Voltech Engineers P. Ltd., CHENNAI V. DCIT, CHENNAI

ITA 1765/CHNY/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 7666 (ITAT-CHENNAI)
• Duration Of Justice: 8 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-02-2017
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2012-2013
• Appeal Filed On: 13-06-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SHIVA SRINIVAS JT
• Assessee Lawyers: S SRIDHAR
• Keywords: Capital asset; Business income; Depreciation; Earning of tax free income; Revenue expenditure; Capital expenditure
• Section: 143(3); 14A; 37(1)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI , . ! , ' !# BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ./I.T.A. NOS.1801 & 1765/MDS/2016 ' $ %$ / ASSESSMENT YEAR : 2011-12 & 2012-13 VOLTECH ENGINEERS P. LTD. NO. 2/429, VOLTECH ECO TOWER, MOUNT POONAMALLEE ROAD, AYYAPPANTHANGAL, CHENNAI - 600 056. VS. THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE III(4), CHENNAI. [PAN: AACCV 0108M] ( / APPELLANT) ( /RESPONDENT) &' ( ) / APPELLANT BY : SHRI S.SRIDHAR, ADVOCATE *+&' ( ) /RESPONDENT BY : SHRI SHIVA SRINIVAS, JT. CIT ( , /DATE OF HEARING : 25-11-2016 -% ( , /DATE OF PRONOUNCEMENT : 20-02-2017 / O R D E R PER SANJAY ARORA, AM : THIS IS A SET OF TWO APPEALS BY THE ASSESSEE ARIS ING OUT OF A COMMON ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-1 1, CHENNAI DATED 30.03.2016, PARTLY ALLOWING THE ASSESSEES APPEALS CONTESTING ITS ASSESSMENTS U/S. 143(3) OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) FOR ASSESSMENT YEARS (AYS) 2011-12 & 2012-13 DATED 05.03.2014 AND 19.03.2015 RESPECTIVELY. - 2 - THE APPEALS RAISING COMMON ISSUES, WERE HEARD TOGET HER, AND ARE BEING DISPOSED OF BY A COMMON, CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2.1 THE ASSESSEES CASE, QUA SECTION 14A, IS THAT THE INVESTMENTS ARE IN SUBSIDIARY/ASSOCIATE COMPANIES, MADE FOR BUSINESS P URPOSES. INVESTMENT IN ANOTHER COMPANY COULD NOT ITSELF BE THE BUSINESS OF A COMPANY, UNLESS OF COURSE IT IS IN THE INVESTMENT BUSINESS, HOLDING THE SAID INVESTMENTS AS STOCK-IN-TRADE, WHICH IS ADMITTEDLY NOT SO IN THE INSTANT CASE. THE LD. AR, THE ASSESSEES COUNSEL, ON BEING CALLED UPON TO EXPLAIN, WOULD SUB MIT OF IT BEING FOR STRATEGIC REASONS, WITHOUT SPECIFYING WHAT THOSE REASONS ARE. WE OBSERVE NO SUCH PLEA BEFORE THE REVENUE AUTHORITIES AND, CONSEQUENTLY, N O FINDING BY THEM IN THE MATTER. THOUGH THERE IS NOTHING ON RECORD TO EXHIBI T THE PURPOSE OF THE INVESTMENT, EVEN NOT AS MUCH AS A REFERENCE TO ITS OBJECTS OR MEMORANDUM OF ASSOCIATION, WE PROCEED ON THE FOOTING THAT THE COM PANY HAS, IN MAKING THE INVESTMENTS, ACTED WITHIN ITS POWERS AND IN ITS IN TEREST. WE SHALL HOWEVER CONSIDER BOTH THE ASPECTS, I.E., OF THE SAME BEING HELD AS AN INVESTMENT/S, FOR BUSINESS PURPOSES, OR AS BY WAY OF STOCK-IN-TRADE, SO THAT IN EITHER CASE IT REPRESENTS A BUSINESS ASSET. NOW, EVEN IF IT WERE A STOCK-IN-TRADE, I.E., HELD FOR TRADING PURPOSES, OF WHICH THERE IS THOUGH NO CLAIM , IT IS DOUBTFUL IF IT COULD BE, FOR THAT REASON, STATED THAT SEC. 14A SHALL NOT APP LY INASMUCH AS THE SAME MANDATES DISALLOWANCE OF ANY EXPENDITURE IN RELATIO N TO INCOME NOT FORMING PART OF THE TOTAL INCOME, AND DOES NOT CONCERN ITSELF WI TH THE CHARACTER OF SUCH INCOME. DIVIDEND INCOME, UNDER THE CONDITION OF INV ESTMENT REPRESENTING STOCK- IN-TRADE, THOUGH BEARING THE CHARACTER OF BUSINESS INCOME, WOULD YET FALL UNDER CHAPTER III OF THE ACT, SO THAT IT REMAINS, AND IS YET, AN EXEMPT INCOME, NOT FORMING PART OF THE TOTAL INCOME, SATISFYING THUS T HE QUALIFYING CONDITION OF S.14A. ACCORDINGLY, THE HOLDING OF THE ASSET/PROPERTY UNDE R REFERENCE EITHER AS AN INVESTMENT OR AS