PCIT-3 Vs DLF Home Developers Ltd (Supreme Court of India)
The matter relates to Assessment Year (AY) 2011–12 and concerns the disallowance of expenditure under Section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962. The Assessing Officer (AO) examined the balance sheets for the financial years ending on 31.03.2010 and 31.03.2011 and observed that the assessee’s investment in equity shares had declined during the relevant period. At the beginning of FY 2010–11, the investments were recorded at Rs. 2,73,331.69 lakhs, which reduced to Rs. 1,78,239.36 lakhs at the end of the year.
Based on this analysis, the AO invoked Rule 8D(2)(ii) and Rule 8D(2)(iii). Under Rule 8D(2)(ii), an amount of Rs. 6,946.01 lakhs was disallowed towards interest expenditure. In addition, Rs. 1,128.93 lakhs was disallowed as administrative expenses under Rule 8D(2)(iii), on the assumption that such expenditure would have been incurred in earning exempt income. After adjusting the suo motu disallowance of Rs. 8,21,883 made by the assessee, the total disallowance made by the AO amounted to Rs. 80,66,72,112.
The assessee challenged the assessment before the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) deleted the disallowance relating to interest expenditure under Rule 8D(2)(ii) but retained the disallowance of Rs. 1,128.93 lakhs under Rule 8D(2)(iii) towards administrative expenses. The CIT(A) reasoned that investment activities involve management decisions such as making investments, maintaining them, and deciding when to exit. These decisions involve inputs, research, and information gathering, resulting in incidental administrative expenses embedded in indirect expenses. Accordingly, the CIT(A) held that some administrative expenditure relating to earning exempt income must have been incurred.
