Sanjay Arora, Accountant Member - This is a set of two Appeals by the Assessee arising out of a common Order by the Commissioner of Income Tax (Appeals)-11, 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. The appeals raising common issues, were heard together, and are being disposed of by a common, consolidated order for the sake of convenience.
2.1 The assessee's case, qua section 14A, is that the investments are in subsidiary/associate companies, made for business purposes. 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 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 the character of such income. Dividend income, under the condition of investment 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 the qualifying condition of s.14A. Accordingly, the holding of the asset/property under reference either as an investment or as stock-in-trade becomes inconsequential or irrelevant; the disallowance being independent of the head or the nature of the income arising 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] 117 ITD 169/[2008] 26 SOT 603 (Mum.) (SB). And, then, again in Dy. CIT v. Damani Estates & Finance (P.) Ltd. [2014] 41 taxmann.com 462 (Mum. - Trib.), drawing extensively on Godrej & Bayce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (Bom.) and Dhanuka & Sons v. CIT [2011] 339 ITR 319/12 taxmann.com 227/201 Taxman 105 (Mag.) (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 1/41 taxmann.com 352 (Mum.)(TM). In the later two decisions, the tribunal, considering that the predominant objective of the investment/ deployment of funds in shares was to earn income by way of share trading income, which is taxable, deemed it proper to restrict the statutory disallowance u/s.14A to twenty percent (20%) of that computed under rule 8D of the Income Tax Rules, 1962 ('the Rules' hereinafter), justifying the departure from the mandatory rule, which is only a rule of estimation or appropriation of the expenditure attributable to income not forming part of the total income. Just as it was not possible, it stands explained therein, to hold that the dividend income flowing from 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 expenditure relatable to the shares would stand to be disallowed inasmuch as the same yield, and predominantly at that, income forming part of the total income (by way 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 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-in-trade 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 in the form of dividend 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 respect, 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 concept 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 for, earning the same. That is, the computation of income cannot be complete without determining and excluding all related expenses, i.e., having a proximate relationship therewith. This principle would apply irrespective of whether the income 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 income, would overstate such income and, correspondingly, understate income forming part of the total income, where the two flow from the same business or set of activities. This is the premise of s. 14A, which is thus integral to the income determination process under the Act. Rule 8D is only to mitigate the issues arising in attribution of expenditure between the two streams of income - taxable 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 strategic 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 income - tax-exempt or otherwise, that arises from the investment. Why, an income which is presently tax-exempt, may stand removed from Chapter III subsequently, and form part of the total income, and vice versa. Income is earned incurring or entailing expenditure, in the normal course of trade or activities, not because the income is tax-exempt or otherwise, and its status as so depends 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, 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 Investment Direct (India) Ltd. v. Dy. CIT [IT Appeal Nos. 3485 & 3944/Mum/2012, dated 17-10-2014]; and Wella India Hair Cosmetics (P.) Ltd. v. Dy. CIT [2014] 51 taxmann.com 203/66 SOT 127 (URO) (Mum. - Trib.), 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 rebuttal by him, as to who then takes the decision/s for investment of funds on behalf of the company. The same would surely vest in its Board of Directors, and which would again be ably assisted by the Management, furnishing it the relevant, whether past, current or anticipated data, to enable decision-making. The same 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 considerations, however, are not relevant for the purpose. In fact, laying down the policies, and causing/ undertaking activities with the stated object of pursuing 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, warranting a review in light thereof from time to time. Rather, the very fact that the assessee claims it as having business implications, makes such a review imperative, entailing cost.
