IMPORTANT POINT
The judgment emphasizes the requirement for the Assessing Officer to be satisfied with the correctness of the claim made by the assessee about the expenditure incurred in relation to income not forming part of the total income under the Act.

JUDGMENT

[Physical Hearing/Hybrid Hearing (as per request)]

Rajiv Shakdher, J. (Oral)

1. This appeal concerns Assessment Year (AY) 2011-12.

2. Via the instant appeal, the appellant/revenue seeks to assail the order dated 19.06.2018 passed by the Income Tax Appellate Tribunal [in short, "Tribunal"].

3. According to Mr Ruchir Bhatia, learned senior standing counsel, who appears on behalf of the appellant/revenue, the sole issue that arises for consideration is: whether the Tribunal has erred in deleting the disallowance amounting to Rs. 80,66,72,112/- made by the Assessing Officer (AO) under Section 14A of the Income-tax Act, 1961 [in short, "the Act"] read with Rule 8D of the Income-tax Rules 1962 [in short, "the Rules"]?

4. The record shows that the AO had taken into account the balance sheets of financial years (FY) ending on 31.03.2010 and 31.03.2011. A comparison of the information embedded in the said balance sheets revealed to the AO that the investments made by the respondent/assessee in equity shares at the beginning of the period in issue i.e., FY 2010-11 (AY 2011-12) was Rs. 2,73,331.69 lakhs. It also revealed that at the end of said FY, the investments fell to Rs.1,78,239.36 lakhs.

4.1. Based on this, the AO applied the provisions of Rule 8D(2)(ii) and (iii). Accordingly, under Rule 8D(2)(ii), Rs. 6,946.01 lakhs was disallowed towards interest expenditure, while Rs. 1,128.93 lakhs was disallowed as administrative expenses that would possibly have been incurred to earn exempt income by taking recourse to Rule 8D(2)(iii) read with Section 14A of the Act. In sum, the total amount disallowed by the AO was Rs. 80,66,72,112/, after deducting the suo motu disallowance made by the respondent/assessee amounting to Rs. 8,21,883/-.

5. The record discloses that the respondent/assessee carried the matter, in appeal, to the Commissioner of Income Tax (Appeals) [in short, "CIT(A)"]. The CIT(A) deleted the disallowance made under Rule 8D(2)(ii) amounting to Rs. 6,946.01 lakhs while retaining the disallowance made by the AO amounting to Rs. 1,128.93 lakhs under Rule 8D(2)(iii) made towards administrative expenses that would possibly have been incurred to earn exempt income. The reason given by the CIT(A) for retaining the disallowance under Rule 8D(2)(iii) is incorporated in paragraph 7.2 of the order.

5.1. For convenience, the same is extracted hereafter:

"7.2 The Assessing Officer, has further made the addition of Rs..1128.93 lacs under Rule 8D(2)(iii) of the Income Tax Rules for the administrative expenses incurred for earning the exempt income. I am not in agreement with the appellant's argument that they have not incurred any administrative expenditure on the investment activity. The appellant contended that there is no proximate nexus between earning of dividend income and the expenditure incurred by it. The administrative expenditure has been incurred under different heads but no administrative expenditure has been allocated to the investment portfolio. In my view, there cannot be a concept of free lunch and making or selling the investments cannot be in the nature of any passive activity involving no input. In-fact, in my view

a) making of investment

b) maintaining or continuing with any investment in a particular share/mutual funds etc. and

c) even the time when to exit from one investment to another, all these activities are well coordinated and well informed management decisions, involving not only inputs from various sources but it also involves acumen of senior management functionaries whether they sit in Subsidiary company or Holding company. There are incidental administrative expenses on collecting the information, research etc. which helps; in arriving at particular investment decisions and these expenses, relating to earning of the income are embedded in the indirect expenses. The investments made being conscious decisions and having deployment of the funds brings into picture the expenditure by way of cost of funds "invested".