURING THE RESTRICTED PERIOD, THE FOUNDER SHALL NOT, DIRECTLY OR INDIRECTLY, 2.2.1 FOR HIMSELF OR ON BEHALF OF OR IN CONJUNCTIO N WITH ANY OTHER PERSON; ITA NOS.1140, 41 & 42 /2018 :- 22 -: 2.2.2 CAUSE HIS AFFILIATES; OR 2.2.3 ASSIST ANY PERSON TO; CALL UPON ANY RETAINED EMPLOYEES OR ANY INDIVIDUAL WHO IS, AT THE TIME THE INDIVIDUAL IS CALLED UPON, AN E MPLOYEE OF THE COMPANY, (A) FOR THE PURPOSE OR WITH THE INTENT OF SOLICITING SUCH EMPLOYEE AWAY FROM, OR OUT OF THE EMPLOYMENT OF THE COMPANY, OR EMPLOY OR OFFER EMPLOYMENT TO ANY INDIVIDUAL WHO WAS AN EMPLOYEE OF THE COMPANY DURING THE PERIOD OF 12 (TWELVE) MONTHS PRI OR THERETO OR IS EMPLOYED BY THE COMPANY; OR (B) WITH A VIEW TO USE THE SPECIFIC KNOWLEDGE OR SKILLS OF SUCH PER SON FOR THE BENEFIT OF ANY PERSON CARRYING ON COMPANY'S ACTIVITIES; OR CC) TO TERMINATE OR BREACH A CONTRACTUAL OR ANY OTHER RELATIONSHIP WITH THE COMP ANY' NOTHING IN THIS CLAUSE 2.2 SHALL APPLY TO AN INDIVI DUAL WHO HAS CEASED TO BE EMPLOYED BY THE COMPANY FOR A PERI OD OF AT LEAST 12 (TWELVE) MONTHS PRIOR THERETO OR AN INDIVIDUAL WHO HAS APPLIED FOR EMPLOYMENT WITH THE FOUNDER OR HIS AFFILIATES OR WITH ANY PERSON WHO IS BEING ASSISTED BY THE FOUNDER, IN RESPONSE TO A GENERAL SOLICITATION FOR SUCH EMPLOYM ENT MADE BY THE FOUNDER OR HIS AFFILIATES OR BY ANY PER SON WHO IS BEING ASSISTED BY THE FOUNDER, WHETHER BY WAY OF NEWSPAPER ADVERTISEMENTS OR OTHER MEDIUM AS THE FOUNDER HAS, FROM, TIME TO TIME, HAD DEALINGS W ITH THE CUSTOMERS AS SET OUT IN SCHEDULE I, THE FOUNDER, UNDERTAKES THAT DURING THE RESTRICTED PERIOD, THE F OUNDER: 2.3.1 SHALL NOT, DIRECTLY OR INDIRECTLY; 2.3.2 SHALL PROCURE THAT HIS AFFILIATES SHALL NOT; OR 2.3.3 SHALL NOT, DIRECTLY OR INDIRECTLY ASSIST ANY PERSON; FOR THE PURPOSES OF CARRYING, FACILITATING OR ASSIS TING ANY COMPANY'S ACTIVITIES, EITHER THROUGH THEMSELVES OR ANY OTHER PERSON: A) SOLICIT OR DEAL, WITH ANY CUSTOMER; OR B) USE HIS KNOWLEDGE OF, OR INFLUENCE OVER, ANY CUSTOMER, OR C) SEEK TO CONTRACT WITH, OR ENGAGE, ANY CUSTOMER. 2.4IF A FINAL JUDGMENT OF A COURT OR TRIBUNAL OF CO MPETENT JURISDICTION DETERMINES THAT ANY TERM OR PROVISION CONTAINED IN CLAUSE 2 IS INVALID OR UNENFORCEABLE, THEN THE PARTIES AGREE THAT THE COURT OR TRIBUNAL SHALL HAVE THE POWER TO REDUCE THE SCOPE, DURATION, OR GEOGRAPHIC AREA OF THE TERM OF PROVISION, TO DELETE SPECIFIC WORDS OR ITA NOS.1140, 41 & 42 /2018 :- 23 -: PHASES OR TO REPLACE ANY INVALID OF UNENFORCEABLE T ERM OR PROVISION WITH A TERM OR PROVISION THAT IS VALID AN D ENFORCEABLE AND