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2016 (1) TMI 1440 - AT - Income TaxCapital gain/loss - relinquishment of an asset/ extinguishment of right in shares - transfer of capital asset u/s 2(47) - long term capital loss on account of reduction in paid up equity share capital - HELD THAT - This issue has been decided in case of Bennett Coleman Co. Ltd. 2011 (9) TMI 1 - ITAT MUMBAI 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. Reopening of assessment u/s 147 - HELD THAT - 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 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.
Issues involved:
1. Appeal by the revenue against CIT(A)'s order for AY 2005-06. 2. Assessment of long term and short term capital losses claimed by a foreign company. 3. Interpretation of the definition of "transfer" under section 2(47) of the Act. 4. Dispute over the initiation of proceedings u/s 147 and on the merits. 5. Comparison of decisions in similar cases by ITAT Special Bench Mumbai. 6. Validity of the AO's assumption of jurisdiction to invoke powers under section 147. Analysis: Issue 1: Appeal by the revenue against CIT(A)'s order for AY 2005-06 The appeal was filed by the revenue against the CIT(A)'s order dated 23.11.2011 for the assessment year 2005-06. The dispute primarily revolved around the denial of the assessee's claim of long term and short term capital losses, which were intended to be carried forward to the next assessment year. Issue 2: Assessment of long term and short term capital losses The foreign company had claimed significant capital losses in its return of income, which were challenged by the Assessing Officer (AO) during the reassessment proceedings initiated under section 147. The AO contended that the cancellation of equity shares did not amount to a transfer under section 2(47) of the Act, leading to the rejection of the capital loss claim. Issue 3: Interpretation of the definition of "transfer" The dispute centered around whether the cancellation of shares by the foreign company constituted a transfer of capital assets as per the definition under section 2(47) of the Act. The AO concluded that there was no relinquishment of capital assets or rights, thereby denying the carry forward of capital losses claimed by the assessee. Issue 4: Dispute over the initiation of proceedings u/s 147 and on the merits The assessee challenged the initiation of proceedings under section 147 and the merits of the case before the CIT(A). While the CIT(A) upheld the initiation of proceedings, the claim of the assessee was allowed on merits, leading to the revenue's appeal against the CIT(A)'s decision. Issue 5: Comparison of decisions in similar cases by ITAT Special Bench Mumbai The ITAT Special Bench Mumbai's decision in the case of Bennett Coleman & Co. Ltd. was cited during the proceedings. The decision highlighted that the loss arising from the reduction in share capital could not be treated as a capital loss under the Income Tax Act, emphasizing that no notional loss or income could be subjected to the Act's provisions. Issue 6: Validity of the AO's assumption of jurisdiction under section 147 The assessee's cross objection challenged the AO's assumption of jurisdiction to invoke powers under section 147 for reassessment. The ITAT agreed with the CIT(A)'s findings that the AO had valid reasons to believe that income had escaped assessment, justifying the initiation of reassessment proceedings. In conclusion, the ITAT allowed the revenue's appeal and dismissed the assessee's cross objection, emphasizing the importance of correctly interpreting the provisions of the Income Tax Act in determining capital losses and assessing income escapement.
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