WINDSTON SPRINGS PVT LTD,MUMBAI vs. DY. CIT -8(3)(2), MUMBAI

On appeal, the Ld. CIT(A) confirmed the addition on account of short-term capital gain holding that the block of assets had ceased to exist as on 07.01.2014. The Ld. CIT(A) also confirmed the disallowance of interest under section 36(1)(iii) and the disallowance of depreciation by treating the building as capital work-in-progress.

Before us, the Ld. Authorised Representative submitted that the sale consideration received from the sale of the Surendranagar residential property was utilised for construction of the Bhuj building. It was submitted that the Bhuj building was completed before 31.03.2014 and in support thereof reliance was placed on the completion certificate issued by the Gram Panchayat, the certificate issued by a Chartered Engineer and the bills raised by contractors. It was contended that since the new building had been added to the block before the end of the previous year, the block of assets had not ceased to exist and, therefore, no short-term capital gain under section 50 was exigible.

The Ld. Authorised Representative (“Ld.AR”) further submitted that no borrowed funds were utilised for construction of the Bhuj building and that the construction was financed out of the sale proceeds of the old building. It was also submitted that the building was completed and ready for use and that depreciation was allowable.

The Ld. Departmental Representative (“Ld.DR”) relied on the orders of the lower authorities.

We have considered the rival submissions and perused the material available on record. From the depreciation chart, it is evident that the assessee had residential buildings with an opening written down value of Rs. 17,38,479/- and had made additions of Rs.

The Assessing Officer proceeded on the premise that the block of assets had ceased to exist on 07.01.2014, being the date of sale of the old building. However, what is relevant for the purposes of section 50 is the position of the block of assets as on the last day of the previous year. Since a new building had been added to the block before 31.03.2014, the block of assets had not ceased to exist.

Having held that the building was completed and ready for use, the assessee is entitled to depreciation and the Assessing Officer is directed to allow the same. As regards the disallowance of interest, the assessee has demonstrated that no borrowed funds were utilised for construction of the new building and that the construction was financed out of the sale proceeds of the old building. The borrowed funds were used for business purposes. Accordingly, the disallowance of interest is also directed to be deleted.

In the result, the appeal for assessment year 2014-15 is allowed.

The Ld. CIT(A) confirmed the disallowance by relying on CBDT Circular dated 21.11.2014 and holding that investment capable of earning exempt income was sufficient to invoke the provisions of section 14A.

Before us, the Ld. Authorised Representative submitted that the assessee had sufficient interest-free funds comprising share capital, reserves and accumulated profits amounting to Rs. 32.58 crore as against capital contribution to the partnership firm of only Rs. 1.11 crore. It was submitted that no borrowed funds were utilised for making the investment and that the Assessing Officer had failed to record satisfaction as required under section 14A(2). Reliance was placed on the decisions of the Hon’ble Supreme Court in Walfort Shares & Securities Ltd. v. CIT (326 ITR 1), the Hon’ble Punjab and Haryana & 703/Mum/2025 Windston Springs Private Limited :- 7 -:

The Ld. Departmental Representative (“Ld.DR”) relied on the orders of the lower authorities.

We have considered the rival submissions and perused the material on record. Section 14A mandates that the Assessing Officer must record dissatisfaction with the correctness of the assessee’s claim having regard to the accounts of the assessee before invoking Rule 8D. In the present case, the Assessing Officer has mechanically applied Rule 8D without recording such satisfaction.

The assessee had interest-free funds far in excess of the investments. The short-term borrowings amounted to Rs. 4.42 crore as against reserves of Rs. 27.45 crore. Therefore, a presumption arises that the investment was made out of interest-free funds and no disallowance of interest under Rule 8D(2)(ii) is warranted.

Further, earning share of profit from a partnership firm does not require any active management or decision-making by the assessee.

In the combined result, both appeals filed by the assessee are allowed.