TMI Blog2017 (3) TMI 476X X X X Extracts X X X X X X X X Extracts X X X X ..... consistency insofar as the tribunal directs non-invocation of s. 14A r/w r. 8D (2)(iii) in case of strategic investments - 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. If the investment being strategic is a relevant consideration - which would require defining it as well as a finding in the matter, it would exclude application of s. 14A 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 investments bearing tax exempt income, and there could be no disallowance in the absence of expenditure. Therefore, to say that one limb of the said rule shall not apply for the reason that the investment is strategic, as (say) for acquiring controlling interest, while upholding the other limb, may not be proper. Besides 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. Admissibility of expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t business, holding the said investments as stock-in-trade, which is admittedly not so in the instant case. The ld. AR, the assessee s counsel, on being called upon to explain, would submit of it being for strategic reasons, without specifying what those reasons are. We observe no such plea before the Revenue authorities and, consequently, no finding by them in the matter. Though there is nothing on record to exhibit 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 company has, in making the investments, acted within its powers and in it s interest. 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 apply inasmuch as the same mandates disallowance of any expenditure in relation to income not forming part of the total income, and does not concern itself with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, both streams of income, i.e., taxable as well as tax-free, so that it seeks to identify expenditure in relation to exempt income with reference to the underlying/ corresponding investment. The law, per s. 14A(2) r/w r. 8D(1), in fact provides a caveat for such adjustments. Now, it stands to reason that if investments forming part of the assessee s stock-intrade does not preclude application of sec. 14A, investments made for business, i.e., assuming so, would surely not. Why, any investment would be made only on business considerations. Capital assets are as much a part of, and investment therein as much integral to, business, as are revenue 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 share holding . And the only question relevant is if the investment has entailed expenditure, direct or indirect, and, further, if income arising there-from is, wholly or in part, income not forming part of the total income. In the present case, the entire income arising or that would ensue on shares, even if regarded as held for the purpose of the assessee s business, is either ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons 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, accordingly, yield dividend income or, in case of their transfer, capital gains, so that there is no scope for scaling down the disallowance u/s. 14A, as was done in the latter 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 17.10.2014); and Wella India Hair Cosmetics (P.) Ltd . v. Dy. CIT [2014] 41 CCH 497 (MumTrib), etc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-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, being confident to being applied to propel future growth of the company. In fact, it s doing good 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, factors. Similar is the case of gain (or loss) that may be realized on the sale of shares, its price being predominately market driven. A price, by definition, is the equilibrium of opposing factors of supply and demand. While one deems it fit to sell, the other, to the contrary, does to buy it at the same rate. That the investment is in shares of subsidiary companies, limits the management s options even further in-as-much as it is obliged to hold on to those 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 decision making. What value, then, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 prescribes the same as the ratio of indirect expenditure required to support an investment. We say so as the expenditure prescribed for disallowance is based only on one variable, i.e., the value of the investment (on an average). Investment activity, it may be appreciated, is much stabler in character in comparison to the trading activity, which involves continuous churning of funds and, thus, activity, requiring a much higher level of organizational support/expenditure. Investments, on the other hand, are long term and strategic, requiring only periodic review of performance with reference to the investment objective/s, besides on account of environmental changes, if any. Why, the prescribed allocation ratio of 0.5% of the investment value qua indirect expenditure is very nominal, recommending itself to easy acceptance, is itself based, even as observed by the hon ble 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 portfoli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arting, 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 language of the provision or the said decisions afore-referred, or in any case meeting the arguments made. In fact, we observe an inconsistency insofar as the tribunal directs non-invocation of s. 14A r/w r. 8D (2)(iii) in case of strategic investments - 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. If the investment being strategic is a relevant consideration - which would require defining it as well as a finding in the matter, it would exclude application of s. 14A in whole, and not in part. Disallowance u/s. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s classicus on the subject, since followed, referred and applied 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 software. We reproduce some of its findings for ready reference: The ERP is an acronym for Enterprise Resource Planning 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 entire organization, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ata 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 field, which is the cornerstone or the basis on which the expenditure is to be considered. Coming to the decisions relied upon by the assessee, the decision in Raychem RPG Ltd . (supra) rests on the factual findings by the tribunal. As regards the decision in Southern Roadways Ltd . (supra), the same is in respect of repair and replacement expenditure and, as such, its 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 assessee s 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 expenditure to be to maintain or preserve an existing asset, while that resulting in an advantage or improvement, qualitatively or quantitatively, is to be regarded as a capital e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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