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DCIT, Circle-1(1), International Taxation, New Delhi. 4-12, Vs. M/s Daikin Industries Ltd.,Umeda Center Building Nakazaki, Nishi 2, Chome, Kita Ku, Osaka, Japan.
January, 21st 2016
               DELHI BENCH "B" NEW DELHI

                          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.



      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.

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

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
      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

      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

      3.   The appellant craves to add, amend, modify or alter any
      grounds of appeal at the time or before the hearing of the

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 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.

         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


C.O. no. 155/Del/2012 (Assessee's cross objection):

9.       Sole effective ground taken by the assessee in its cross-objection is as


         "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

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.
Copy of order to:
   1. Assessee
   2. AO
   3. CIT
   4. CIT(A)
   5. DR, ITAT, New Delhi.
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