STOCK-IN-TRADE BECOMES INCONSEQ UENTIAL OR IRRELEVANT; THE DISALLOWANCE BEING INDEPENDENT OF THE HEAD OR THE N ATURE OF THE INCOME ARISING - 3 - THERE-FROM, AND THE ONLY THING RELEVANT IS IF IT IS TAX-EXEMPT . IN FACT, WHERE SO, IT DOES NOT FALL UNDER ANY HEAD OF INCOME. THIS ASPECT OF THE MATTER STANDS EXHAUSTIVELY CONSIDERED BY THE TRIBUNAL IN ITO V. DAGA CAPITAL MANAGEMENT (P.) LTD . [2009] 312 ITR (AT) 1 (MUM)(SB). AND, THEN, AGAIN IN DY. CIT V. DAMANI ESTATES & FINANCE (P.) LTD . [2013] 25 ITR (TRIB) 683 (MUM), DRAWING EXTENSIVELY ON GODREJ & BOYCE MFG. CO. LTD. V. DY. CIT [2010] 328 ITR 81 (BOM) AND DHANUKA & SONS V. CIT [2011] 339 ITR 319 (CAL), BESIDES DAGA CAPITAL MANAGEMENT (P.) LTD . (SUPRA). THE LATTER WAS ENDORSED BY ITS LARGER BENCH IN DH SECURITIES (P.) LTD. V. DY. CIT [2014] 146 ITD 1(MUM)(TM) (31 ITR (TRIB) 381). IN THE LATER TWO DECISIONS, THE TR IBUNAL, CONSIDERING THAT THE PREDOMINANT OBJECTIVE OF THE INVESTMENT/ DEPLOYMENT OF FUNDS IN SHARES WAS TO EARN INCOME BY WAY OF SHARE TRADING INCOME, WHICH I S TAXABLE, DEEMED IT PROPER TO RESTRICT THE STATUTORY DISALLOWANCE U/S.14A TO T WENTY PERCENT (20%) OF THAT COMPUTED UNDER RULE 8D OF THE INCOME TAX RULES, 196 2 (THE RULES HEREINAFTER), JUSTIFYING THE DEPARTURE FROM THE MAN DATORY RULE, WHICH IS ONLY A RULE OF ESTIMATION OR APPROPRIATION OF THE EXPENDIT URE ATTRIBUTABLE TO INCOME NOT FORMING PART OF THE TOTAL INCOME. JUST AS IT WAS NO T POSSIBLE, IT STANDS EXPLAINED THEREIN, TO HOLD THAT THE DIVIDEND INCOME FLOWING F ROM THE SHARES SHALL NOT ATTRACT DISALLOWANCE U/S.14A AS THE SHARES ARE HELD AS STOCK-IN-TRADE, IT WAS EQUALLY IMPERMISSIBLE TO HOLD THAT THE ENTIRE EXPEN DITURE RELATABLE TO THE SHARES WOULD STAND TO BE DISALLOWED INASMUCH AS THE SAME Y IELD, AND PREDOMINANTLY AT THAT, INCOME FORMING PART OF THE TOTAL INCOME (BY W AY OF SHARE TRADING INCOME). RULE 8D DOES NOT ENVISAGE SUCH A SCENARIO, THAT IS, OF THE SAME ASSET (OR ASSET PORTFOLIO) YIELDING, AT THE SAME TIME, BOTH STREAMS OF INCOME, I.E., TAXABLE AS WELL AS TAX-FREE, SO THAT IT SEEKS TO IDENTIFY EXPE NDITURE IN RELATION TO EXEMPT INCOME WITH REFERENCE TO THE UNDERLYING/ CORRESPOND ING INVESTMENT. THE LAW, PER S. 14A(2) R/W R. 8D(1), IN FACT PROVIDES A CAVE AT FOR SUCH ADJUSTMENTS. NOW, IT STANDS TO REASON THAT IF INVESTMENTS FORMING P ART OF THE ASSESSEES STOCK-IN- - 4 - TRADE DOES NOT PRECLUDE APPLICATION OF SEC. 14A, IN VESTMENTS MADE FOR BUSINESS, I.E., ASSUMING SO, WOULD SURELY NOT. WHY, ANY INVES TMENT WOULD BE MADE ONLY ON BUSINESS CONSIDERATIONS. CAPITAL ASSETS ARE AS M UCH A PART OF, AND INVESTMENT THEREIN AS MUCH INTEGRAL TO, BUSINESS, AS ARE REVE NUE ASSETS, AND IT WOULD BE MISPLACED TO SUGGEST OR CONSIDER ONLY DEPLOYMENT IN WORKING CAPITAL AS TOWARD BUSINESS. AS SUCH, NOTHING TURNS ON THE CHARACTER OF THE SHAR E HOLDING . AND THE ONLY QUESTION RELEVANT IS IF THE INVESTMENT HAS ENTAILED EXPENDI TURE, DIRECT OR INDIRECT, AND, FURTHER, IF INCOME ARISING THERE-FRO M IS, WHOLLY OR IN PART, INCOME NOT FORMING PART OF THE TOTAL INCOME. IN THE PRESEN T CASE, THE ENTIRE INCOME ARISING OR THAT WOULD ENSUE ON SHARES, EVEN IF REGA RDED AS HELD FOR THE PURPOSE OF THE ASSESSEES BUSINESS, IS EITHER IN THE FORM OF D IVIDEND INCOME OR AS CAPITAL GAINS, BOTH TAX-EXEMPT UNDER CHAPTER III OF THE ACT . THIS WOULD THEN DETERMINE THE QUALITY OF THE EXPENDITURE INCURRED IN ITS RESP ECT, MAKING IT INELIGIBLE FOR BEING ADMISSIBLE IN DETERMINING INCOME FORMING PART OF THE TOTAL INCOME. TRACING THE GENESIS OF SECTION 14A BY REVIEWING THE DECISIONS BY THE APEX COURT RENDERED PRIOR TO ITS INSERTION, IT WAS EXPLAINED IN GODREJ & BOYCE MFG. CO. LTD. (SUPRA) THAT SECTION 14A PREDICATES ON