Reduction in share capital is not allowable as capital loss

ITAT New Delhi, 18 Jan 2016

Daikin Industries Ltd., New Delhi vs Department Of Income Tax


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.

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.


1.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 3consideration 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 4 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 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 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 6finding 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.



Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s