THAT COMES CLOSEST TO EXPRESSING TH E INTENTION OF THE INVALID OR UNENFORCEABLE TERM OR P ROVISION. THIS CLAUSE 2.4 SHALL BE ENFORCEABLE AS SO MODIFIED AFTER THE EXPIRATION OF THE TIME WITHIN WHICH THE JUDGMEN T MAY BE APPEALED. THE PARTIES AGREE THAT THIS CLAUSE 2.4 IS REASONABLE AND NECESSARY TO PROTECT AND PRESERVE TH E LEGITIMATE BUSINESS INTERESTS, THE VALUE OF THE COM PANY'S ACTIVITIES, BEING ACQUIRED BY THE ACQUIRER AND TO P REVENT ANY UNFAIR ADVANTAGE BEING CONFERRED ON EITHER PARTY. 2.5 THE PARTIES AGREE THAT THE COVENANTS OF NON- COMPETITION AND NON-SOLICITATION CONTAINED IN THIS CLAUSE 2 ARE REASONABLE COVENANTS UNDER THE CIRCUMSTANCES. RESTRICTION PERIOD MENTIONED IN THE DEFINITION CLA USE 1.1, OF THE ABOVE AGREEMENT IS A PERIOD OF EIGHTEEN MONTHS, FROM THE CLOSING DATE. OR IN OTHER WORDS, THE TENURE OF THE AGREEMENT WAS ONLY F OR EIGHTEEN MONTHS. WE CANNOT SAY THAT ASSESSEE DERIVED ANY END URING BENEFIT DUE TO THE ABOVE PAYMENT EFFECTED BY IT FOR OBTAINI NG CERTAIN COMMITMENTS FROM SHRI V. SHANKAR AND RESTRICTING HI MSELF FROM INDULGING IN ANY COMPETITION WITH THE BUSINESS OF T HE ASSESSEE OR FROM WEANING WAY THE EMPLOYEES. HONBE JURISDICTIONAL H IGH COURT IN THE CASE OF M/S.ASIANET COMMUNICATIONS LTD VS. CIT [T.C (APPEAL ) NO.174 OF 2005 DATED 26.06.2018] WITH REGARD TO NON COMPETE COMPENSATION, HAD HELD AS UNDER AT PARAS 46 TO 49 OF ITS JUDGMENT . ITA NOS.1140, 41 & 42 /2018 :- 24 -: 46.THE GOVERNANCE FOR NON-COMPETE I S TRACEABLE T O S E CTION 2 7 OF THE INDIAN CONTRACT AC T, 1872 WH I CH READS AS BELOW '27. AGREEMENTS IN RESTRAINT OF TRADE , VOID .- EVERY AGREEMENT, - BY WHICH ANYONE IS RESTRAINED FROM E X E RCISIN G A LAWFUL PROFESSION , TRADE OR BUSINESS OR A N Y KI ND , IS TO T H AT EXTENT VOID. EXCEPTION 1 . - SAVING OF AGREEMENT NOT TO CARRY ON BUSINESS OF WHICH GOODWILL IS SOLD - O N E WHO SELLS THE GOODWILL OF A BUSINESS MAY AGREE WITH THE BUYE R TO REFRAIN FROM CARRY I NG ON A SIMILAR BUSINESS , W I TH I N S PE CI F IED LOCAL L I MITS , SO LONG AS THE BUYER , O R AN Y PE R SON DER I V ING TITLE TO THE GOO D WILL FROM H I M, CARRIES ON A LIKE BUSINESS THEREIN, PROVIDED THAT SUCH LIMITS APPEAR TO THE CO URT REASONABLE, REGARD BEING HAD TO THE NATURE OF THE BUSINESS. ANY CONTRACTUAL TERM THAT IMPOSES RESTRAINT ON A CONTRACTING PARTY FROM ENGAGING IN ANY BUSINESS FOR A R EASONABLE TERM MUST BE BACKED BY CONSIDERATION. THEREFORE, THE NON-COMPETE COMPENSATION IS BUT A CONSIDERATION PAID TO THE PARTY WHO IS KEPT OUT OF COMPETING BUSINESS DURING THE TERM OF THE CONTRACT. 