IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "B" NEW DELHI
BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER
AND
Ms. SUCHITRA KAMBLE : JUDICIAL MEMBER
ITA no. 1215/Del/2012
Asstt. Yr: 2005-06
DCIT, Circle-1(1), Vs. M/s Daikin Industries Ltd.,
International Taxation, Umeda Center Building
New Delhi. 4-12, Nakazaki, Nishi 2, Chome,
Kita Ku, Osaka, Japan.
PAN: AACCD 2498 N
C.O. 155/Del/2012
( In ITA no. 1215/Del/2012)
Asstt. Yr: 2005-06
M/s Daikin Industries Ltd., Vs. DCIT, Circle-1(1),
Umeda Center Building International Taxation,
4-12, Nakazaki, Nishi 2, Chome, New Delhi.
Kita Ku, Osaka, Japan.
( Appellant ) (Respondent)
Department by : Shri Anuj Arora CIT(DR)
Assessee by : Shri Vishal Kalra Adv.
Date of hearing : 03/12/2015.
Date of order : 18/01/2016.
ORDER
PER S.V. MEHROTRA, A.M:
The captioned appeal by the revenue and the cross objection by the
assessee have been preferred against CIT(A)'s order dated 23.11.2011
relating to AY 2005-06.
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ITA no. 1215/Del/2012 ( Revenue's appeal):
2. The assessee, a foreign company, had filed its return of income on
30.10.1985, showing loss of Rs. 5,44,087,500/-. Notice u/s 148 was issued
on 13.02.2007, after recording reasons, primarily for denying the assessee's
claim of long term capital loss of Rs. 15,60,00,000/- and short term capital
loss of Rs. 388,087,500/-, which was claimed to be carried forward to AY
2006-07. Brief facts apropos this issue are that during the previous year
2004-05, 5,480,000 equity shares held by assessee in Daikin Airconditioning
India Pvt. Ltd. were cancelled under the capital reduction scheme, which
was approved on 10.3.2005 by the Hon'ble Delhi High Court u/s 102 of the
Companies Act, 1956 and the order of the High Court was registered by
Registrar of Companies during the year ending March 31, 2005. The
assessee had claimed that as per the definition of "transfer" u/s 2(47), since
there was relinquishment of an asset/ extinguishment of right in shares,
therefore, it amounted to transfer of a capital asset. The assessee's claim was
that the reduction in capital resulted in relinquishment of asset/
extinguishment of right in the shares held by the assessee in Daikin
Airconditioning India Pvt. Ltd.
3. The AO, after considering the entire course of events, including the
resolutions passed for cancellation of shares and after taking into
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consideration various decisions concluded that the portion of right which
gets extinguished on cancellation in case of equity shareholder can be
summarized as below:
"Rights in the company before cancellation or reduction
Vis-à-vis
Rights in the company after cancellation or reduction.
4. He observed that in the present case there was neither relinquishment
of the capital asset nor any rights in the capital asset. He, accordingly, held
that it was not a transfer u/s 2(47) of the Act and rejected the assessee's
claim regarding carry forward of capital loss.
5. Before Ld. CIT(A), the assessee had challenged the initiation of
proceedings u/s 147 as well as on merits. Ld. CIT(A) rejected the assessee's
claim in regard to initiation of proceedings, however, allowed the assessee's
claim on merits.
6. Ld. CIT(A) relied on the decision in the case of Zyma Laboratories
Ltd. Vs. ACIT 7 SOT 164. Being aggrieved with the order of ld. CIT(A), the
department has filed appeal on following grounds:
"1. On the facts and in the circumstances of the case, the Ld.
CIT (A) has erred in deleting the addition of Rs. 544087500/-
made by the AO on account of wrong claim of capital loss,
holding that the cancellation of shares resulted in
extinguishment of capital asset held by the assessee the
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therefore is a 'transfer' within the meaning of provision of
section 2(47) of the Act.
2. On the facts and in the circumstances of the case, the Ld
CIT(Appeal) has erred in not appreciating the findings of the
AO that the cancellation of shares was done for accounting and
legal purpose only and in substance was an accounting
transaction only and therefore cancellation of shares was not
transfer within the meaning of sub section 47 of section 2 of
Act.
3. The appellant craves to add, amend, modify or alter any
grounds of appeal at the time or before the hearing of the
appeal."
7. At the time of hearing, ld. counsel for the assessee fairly conceded
that this issue has been decided by ITAT Special Bench Mumbai in the case
of Bennett Coleman & Co. Ltd. Vs. Addl. CIT(2011) 14 Taxmann.com 1
(Mum.), wherein in paras 28 & 29 it has been held as under:
"28. We also find force in the submissions of the Ld. DR that as
per sec.55(v) the cost the cost of acquisition of shares even
after conversion etc. has to be taken with reference to the cost
of original shares. Therefore, after reduction of share capital
the cost of acquisition of the remaining shares would be
reckoned with references to the original cost. Though at this
stage assessee has not obtained any benefit because loss has
been computed with reference to the actual cost, but, in future,
if assessee decides to sell its shareholding in TGL then assessee
has the right, U/s 55(v), to substitute the cost of acquisition with
reference to the original shareholding and in that case it may
amount to double benefit later on which is not permissible
under the law.
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29. Therefore, in the light of the above discussion, we are of
the opinion, that the loss arising on account of reduction in
share capital cannot be subjected to provisions of sec.45 r.w.s.
48 and, accordingly, such loss is not allowable as capital loss.
At best such loss can be described as notional loss and it is
settled principle that no notional loss or income can be
subjected to the provisions of the I.T. Act. We hold accordingly.
8. Respectfully following the decision of Special Bench of the ITAT in
the case of Bennett Coleman & Co. Ltd. (supra), revenue's appeal is
allowed.
C.O. no. 155/Del/2012 (Assessee's cross objection):
9. Sole effective ground taken by the assessee in its cross-objection is as
under:
"That on the facts and circumstances of the case and in law, the
Commissioner of Income-tax (Appeals) - XXIX has erred in
holding that the Assessing Officer had validly assumed
jurisdiction to invoke the powers contained in section 147 of the
Act to initiate reassessment proceedings against the respondent
and in not holding that the order dated December 24, 2007
issued pursuant to such invocation was without jurisdiction,
bad in law and void ab initio.
10. In regard to assessee's cross objection we are in agreement with the
findings of ld. CIT(A) that the issue under consideration was such that prima
facie it was possible to entertain a view that the assessee had wrongly
claimed capital loss of Rs. 54,40,87,500/- on account of calculation of shares
and thereby resulting into escapement of income. Therefore, we endorse the
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finding of ld. CIT(A) in holding that the AO had reason to believe that
income had escaped assessment and he was within his competence to invoke
the powers contained in section 147 to initiate reassessment of the income of
the assessee. In the result, cross objection is dismissed.
11. In the result, departmental appeal is allowed and the cross-objection
filed by the assessee is dismissed.
Order pronouncement in open court on 18/01/2016.
Sd/- Sd/-
(SUCHITRA KAMBLE ) (S.V. MEHROTRA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 18/01/2016.
*MP*
Copy of order to:
1. Assessee
2. AO
3. CIT
4. CIT(A)
5. DR, ITAT, New Delhi.
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