2011 (10) TMI 693 - AT - Income Tax

Tribunal decision: FMV for LTCG, foreign payments allowed, Rule 8D restriction upheld

The Assistant Commissioner of Income Tax Company Circle – V (1) I Chennai. Versus M/s. Sical Logistics Ltd.,

The Tribunal allowed the assessee's appeal and dismissed the Revenue's appeal. The Tribunal accepted the registered valuer's report for determining Fair ... Capital gain computation - FMV adoption - AO proceeded to rework the fair market value of this land as on 01.04.1981 - Held that:- egarding the fair market value as on 01.04.1981. The Sub-Registrar cannot do that. He can only tell about a guideline value on a given date. But, astonishingly, he has given two distantly divergent values and arrived at an Arithmetic Mean, which is not in his domain. Moreover, it is a common factor that the guideline values were not updated in earlier period. The valuer’s report has taken into account all the relevant factors. Therefore, we left with no option but to accept the valuer’s report. The Assessing Officer could confront the chartered valuer, if he was not satisfied with the valuer’s report. The Assessing Officer has not done anything in this direction and has simply rejected the report without any reasons and rhymes. To our great chagrin, when the fair market value has to be ascertained on the date of sale, the Department itself refused to rely on guideline value and it is only when the cost of asset (land) is being ascertained, the Assessing Officer usually try to take shelter under the guideline value. On the contrary, the approved valuer in his report has relied on the market value, which is based on local enquiries made from the surroundings and he has also relied on the local status of this land existing in that year. Hence, we accept the computation given by the assessee and delete the entire addition made in this regard. TDS u/s 195 - Disallowance under section 40(a)(i) non-deduction at source on the amount paid to FSC for the time charter hire - Held that:- Section 172 is a complete code by itself. Thus, the amount paid by the assessee to the FSC on time charter agreement would not amount to ‘royalty’ neither under Explanation 2 or under section 9(1)(b)(ii) or under the DTAA and in this case only section 172 applies. This, no tax is needed to be deducted at source under section 195 as the amount paid does not amount to ‘royalty’. Therefore, the disallowance under section 40(a)(i) for non-deduction at source on the amount paid to FSC for the time charter hire is erroneous and the same is set aside. Disallowance under section 40A r.w. Rule 8D has been correctly held by the ld. CIT(A) to be applicable from the assessment year 2008-09 onwards and not for the earlier assessment years. Therefore, he has rightly restricted the disallowance under section 40A of the Act. Issues Involved:1. Determination of Fair Market Value (FMV) for Long Term Capital Gains (LTCG) on the sale of Vanagaram land.2. Disallowance under section 40(a)(i) of the Income Tax Act for payments made to foreign shipping companies.3. Applicability of Rule 8D for disallowance under section 40A of the Income Tax Act.Detailed Analysis:1. Determination of Fair Market Value (FMV) for Long Term Capital Gains (LTCG) on the Sale of Vanagaram Land:The primary issue revolves around ascertaining the FMV of Vanagaram land as on 01.04.1981. The assessee claimed LTCG based on a valuation of Rs. 665.80 per sq.mt. provided by a registered valuer. The Assessing Officer (AO) rejected this valuation, relying instead on a guideline value from the Sub-Registrar's office, which estimated the FMV between Rs. 15,000 to Rs. 50,000 per acre. The AO reworked the FMV to Rs. 3,25,861 per acre, resulting in an addition of Rs. 18,41,57,238 to the LTCG.The CIT(A) adopted an average rate between the guideline value and the registered valuer's estimate, directing the AO to recompute the cost of acquisition at Rs. 20,04,172 per acre. Both parties were aggrieved by this decision.The Tribunal examined the evidence and found the registered valuer's report more reliable, as it considered local surveys and factors like proximity to roads and industrial estates. The Tribunal noted that the guideline value from the Sub-Registrar's office was vague and not specific to the land in question. The Tribunal accepted the registered valuer's report and deleted the addition made by the AO, allowing the assessee's appeal and dismissing the Revenue's appeal.2. Disallowance Under Section 40(a)(i) of the Income Tax Act for Payments Made to Foreign Shipping Companies:The assessee hired two ships from foreign companies for transporting coal between Indian ports without deducting tax at source. The AO treated these payments as royalty under section 9(1)(vi) of the Act, invoking section 40(a)(i) for non-deduction of tax. The AO argued that the payment for hiring ships was akin to hiring commercial equipment, thus taxable in India.The assessee contended that these payments were covered under section 172 of the Act, which is a complete code for taxation of shipping income and overrides section 40(a)(i). The Tribunal agreed with the assessee, noting that the ships were hired on a time charter basis, with control and direction remaining with the ship owners. The Tribunal found that the payments did not constitute royalty, as the assessee neither had control nor possession of the ships. The Tribunal relied on the Delhi High Court's decision in Asia Satellite Telecommunication Co. Ltd. vs. DCIT, which held that payments for use of equipment without control or possession do not amount to royalty.The Tribunal concluded that section 172 applies, and no tax was required to be deducted at source under section 195. Thus, the disallowance under section 40(a)(i) was set aside, allowing the assessee's appeal.3. Applicability of Rule 8D for Disallowance Under Section 40A of the Income Tax Act:The CIT(A) held that the disallowance under section 40A read with Rule 8D applies from the assessment year 2008-09 onwards and not for earlier years. The Tribunal upheld this finding, referencing the decision in Sundaram Finance's case, affirming that the CIT(A) correctly restricted the disallowance under section 40A.Conclusion:The Tribunal allowed the assessee's appeal and dismissed the Revenue's appeal, providing detailed reasoning for each issue. The Tribunal accepted the registered valuer's report for FMV determination, set aside the disallowance under section 40(a)(i) for payments to foreign shipping companies, and upheld the CIT(A)'s restriction on the applicability of Rule 8D.