47.THE NON-COMPETE COMPENSATION , FROM THE STAND POINT OF THE PAYEE OF SUCH COMPENSATION, IS SO PA I D I N ANT I CIPATION THAT ABSENCE OF A COMPETITION FROM THE OTH ER PARTY TO THE CONTRACT MAY SECURE A BENEFIT TO THE P ARTY PAYING THE COMPENSATION. THERE IS NO CERTAINTY THAT SUCH BENEFI T WOULD ACCRUE. IN OTHER WORDS, INSPITE OF THE FACT THAT A COMPETITOR IS KEPT OUT OF THE COMPETITION , ONE MAY STILL SUFFER LOSS. IF IT WERE TO BE A CAPITAL EXPEN DITURE ITA NOS.1140, 41 & 42 /2018 :- 25 -: WHETHER OR NOT, AN ASSESSEE MAKES A BUSINESS PROFIT , THE CHARACTER AND VALUE OF THE CAPITAL ASSETS WILL, SUB JECT TO DEPRECIATION, REMAIN UNALTERED 48.THUS, THE FACTS CLEARLY DISCLOSE THAT ON ACCOUNT OF THE PAYMENT OF NON-COMPETE FEE, THE ASSESSEE HAS NOT ACQUIRED ANY NEW BUSINESS, PROFIT MAKING APPARATUS HAS REMAINED THE SAME, THE ASSETS USED TO RUN THE BUSINESS REMAINED THE SAME AND THERE IS NO NEW BUSINESS OR N O NEW SOURCE OF INCOME, WHICH ACCRUE TO THE ASSESSEE ON ACCOUNT OF THE PAYMENT OF NON-COMPETE FEE. APART FR OM THAT THE STAND TAKEN BY THE REVENUE THAT THE PETITI ONER HAD AMORTISED EXPENDITURE SPREAD OVER FOR THE PERIO D OF FIVE YEARS HAS BEEN FOUND TO BE FACTUALLY INCORRECT , AS THE ASSESSEE HAS NOT CAPITALISED THE SAME IN THEIR ACCO UNTS, BUT TREATED IT AS DEFERRED REVENUE EXPENDITURE FOR A PERIOD OF FIVE YEA R S. THAT APART, SUCH ISSUE WAS NEVER RAISED BY THE REVENUE BEFORE ANY OF THE LOWER AUTHORITIES, AS THE TRIBUNAL HAS RECORDED THAT THERE IS NO DISPUTE REGA RDING THE FACTS. 49.ACCORDINGLY, THE FIRST SUBSTANT I AL QUESTION OF LAW IS ANSWERED IN FAVOUR OF THE ASSESSEE A ND AGAINST THE REVENUE. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE OPINION THAT NON COMPETE FEE WAS A REVENUE EXPENDITURE, AND HAD TO BE ALLOWED IN ONE GO, IRRESPECTIVE OF THE METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE. ACCORDINGLY, WE SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES ITA NOS.1140, 41 & 42 /2018 :- 26 -: AND ALLOW THE CLAIM OF THE ASSESSEE. GROUND NO.5 O F THE ASSESSEE FOR ASSESSMENT YEAR 2014-15 STANDS ALLOWED. 26. IN THE RESULT, THE APPEALS OF THE ASSESSEE FOR ALL THE ASSESSMENT YEARS ARE TREATED AS PARTLY ALLOWED. ORDER PRONOUNCED ON FRIDAY, THE 14TH DAY OF DE CEMBER, 2018, AT CHENNAI. SD/- SD/- ( ' # ' $ . %& ) ( DUVVURU RL REDDY ) ( / JUDICIAL MEMBER ( . ) (ABRAHAM P. GEORGE) / ACCOUNTANT MEMBER '# / CHENNAI $% / DATED:14TH DECEMBER, 2018. KV %& '()( / COPY TO: 1 . / APPELLANT 3. *+, / CIT(A) 5. (-. / / DR 2. / RESPONDENT 4. * / CIT 6. .01 / GF