THE VERY CO NCEPT OF INCOME INASMUCH AS IT IMPLIES OR REFERS TO THE NET GAIN OR ACCRETION TO CAPITAL, I.E., NET OF ALL EXPENDITURE INCURRED, OR LIABILITIES ASSUMED FO R, EARNING THE SAME. THAT IS, THE COMPUTATION OF INCOME CANNOT BE COMPLETE WITHOUT DE TERMINING AND EXCLUDING ALL RELATED EXPENSES, I.E., HAVING A PROXIMATE RELA TIONSHIP THEREWITH. THIS PRINCIPLE WOULD APPLY IRRESPECTIVE OF WHETHER THE I NCOME FORMS, OR DOES NOT FORM, PART OF THE TOTAL INCOME (DEFINED U/S. 2(45) OF THE ACT). NOT THEREFORE EXCLUDING EXPENDITURE RELATABLE TO TAX-EXEMPT INCOM E, WOULD OVERSTATE SUCH INCOME AND, CORRESPONDINGLY, UNDERSTATE INCOME FORM ING PART OF THE TOTAL INCOME, WHERE THE TWO FLOW FROM THE SAME BUSINESS O R SET OF ACTIVITIES. THIS IS THE PREMISE OF S. 14A, WHICH IS THUS INTEGRAL TO TH E INCOME DETERMINATION PROCESS UNDER THE ACT . RULE 8D IS ONLY TO MITIGATE THE ISSUES ARISING IN ATTRIBUTION OF - 5 - EXPENDITURE BETWEEN THE TWO STREAMS OF INCOME TAX ABLE AND NON-TAXABLE, FLOWING FROM THE SAME ACTIVITY, PROVIDING A UNIFORM BASIS FOR SUCH ATTRIBUTION OR ESTIMATION. NOTHING, THEREFORE, IN OUR VIEW, TURNS ON THE ASSESSEE PLEADING OF INVESTMENT IN SUBSIDIARY/ASSOCIATE COMPANIES BEING HELD FOR THE PURPOSE OF ITS BUSINESS, I.E., AS BUSINESS ASSETS, OR FOR STRATEGI C REASONS, WHICH ASSERTIONS, PARI MATERIA IN NATURE, WOULD THOUGH HAVE TO BE PROVED. THIS IS AS ALL THAT IS RELEVANT, FOR THE PURPOSE OF SECTION 14A TERMS OF WHICH ARE CLEAR, IS NOT THE OBJECT FOR WHICH THE INVESTMENT WAS MADE, BUT THE QUALITY OF I NCOME TAX-EXEMPT OR OTHERWISE, THAT ARISES FROM THE INVESTMENT. WHY, AN INCOME WHICH IS PRESENTLY TAX-EXEMPT, MAY STAND REMOVED FROM CHAPTER III SUBS EQUENTLY, AND FORM PART OF THE TOTAL INCOME, AND VICE VERSA. INCOME IS EARNED INCURRING OR ENTAILING EXPENDITURE, IN THE NORMAL COURSE OF TRADE OR ACTIV ITIES, NOT BECAUSE THE INCOME IS TAX-EXEMPT OR OTHERWISE, AND ITS STATUS AS SO DE PENDS ON THE PROVISIONS OF THE ACT AS IN FORCE FOR THE TIME BEING. THE APPLICATION OF SECTION 14A, WHERE SHARES YIELDING DIVIDEND INCOME ARE HELD AS STOCK-IN-TRADE , WE EMPHASIZE, WAS PRECISELY THE ISSUE IN DHANUKA & SONS (SUPRA), RENDERED FOLLOWING GODREJ & BOYCE MFG. CO. LTD. (SUPRA); DAGA CAPITAL MANAGEMENT (P.) LTD . (SUPRA); AND DAMANI ESTATES & FINANCE (P.) LTD . (SUPRA), ENDORSED, ONCE AGAIN, BY A LARGER BENCH IN DH SECURITIES (P.) LTD. (SUPRA). IN THE PRESENT CASE, THE SHARES ARE ADMITTEDLY NOT HELD AS STOCK-IN-TRADE AND, ACCORDIN GLY, YIELD DIVIDEND INCOME OR, IN CASE OF THEIR TRANSFER, CAPITAL GAINS, SO THAT T HERE IS NO SCOPE FOR SCALING DOWN THE DISALLOWANCE U/S. 14A, AS WAS DONE IN THE LATTE R TWO DECISIONS (BY THE TRIBUNAL). IN FACT, THE SAID REDUCTION IS ONLY WITH REFERENCE TO INTEREST EXPENDITURE, DIRECT OR INDIRECT, AND NOT INDIRECT, ADMINISTRATIVE EXPENDITURE, FOR WHICH ONLY DISALLOWANCE STANDS MADE IN THE INSTANT CASE, SO THAT IT WOULD HOLD IN ANY CASE (REFER: DAMANI ESTATES & FINANCE (P.) LTD . (SUPRA); HSBC INVEST DIRECT (INDIA) LTD . (IN ITA NOS. 3485 & 3944/MUM/2012 DATED 17.10.201 4); - 6 - AND WELLA INDIA HAIR COSMETICS (P.) LTD . V. DY. CIT [2014] 41 CCH 497 (MUMTRIB), ETC.). 