The matter has been examined by the tribunal in many a case, finding the consideration of the investment being guided by 'strategic' reasons - whatever that may mean, or in subsidiary (or associate) companies, as not relevant, again, with reference to the decisions by its larger benches. 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 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 whole of its' investment being in shares in subsidiary companies, which it claims is for strategic reason/s and not for income generation. We have already noted that income on investment in shares is almost wholly extrinsic to the company's internal processes. An investee-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, its claim of the shares being in subsidiary companies? True, there is merit in the contention that the investment being in (or primarily so) shares in subsidiary companies, the administrative cost may be lower, i.e., than that would normally obtain in case of investment in non-related companies. But then the question is not as to whether it is lower (or not so) in relation to another situation/scenario, but of what that expenditure is, and whether the claim as made is supported by its accounts, or even on any other objective basis. Incurring of expenditure is, after all, a matter 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 assessee's accounts which are admittedly not maintained activity-wise, also pointing to the paradox 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 reference:
'The matter at hand is not without precedent. The proposition qua non-application of r. 8D(2)(iii) came up before, and stood discountenanced 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 v. 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 (of investment) in respect of indirect 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, recommending 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. 9-11) and para 20 (pgs. 698-700) of the said decision, which we reproduce as under for ready reference:
'Continuing further, the part of the rule prescribing the ratio in respect of indirect expenditure (r. 8D(2)(iii)) cannot be altered 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 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 portfolio value) would be their profit. The nominal rate of 0.5% also eschews the charge of it being harsh, while being at the same time clarificatory of its purpose; the investment activity 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 to 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 perceived as under-priced, and its market price would appreciate in time, yielding 'good' return and, rather, in a shorter period of time. That is, the investment component or element is inbuilt in any purchase and toward which the allocation of indirect expenditure is prescribed per r. 8D(2)(iii). The fact that trading shares also yield dividend income, which is not taxable, i.e., besides share trading income, is itself relevant and sufficient for attracting 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 specifically 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 relevant part of the order for the sake of better clarity (page 55 of 312 ITR (AT)):
"Learned Counsel for the assessee ……. We are not impressed with this submission raised on behalf of the assessee for the out-and-out reason that the reference in this rule is to the 'value of investment' and not the assets 'held as investment'. A person may make investment in shares and the shares so purchased may be held either as "Stock-in-trade' or 'Investment'. The word 'investment' 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, admissible 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. v. Dy. CIT [IT Appeal Nos. 1673 & 1674/Mds./2015, dated 1-7-2016] 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. 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. 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 reference is made in this order, finding it as irrelevant or of no consequence, given the clear mandate of s. 14A. We decide accordingly.
3. The next issue arising in these appeals is the admissibility of expenditure of Enterprise Resource Planning (ERP) software installed by the assessee, as revenue expenditure. The same has been denied on the 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 422/63 Taxman 493 (SC). The same found confirmation 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 Chemicals Industries Ltd. v. Asstt. CIT [2008] 110 ITD 171/[2007] 17 SOT 43 (URO) (Pune), wherein the expenditure was again on ERP software, and held to constitute an intangible asset exigible to depreciation, so that he decided likewise, allowing assessee depreciation thereon. Aggrieved, the assessee is in second appeal, relying before us on decisions in CIT v. Southern Roadways Ltd. [2007] 288 ITR 15/158 Taxman 1 (Mad.) and CIT v. Raychem RPG Ltd. [2012] 346 ITR 138/21 taxmann.com 507 (Bom.).
4. We have heard the parties, and perused the material on record.
The question therefore before us is whether the expenditure 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 apparatus, a tool of the business, or addition thereto, it would be a capital asset. Reference may be made to the decision in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1/3 Taxman 69 (SC), a locus 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, reorganization of data flow and decision-making centres, 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 all 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 and profits. In other words, ERP implementation makes a business organization 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 rebutted the findings by the Revenue or impugned the reliance/s made by it. Its' case thus rests on and is therefore no more than a bald statement of the expenditure yielding no enduring benefit, which being allied to the functional test, is precisely question that is to be determined. Rather, broadly speaking, we do not think there is much difference, i.e., conceptually or in principle, between the hardware (computer) and the software, which are two integral components of one composite computerized environment/system, working in unison for the purpose of the assessee's business, so that regarding one as capital, merely because it is tangible, and the other as revenue, because it is not, may not be proper. The tribunal, again, in Amway India Enterprises v. Dy. CIT [2008] 111 ITD 112/21 SOT 1 (Delhi) (SB), emphasized the functional test, i.e., apart from the ownership and enduring benefit tests, stating that the advantage that accrues from the expenditure is to be regarded in the commercial sense. We may though clarify that the 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 advantage, 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 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. Saravana Spg. Mills (P.) Ltd. [2007] 293 ITR 201/163 Taxman 201 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 expenditure. Reference may also profitably be made to the decision in CIT v. Madras Cements Ltd. [2002] 255 ITR 243/123 Taxman 412 (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 before 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 dismissed.