2.2 THE ASSESSEE, AND SO DOES THE LD. AR BEFORE US, CONTENDS THAT NO SUCH EXPENDITURE STANDS INCURRED, SO THAT THERE IS NONE TO BE DISALLOWED. ON THIS, IT WAS POSED BY THE BENCH DURING HEARING, TO NO REBUTT AL BY HIM, AS TO WHO THEN TAKES THE DECISION/S FOR INVESTMENT OF FUNDS ON BEH ALF OF THE COMPANY. THE SAME WOULD SURELY VEST IN ITS BOARD OF DIRECTORS, AND WH ICH WOULD AGAIN BE ABLY ASSISTED BY THE MANAGEMENT, FURNISHING IT THE RELEV ANT, WHETHER PAST, CURRENT OR ANTICIPATED DATA, TO ENABLE DECISION-MAKING. THE SA ME CANNOT BE SAID TO BE SANS ANY COST. THE CONSIDERATIONS FOR MAKING INVESTMENT IN AN ASSOCIATE/SUBSIDIARY COMPANY MAY BE DIFFERENT FROM THAT WHICH OBTAIN FOR AN OUTSIDE COMPANY. CONSIDERATIONS THERE ARE AND WILL BE, AND DECISIONS ARE TAKEN ON THE ANVIL AND IN PURSUANCE OF THOSE CONSIDERATIONS. THESE CONSIDERAT IONS, HOWEVER, ARE NOT RELEVANT FOR THE PURPOSE. IN FACT, LAYING DOWN THE POLICIES, AND CAUSING/ UNDERTAKING ACTIVITIES WITH THE STATED OBJECT OF PU RSUING THE SAID POLICIES, IS THE TASK OF THE TOP MANAGEMENT OF A COMPANY, ENTAILING EXPENDITURE, WHICH GENERALLY PERCOLATES DOWN TO ITS LOWER ECHELONS AS WELL. AGAIN, THIS IS AN ONGOING PROCESS AS INVESTMENT SCENARIO AND BUSINESS ENVIRONMENT IS, IF NOT VOLATILE, DYNAMIC AND, IN ANY CASE, NOT CONSTANT, W ARRANTING A REVIEW IN LIGHT THEREOF FROM TIME TO TIME. RATHER, THE VERY FACT TH AT THE ASSESSEE CLAIMS IT AS HAVING BUSINESS IMPLICATIONS, MAKES SUCH A REVIEW I MPERATIVE, ENTAILING COST. THE MATTER HAS BEEN EXAMINED BY THE TRIBUNAL IN MAN Y A CASE, FINDING THE CONSIDERATION OF THE INVESTMENT BEING GUIDED BY ST RATEGIC REASONS WHATEVER THAT MAY MEAN, OR IN SUBSIDIARY (OR ASSOCIATE) COMP ANIES, AS NOT RELEVANT, AGAIN, WITH REFERENCE TO THE DECISIONS BY ITS LARGER BENCH ES. WE MAY IN THIS REGARD ADVERT TO THE DECISIONS IN HSBC INVEST DIRECT (INDIA) LTD . (SUPRA) AND WELLA INDIA HAIR COSMETICS (P.) LTD . (SUPRA), IN BOTH OF WHICH THE INVESTMENT WAS - 7 - PREDOMINANTLY IN SUCH INVESTMENTS. WE MAY REPRODUCE THE RELEVANT PART OF THE DECISION IN THE FORMER, WE WOULD BE INSTRUCTIVE: THE ASSESSEE SPEAKS OF THE BULK, NAY, ALMOST THE W HOLE OF ITS INVESTMENT BEING IN SHARES IN SUBSIDIARY COMPANIES, WHICH IT CLAIMS IS FOR STR ATEGIC REASON/S AND NOT FOR INCOME GENERATION. WE HAVE ALREADY NOTED THAT INCOME ON IN VESTMENT IN SHARES IS ALMOST WHOLLY EXTRINSIC TO THE COMPANYS INTERNAL PROCESSES. AN I NVESTEE-COMPANY MAY DO GOOD, YET NOT DECLARE DIVIDEND, OR DECLARE IT AT A RATE WHICH IS NOWHERE COMPATIBLE WITH THE INVESTMENT THEREIN, FINDING IT BETTER TO RETAIN RESOURCES, BEI NG CONFIDENT TO BEING APPLIED TO PROPEL FUTURE GROWTH OF THE COMPANY. IN FACT, ITS DOING G OOD IS ITSELF INDEPENDENT OF THE INVESTMENT BY THE ASSESSEE THEREIN, BEING DEPENDENT ON A HOST OF COMPANY-SPECIFIC AS WELL AS EXTERNAL, I.E., INDUSTRY OR ECONOMY SPECIFIC, FA CTORS. SIMILAR IS THE CASE OF GAIN (OR LOSS) THAT MAY BE REALIZED ON THE SALE OF SHARES, ITS PRI CE BEING PREDOMINATELY MARKET DRIVEN. A PRICE, BY DEFINITION, IS THE EQUILIBRIUM OF OPPOSIN G FACTORS OF SUPPLY AND DEMAND. WHILE ONE DEEMS IT FIT TO SELL, THE OTHER, TO THE CONTRAR Y, DOES TO BUY IT AT THE SAME RATE. THAT THE INVESTMENT IS IN SHARES OF SUBSIDIARY COMPANIES, LI MITS THE MANAGEMENTS OPTIONS EVEN FURTHER IN-AS-MUCH AS IT IS OBLIGED TO HOLD ON TO T HOSE SHARES, INCURRING COSTS, EVEN IF THE SAME DO NOT QUALIFY ON THE INVESTMENT CRITERION. IT MAY EVEN HAVE ACCESS TO INFORMATION THAT MAY NOT BE IN THE PUBLIC DOMAIN AND, BESIDES, TO A BETTER INFORMATION, I.E., BOTH QUANTITATIVELY AND QUALITATIVELY, ENABLING BETTER D ECISION MAKING. WHAT VALUE, THEN, ITS CLAIM OF THE SHARES BEING IN SUBSIDIARY COMPANIES ? TRUE, THERE IS MERIT IN THE CONTENTION THAT THE INVESTMENT BEING IN (OR PRIMARILY SO) SHAR ES IN SUBSIDIARY COMPANIES, THE ADMINISTRATIVE COST MAY BE LOWER, I.E., THAN THAT W OULD NORMALLY OBTAIN IN CASE OF INVESTMENT IN NON-RELATED COMPANIES. BUT THEN THE Q UESTION IS NOT AS TO WHETHER IT IS LOWER (OR NOT SO) IN RELATION TO ANOTHER SITUATION/SCENAR IO, BUT OF WHAT THAT EXPENDITURE IS, AND WHETHER THE CLAIM AS MADE IS SUPPORTED BY ITS ACCOU NTS, OR EVEN ON ANY OTHER OBJECTIVE BASIS. INCURRING OF EXPENDITURE IS, AFTER ALL, A MA TTER OF FACT. IF IT IS NOT IN THE ACCOUNTS, WHERE THE EXPENDITURE INCURRED IS REFLECTED, WHERE IT IS ? AS APPARENT, THE ARGUMENT OF A LOWER COST WHERE THE INVESTMENT IS IN SUCH COMPANIES, WAS ALSO CONSIDERED AND DISCOUNTENANCED, FINDING IT AS WITHOUT MERIT WHERE NOT SUPPORTED BY THE ASSESSEES ACCOUNTS WHIC H ARE ADMITTEDLY NOT MAINTAINED ACTIVITY-WISE, ALSO POINTING TO THE PARA DOX IN THE ARGUMENT. THE ISSUE OF THE APPLICABILITY OR OTHERWISE OF R. 8D(2)(III) IN CASE OF SUCH INVESTMENTS WAS ALSO CONSIDERED AND FOUND TO BE UNMERITED, AND NOT WITHOUT PRECEDENTS. WE MAY EXTRACT THE RELEVANT PART THERE-FROM FOR READY REFE RENCE: THE MATTER AT HAND IS NOT WITHOUT PRECEDENT. THE PR OPOSITION QUA NON-APPLICATION OF R. 8D(2)(III) CAME UP BEFORE, AND STOOD DISCOUNTENANCE D BY THE TRIBUNAL IN D. H. SECURITIES (P.) LTD. (SUPRA) AND DAMANI ESTATES & FINANCE (P.) LTD. (SUPRA), WITH REFERENCE TO THE DECISIONS IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA) AND ITO VS. DAGA CAPITAL MANAGEMENT PVT. LTD. (SUPRA). THE TRIBUNAL IN D. H. SECURITIES (P.) LTD. (SUPRA) EXPRESSED THE VIEW THAT R. 8D(2)(III), PRESCRIBING A RATIO (O F INVESTMENT) IN RESPECT OF INDIRECT - 8 - EXPENDITURE, COULD NOT BE ALTERED, AS ON ACCOUNT OF HARDSHIP (SEE PARA 6.5, PGS. 9-10 OF THE REPORTS). THE SAME (RATIO) WAS IN FACT NOMINAL, REC OMMENDING ITSELF TO EASY ACCEPTANCE, AS ALSO OBSERVED BY IT IN DAMANI ESTATES & FINANCE (P.) LTD. (SUPRA). REFERENCE FOR THE SAME MAY BE MADE TO THE DISCUSSION AT PARA 6.5 (PGS. 9-1 1) AND PARA 20 (PGS. 698-700) OF THE SAID DECISION, WHICH WE REPRODUCE AS UNDER FOR READ Y REFERENCE: CONTINUING FURTHER, THE PART OF THE RULE PRESCRIBI NG THE RATIO IN RESPECT OF INDIRECT EXPENDITURE (R. 8D(2)(III)) CANNOT BE ALTE RED ON ACCOUNT OF HARDSHIP (REFERENCE IS DRAWN TO THE SECTION OF THE JUDGMENT IN GODREJ & BOYCE (SUPRA) ON THE CONSTITUTIONALITY OF SUB-SECTIONS (2 ) & (3) OF SECTION 14A AND RULE 8D/PGS. 113 123). EVEN SO, THE RULE PRESCRIB ES THE SAME AS THE RATIO OF INDIRECT EXPENDITURE REQUIRED TO SUPPORT AN INVE STMENT. WE SAY SO AS THE EXPENDITURE PRESCRIBED FOR DISALLOWANCE IS BASED ON LY ON ONE VARIABLE, I.E., THE VALUE OF THE INVESTMENT (ON AN AVERAGE). INVEST MENT ACTIVITY, IT MAY BE APPRECIATED, IS MUCH STABLER IN CHARACTER IN COMPAR ISON TO THE TRADING ACTIVITY, WHICH INVOLVES CONTINUOUS CHURNING OF FUN DS AND, THUS, ACTIVITY, REQUIRING A MUCH HIGHER LEVEL OF ORGANIZATIONAL SUP PORT/EXPENDITURE. INVESTMENTS, ON THE OTHER HAND, ARE LONG TERM AND S TRATEGIC, REQUIRING ONLY PERIODIC REVIEW OF PERFORMANCE WITH REFERENCE TO TH E INVESTMENT OBJECTIVE/S, BESIDES ON ACCOUNT OF ENVIRONMENTAL CH ANGES, IF ANY. WHY, THE PRESCRIBED ALLOCATION RATIO OF 0.5% OF THE INVESTME NT VALUE QUA INDIRECT EXPENDITURE IS VERY NOMINAL, RECOMMENDING ITSELF TO EASY ACCEPTANCE, IS ITSELF BASED, EVEN AS OBSERVED BY THE HONBLE COURT (AT 116 OF THE REPORT), ON THE 2% TO 2.5% (OF THE INVESTMENT) USUALLY CHARGED BY THE PORTFOLIO MANAGEMENT SERVICE (PMS) PROVIDERS, OF WHICH AROUND 1% (OF THE PORTFOLIO VALUE) WOULD BE THEIR PROFIT. THE NOMINAL RATE OF 0.5% ALSO ESCHEWS THE CHARGE OF IT BEING HARSH, WHILE BEING A T THE SAME TIME CLARIFICATORY OF ITS PURPOSE; THE INVESTMENT ACTIVI TY BEING ESSENTIALLY SPORADIC AND EPISODIC. IN FACT, THE ASSESSEE ITSELF EXPLAINS OF NO CHANGE IN ITS INVESTMENT PORTFOLIO DURING THE YEAR EXCEPT FOR ONE SWITCH FROM A COMPANY SHARE TO UNITS OF A MUTUAL FUND (HDFC LIQUID FUND). OUR DISCUSSION IS, HOWEVER, ONLY TOWARD THE NOMINALITY AND PURPORT OF THE CHARGE, AND DOES NOT IN ANY MANNER IMPLY OF IT BEING CONFINED ONLY T O SHARES HELD AS INVESTMENT. THIS IS AS EVEN THOUGH PURCHASED WITH A SHORT TERM PERSPECTIVE, THE SHARES ARE PURCHASED ONLY WITH PROFIT OBJECTIVE , I.E., AS REPRESENTING A GOOD INVESTMENT OPPORTUNITY, SO THAT IT IS PERCEIVE D AS UNDER-PRICED, AND ITS MARKET PRICE WOULD APPRECIATE IN TIME, YIELDING GO OD RETURN AND, RATHER, IN A SHORTER PERIOD OF TIME. THAT IS, THE INVESTMENT C OMPONENT OR ELEMENT IS INBUILT IN ANY PURCHASE AND TOWARD WHICH THE ALLOCA TION OF INDIRECT EXPENDITURE IS PRESCRIBED PER R. 8D(2)(III). THE FA CT THAT TRADING SHARES ALSO YIELD DIVIDEND INCOME, WHICH IS NOT TAXABLE, I.E., BESIDES SHARE TRADING INCOME, IS ITSELF RELEVANT AND SUFFICIENT FOR ATTRA CTING THE PROVISION OF S.14A(1). IN FACT, AN ARGUMENT TO THIS EFFECT, I.E. , R. 8D(2)(III) AS BEING NOT APPLICABLE TO SHARES HELD AS STOCK-IN-TRADE, WAS SP ECIFICALLY ASSUMED IN THE CASE OF DAGA CAPITAL (SUPRA). THE TRIBUNAL REJECTED THE ARGUMENT, MADE WITH REFERENCE TO THE LANGUAGE OF R.8D, CLARIFYING THAT THE WORDS USED ARE VALUE OF INVESTMENT AND NOT HELD AS INVESTMENT. WE MAY REPRODUCE THE - 9 - RELEVANT PART OF THE ORDER FOR THE SAKE OF BETTER C LARITY (PAGE 55 OF 312 ITR (AT)): LEARNED COUNSEL FOR THE ASSESSEE . WE ARE NOT IMPRESSED WITH THIS SUBMISSION RAISED ON BEHALF OF THE ASSESSEE FO R THE OUT-AND-OUT REASON THAT THE REFERENCE IN THIS RULE IS TO THE V ALUE OF INVESTMENT AND NOT THE ASSETS HELD AS INVESTMENT. A PERSON M AY MAKE INVESTMENT IN SHARES AND THE SHARES SO PURCHASED MA Y BE HELD EITHER AS STOCK-IN-TRADE OR INVESTMENT. THE WORD INVE STMENT IN THIS RULE REFERS TO THE MAKING OF PURCHASE OF SHARES AND NOT HOLDING IT AS INVESTMENT. WE DECIDE ACCORDINGLY. 2.3 THE DISALLOWANCE OF IMPUGNED INDIRECT, ADMISSIB LE EXPENDITURE UNDER SECTION 14A READ WITH RULE 8D (2) (III) IS, IN VIEW OF THE FOREGOING, APPOSITE AND UPHELD. WE MAY, BEFORE PARTING, THOUGH CLARIFY THAT WE HAVE BASED OUR DECISION ON, APART FROM THE CLEAR LANGUAGE OF THE PROVISION OF SEC. 14A READ WITH RULE 8D, THE DECISIONS IN GODREJ & BOYCE MFG. CO. LTD. (SUPRA), WHICH ITSELF DRAWS ON SEVERAL BY THE APEX COURT; DHANUKA & SONS (SUPRA), AND BY THE LARGER BENCHES OF THIS TRIBUNAL AFORE-NOTED, OBVIATING THE NEED TO REFER TO THE DECISION IN EIH ASSOCIATED HOTELS LTD . (IN ITA NOS. 1673 & 1674/MDS/2015 DATED 01/7/2016 ) INASMUCH AS THE SAME IS WITHOUT REFERENCE TO THE LA NGUAGE OF THE PROVISION OR THE SAID DECISIONS AFORE-REFERRED, OR IN ANY CASE MEETI NG THE ARGUMENTS MADE. IN FACT, WE OBSERVE AN INCONSISTENCY INSOFAR AS THE TR IBUNAL DIRECTS NON-INVOCATION OF S. 14A R/W R. 8D (2)(III) IN CASE OF STRATEGIC I NVESTMENTS - WHICH WOULD THOUGH NEED TO BE PROVED, WHILE AT THE SAME TIME APPROVING THE APPLICATION OF R. 8D(2) (I)/(II) IN CASE OF BORROWED CAPITAL USED FOR SUCH INVESTMENTS. EITHER S. 14A APPLIES OR NOT SO IN RESPECT OF SUCH INVESTMENTS. I F THE INVESTMENT BEING STRATEGIC IS A RELEVANT CONSIDERATION - WHICH WOULD REQUIRE D EFINING IT AS WELL AS A FINDING IN THE MATTER, IT WOULD EXCLUDE APPLICATION OF S. 1 4A IN WHOLE, AND NOT IN PART. DISALLOWANCE U/S. 14A, IT NEEDS TO BE APPRECIATED, IS ONLY QUA EXPENDITURE ACTUALLY INCURRED AND CLAIMED IN RELATION TO SUCH I NVESTMENTS BEARING TAX EXEMPT INCOME, AND THERE COULD BE NO DISALLOWANCE IN THE A BSENCE OF EXPENDITURE. THEREFORE, TO SAY THAT ONE LIMB OF THE SAID RULE SH ALL NOT APPLY FOR THE REASON THAT - 10 - THE INVESTMENT IS STRATEGIC, AS (SAY) FOR ACQUIRING CONTROLLING INTEREST, WHILE UPHOLDING THE OTHER LIMB, MAY NOT BE PROPER. BESIDE S BEING INCONGRUENT WITH THE LAW IN THE MATTER AS EXPLAINED BY THE HIGHER COURTS OF LAW AS WELL AS THE LARGER BENCHES OF THIS TRIBUNAL, THE PREMISE IS INTERNALLY INCONSISTENT. THAT THE NATURE OF THE INVESTMENT - STRATEGIC OR THE OTHERWISE, IS NOT A RELEVANT CONSIDERATION, STANDS HELD IN OTHER DECISIONS AS WELL TO SOME OF WHICH RE FERENCE IS MADE IN THIS ORDER, FINDING IT AS IRRELEVANT OR OF NO CONSEQUENCE, GIVE N THE CLEAR MANDATE OF S. 14A. WE DECIDE ACCORDINGLY. 3. THE NEXT ISSUE ARISING IN THESE APPEALS IS THE A DMISSIBILITY OF EXPENDITURE OF ENTERPRISE RESOURCE PLANNING (ERP) SOFTWARE INST ALLED BY THE ASSESSEE, AS REVENUE EXPENDITURE. THE SAME HAS BEEN DENIED ON T HE GROUND OF IT REPRESENTING CAPITAL EXPENDITURE, INADMISSIBLE U/S. 37(1) OF THE ACT, RELYING ON THE DECISION IN ARVIND MILLS LTD. V. CIT [1992] 197 ITR 422 (SC). THE SAME FOUND CONFIRMATIO N IN APPEAL BY THE LD. CIT(A), WHO FOUND THE FACTS OF THE CASE TO BE AT PAR AND, THUS, COMPARABLE WITH THAT IN SUDARSHAN CHEMICAL INDUSTRIES LTD. VS. ASST. CIT [2008] 110 ITD 171 (PUNE), WHEREIN THE EXPENDITURE WAS AGAIN ON ERP SOFTWARE, AND HELD TO CONSTITUTE AN INTANGIBLE ASSE T EXIGIBLE TO DEPRECIATION, SO THAT HE DECIDED LIKEWISE, ALLOWING ASSESSEE DEPRECI ATION THEREON. AGGRIEVED, THE ASSESSEE IS IN SECOND APPEAL, RELYING BEFORE US ON DECISIONS IN CIT V. SOUTHERN ROADWAYS LTD. [2007] 288 ITR 15 (MAD) AND CIT V. RAYCHEM RPG LTD. [2012] 346 ITR 138 (BOM). 4. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. THE QUESTION THEREFORE BEFORE US IS WHETHER THE EXP ENDITURE ON ERP SOFTWARE IS IN THE NATURE OF REVENUE EXPENDITURE OR IN THE CAPITAL FIELD, YIELDING AN ENDURING BENEFIT TO THE ASSESSEE. THE LAW IN THE MATTER IS TRITE, SO THAT WHERE THE SAME FORMS A PART OF THE PROFIT MAKING APPARATU S, A TOOL OF THE BUSINESS, OR ADDITION THERETO, IT WOULD BE A CAPITAL ASSET. REFE RENCE MAY BE MADE TO THE - 11 - DECISION IN EMPIRE JUTE COMPANY LTD. V. CIT [1981] 124 ITR 1 (SC), A LOCUS CLASSICUS ON THE SUBJECT, SINCE FOLLOWED, REFERRED AND APPLI ED BY COURTS AND TRIBUNALS ACROSS THE COUNTRY. IN ARVIND MILLS LTD. (SUPRA), THE APEX COURT CONSIDERED THE CAPITAL EXPENDITURE IN TERMS OF IT PROVIDING BETTER FACILITIES FOR CARRYING ON THE APPELLANTS BUSINESS, I.E., TOWARD CAPACITY BUILDING THROUGH PROVISION OF BETTER INFRASTRUCTURE. THE MATTER THUS IS ESSENTIALLY A QUESTION OF FACT, WITH THE LAW IN THE MATTER BEING WELL SETTLED . HOW, THEN, WE WONDER, RELIANCE ON CASE LAW, ANSWERING A QUESTION/S OF LAW IN THE GIVEN FACTS OF THE CASE, BE OF MUCH ASSISTANCE? THE TRIBUNAL IN SUDARSHAN CHEMICAL INDUSTRIES LTD. (SUPRA), EXAMINING, SIMILARLY, THE ISSUE QUA ERP SOFTWARE, CONSIDERED THE MATTER IN DETAIL, NOTING THE VARIOUS ASPECTS OF ERP SOFTWA RE. WE REPRODUCE SOME OF ITS FINDINGS FOR READY REFERENCE: THE ERP IS AN ACRONYM FOR ENTERPRISE RESOURCE PLAN NING WHICH IS A COMPLEX COMPUTER-BASED SYSTEM USED BY CORPORATIONS ACROSS THE WORLD TO AUTOMATE KEY BACK-OFFICE BUSINESS PROCESSES LEADING TO REMARKABLE ADVANTAGES IN TERMS OF PRODUCTIVITY AND PROFITS FOR ANY ORGANIZATION SMALL, MEDIUM OR LARGE. THE ERP IMPLEMENTATION INVOLVES NETWORKING THE ENT IRE ORGANIZATION, REORGANIZATION OF DATA FLOW AND DECISION-MAKING CEN TRES, TRAINING OF MANPOWER AND CONSIDERABLE EXPENDITURE ON HARDWARE. IT BRINGS ABOUT TREMENDOUS IMPROVEMENT IN THE DAY-TO-DAY EFFICIENCY BY REDUCING OPERATING CYCLE TIME OF THE BUSINESS, PRUNING LEAD TIME IN AL L BUSINESS FUNCTIONS, REDUCING INVENTORY CARRYING COST, IMPROVING VENDOR PERFORMANCE IN TERMS OF TIMING AND QUALITY, IMPROVING RETURN ON INVESTMENTS , MAKING AVAILABLE UPDATED CRITICAL MANAGEMENT INFORMATION, IMPROVING SYSTEM AND PROCEDURES RESULTING IN FASTER DECISION MAKING BRINGING ABOUT EFFECTIVE COST CONTROL AND BENCH MARKING, RESULTING IN IMPROVED PRODUCTIVITY A ND PROFITS. IN OTHER WORDS, ERP IMPLEMENTATION MAKES A BUSINESS ORGANIZA TION A BETTER PROFIT MAKING APPARATUS FOR ALL THE TIME TO COME . CLEARLY, THEREFORE, ERP IS, FUNCTIONALLY SPEAKING, A TOOL, A PART OF THE PROFIT- MAKING APPARATUS, OF THE BUSINESS, FOR ENABLING IT S MANAGEMENT AND OPERATIONS IN A MANNER NOT POSSIBLE OR FEASIBLE OTHERWISE, IMPROVING PRODUCTIVITY IN SHORT . THE ASSESSEE HAS NOT PLACED ANY MATERIAL ON RECORD AT ANY STAGE TO EXHIBIT OR SUBSTANTIATE ITS CASE, NOR HAS IN ANY MANNER REBUTT ED THE FINDINGS BY THE REVENUE OR IMPUGNED THE RELIANCE/S MADE BY IT. ITS CASE TH US RESTS ON AND IS THEREFORE NO - 12 - MORE THAN A BALD STATEMENT OF THE EXPENDITURE YIELD ING NO ENDURING BENEFIT, WHICH BEING ALLIED TO THE FUNCTIONAL TEST, IS PRECI SELY QUESTION THAT IS TO BE DETERMINED. RATHER, BROADLY SPEAKING, WE DO NOT THI NK THERE IS MUCH DIFFERENCE, I.E., CONCEPTUALLY OR IN PRINCIPLE, BETWEEN THE HAR DWARE (COMPUTER) AND THE SOFTWARE, WHICH ARE TWO INTEGRAL COMPONENTS OF ONE COMPOSITE COMPUTERIZED ENVIRONMENT/SYSTEM, WORKING IN UNISON FOR THE PURPO SE OF THE ASSESSEES BUSINESS, SO THAT REGARDING ONE AS CAPITAL, MERELY BECAUSE IT IS TANGIBLE, AND THE OTHER AS REVENUE, BECAUSE IT IS NOT, MAY NOT BE PRO PER. THE TRIBUNAL, AGAIN, IN AMWAY INDIA ENTERPRISES V. DY. CIT [2008] 111 ITD 112 (DEL)(SB), EMPHASIZED THE FUNCTIONAL TEST, I.E., APART FROM THE OWNERSHIP AND ENDURING BENEFIT TESTS, STATING THAT THE ADVANTAGE THAT ACCRUES FROM THE EX PENDITURE IS TO BE REGARDED IN THE COMMERCIAL SENSE. WE MAY THOUGH CLARIFY THAT TH E SAME DOES NOT IMPLY, AS A READING OF THE ORDER IN SUDARSHAN CHEMICAL INDUSTRIES LTD. (SUPRA) WOULD SHOW, THAT THE ADVANTAGE IS CONFINED TO A TRADING ADVANTA GE, BUT COULD BE IN TERMS OF IMPROVED MANAGEMENT SYSTEMS; COST-CUTTING; DATA OR INFORMATION ANALYSIS FOR DECISION MAKING; ETC. BETTER RESOURCE PLANNING IN SHORT. IT IS THE ADVANTAGE TO THE BUSINESS IN THE REVENUE OR IN THE CAPITAL F IELD, WHICH IS THE CORNERSTONE OR THE BASIS ON WHICH THE EXPENDITURE IS TO BE CONSIDE RED. COMING TO THE DECISIONS RELIED UPON BY THE ASSESSEE , THE DECISION IN RAYCHEM RPG LTD . (SUPRA) RESTS ON THE FACTUAL FINDINGS BY THE TRIB UNAL. AS REGARDS THE DECISION IN SOUTHERN ROADWAYS LTD . (SUPRA), THE SAME IS IN RESPECT OF REPAIR AND REPLACEMENT EXPENDITURE AND, AS SUCH, IT S IMPORT IS AGAIN TO BE CONSIDERED WITH REFERENCE TO THE FACTUAL FINDING OF WHETHER THE EXPENDITURE LEADS TO A BUSINESS ADVANTAGE IN THE CAPITAL FIELD OR NOT . THE ASSISTANCE THEREFORE TO THE ASSESSEES CASE CANNOT BE APPRECIATED DIVORCED FROM OR WITHOUT REFERENCE TO THE SAID FINDINGS. THE APEX COURT HAS ONCE AGAIN IN CIT V. SARVANA SPINNING MILLS (P.) LTD . [2007] 293 ITR 201 (SC) CLARIFIED THE LAW IN THE MATTER WITH REGARD TO SUCH EXPENDITURE, HOLDING THE PURVIEW OF REPAIR E XPENDITURE TO BE TO MAINTAIN - 13 - OR PRESERVE AN EXISTING ASSET, WHILE THAT RESULTING IN AN ADVANTAGE OR IMPROVEMENT, QUALITATIVELY OR QUANTITATIVELY, IS TO BE REGARDED AS A CAPITAL EXPENDITURE. REFERENCE MAY ALSO PROFITABLY BE MADE TO THE DECISION IN CIT V. MADRAS CEMENTS LTD . [2002] 255 ITR 243 (MAD). IN VIEW OF THE FOREGOING, WE HAVE NO HESITATION IN CONFIRMING THE ORDERS OF THE AUTHORITIES BELOW. WE DECIDE ACCORDINGLY. 5. WE OBSERVE THE ASSESSEE TO HAVE ASSUMED ANOTHER GROUND AS WELL, I.E., QUA NON ALLOWANCE OF PROPER OPPORTUNITY OF HEARING BEFO RE THE LD. CIT(A). NO ARGUMENTS IN THIS REGARD WERE RAISED BEFORE US. THE SAME IS ACCORDINGLY DISMISSED AS NOT PRESSED. 6. IN THE RESULT, THE APPEALS BY THE ASSESSEE ARE D ISMISSED. ORDER PRONOUNCED ON 20 TH FEBRUARY, 2017 AT CHENNAI . SD/- SD/- ( . ! ) ( ) (G. PAVAN KUMAR) (SANJAY ARORA) ' /JUDICIAL MEMBER /ACCOUNTANT MEMBER /CHENNAI, . /DATED, FEBRUARY 20, 2017 EDN / ( *',01 21%, /COPY TO: 1. &' /APPELLANT 2. *+&' /RESPONDENT 3. 3, ( )/CIT(A) 4. 3, /CIT 5. 145 *',' /DR 6. 56$ 7 /GF