Appeal Details
Counselvise Citation
[2012] 140 COUNSELVISE.COM (IT) 66415 (ITAT-HYDERABAD)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
1 year(s) 3 month(s) 3 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
31-10-2012
Appeal Filed By
Assessee
Order Result
Dismissed
Bench Allotted
B
Assessment Year
1998-1999
Appeal Filed On
27-07-2011
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER I.T.A. NO. 1384/HYD/2011 A.Y. 1997-98 I.T.A. NO. 1385/HYD/2011 A.Y. 1998-99 ITA NO. 1386/HYD/2011 A.Y. 1999-2000 M/S. DR. REDDY'S LABORATORIES LTD., HYDERABAD PAN: AAACD7999Q VS. THE ADDL. CIT CIRCLE-1(2) HYDERABAD APPELLANT RESPONDENT I.T.A. NO. 1289/HYD/2011 ASSESSMENT YEAR 1999-2000 THE ASST. CIT CIRCLE-1(2) HYDERABAD VS. M/S. DR. REDDY'S LABORATORIES LTD., HYDERABAD PAN: AAACD7999Q APPELLANT RESPONDENT ASSESSEE BY: SRI S. RAGHUNATHAN REVENUE BY: SRI K. GNANA PRAKASH DATE OF HEARING: 26.09.2012 DATE OF PRONOUNCEMENT: 31.10.2012 O R D E R PER CHANDRA POOJARI, AM: ITA NOS. 1384 TO 1386/HYD/2011 ARE BY THE ASSESSEE DIRECTED AGAINST DIFFERENT ORDERS OF THE CIT(A)-II, HYDERABAD AND ITA NO. 1289/HYD/2011 IS BY THE REVENUE DIRECTE D AGAINST THE ORDER OF THE CIT(A)-II, HYDERABAD DATED 26.4.2011 FOR ASSESSMENT YEARS 1997-98 TO 1999-2000 . 2 ITA NOS. 1384-1386 & 1289/HYD/2012 M/S. REDDY'S LABORATORIES LTD. ============================ 2. THE COMMON GROUND IN ALL THE THREE APPEALS OF THE ASSESSEE IS WITH REGARD TO TREATMENT OF LOSS ARISIN G FROM THE PURCHASE AND SALE OF SHARES WHETHER AS SPECULATION LOSS IN VIEW OF THE EXPLANATION TO SECTION 73 OF INCOME-TAX ACT, 1961 OR AS BUSINESS LOSS. FACTS OF THE CASE IN ALL THE THREE YEARS ARE SIMILAR. IN EARLIER OCCASION THE ASSESSEE CAME IN APPEAL BEFORE THIS TRIBUNAL ON THIS ISSUE. THE TRIBUNAL C ONSIDERED THIS ISSUE ELABORATELY FOR A.Y. 1997-98 IN ITA NO. 621/HYD/2000 AND REMITTED THE ISSUE BACK TO THE FIL E OF THE ASSESSING OFFICER VIDE ORDER DATED 24 TH AUGUST, 2007 BY HOLDING AS FOLLOWS: '21. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD. AT THE OUTSET. IT WOULD BE PERT INENT TO REFER TO THE DECISION OF THE SPECIAL BENCH IN THE CASE OF CONCORD COMMERCIALS (P) LTD. (SUPRA). AT PARAGRAPH 24, THE BENCH OBSERVED AS FOLLOWS: 'THE TWO KINDS OF EXCEPTIONS PROVIDED IN EXPLANATIO N TO SECTION 73 ARE BASED ON TWO INDEPENDENT TESTS LAID DOWN IN THE EXPLANATION ITSELF. THE TEST TO BE APPLIED ON THE FIRST CATEGORY OF COMPANY IS THE CHARACTER OF ITS GROSS TOTAL INCO ME. THE TEST LAID DOWN IN THE CASE OF THE SECOND CATEGORY OF COM PANY IS THE NATURE OF THE PRINCIPAL BUSINESS CARRIED ON BY IT. IN THE FIRST CATEGORY, WHERE THE TEST IS THAT OF THE CHARACTER O F GROSS TOTAL INCOME THE OTHER TEST RELATING TO THE NATURE OF PRI NCIPAL BUSINESS CARRIED ON BY IT DOES NOT APPLY. LIKEWISE IN THE S ECOND CATEGORY OF COMPANY WHERE THE TEST IS THE NATURE OF THE PRINCIPAL BUSINESS CARRIED ON BY IT THE TEST OF THE GROSS TOTAL INCOME DOES NOT APPLY. THE TWO EXCEPTIONS PROVIDED IN EXPLANATION TO SECTION 73 ARE GOVERNED BY TWO DIFFE RENT TESTS LAID DOWN IN THE SAID EXPLANATION ITSELF. THEREFORE . THE EXAMINATION OF THE EXCEPTIONS PROVIDED IN EXPLANATI ON TO SECTION 73 IS TO BE DONE STRICTLY IN ACCORDANCE WIT H THE TESTS LAID DOWN IN THE EXPLANATION.' IN THE PRESENT CASE, THE LEARNED COUNSEL FOR THE AS SESSEE HAS RESTED HIS ARGUMENTS ON THE SECOND EXCEPTION. ON T HE OTHER HAND, THE REVENUE HAS TRIED TO ADVANCE ITS CASE ON THE BASIS OF EXCEPTION. IN FACT, IN ALL THE CASES RELIED UPON B Y THE LEARNED DEPARTMENTAL REPRESENTATIVE, IT IS ONLY THE FIRST E XCEPTION 3 ITA NOS. 1384-1386 & 1289/HYD/2012 M/S. REDDY'S LABORATORIES LTD. ============================ WHICH HAS BEEN CONSIDERED BY THE COURTS AND THE TRI BUNAL. IN NONE OF THE CASES, THE SECOND EXCEPTION HAS COME UP FOR CONSIDERATION. AS A MATTER OF FACT, EVEN IN THE CAS E BEFORE THE SPECIAL BENCH (SUPRA), THE TRIBUNAL LAID DOWN THE T ESTS FOR THE FIRST EXCEPTION. HOWEVER, SINCE IT WAS NOT CONCERNE D WITH THE SECOND EXCEPTION, THE TESTS FOR THE SAME HAVE NOT B EEN LAID DOWN AND, THEREFORE, OUR TASK IN THIS APPEAL BECOME S QUITE ONEROUS. NEEDLESS TO SAY, IF IT WAS THE FIRST EXCE PTION WHICH WAS TO BE CONSIDERED, THE CASE IS UNDOUBTEDLY CAUGH T WITHIN THE MISCHIEF OF THE EXPLANATION TO SECTION 73. HOWEVER , AS MENTIONED EARLIER, IT IS THE SECOND EXCEPTION ON WH ICH THE ASSESSEE HAS TRIED TO REST ITS CASE AND ACCORDINGLY , WE PROCEED TO ADJUDICATE ON THE SAME. 22. IF ONE GOES BY THE LANGUAGE IN THE EXPLANATION TO S. 73, THE EXPRESSION USED IS '.... OR A COMPANY THE PRINC IPAL BUSINESS OF WHICH IS .....'. THE QUESTION WE POSE TO OURSEL VES IS WHETHER THE PROVISION CONTEMPLATES THAT THERE CAN BE ONLY O NE PRINCIPAL BUSINESS OR THERE CAN BE MORE THAN ONE PRINCIPAL BU SINESS AS WELL. TO OUR MIND, PERHAPS THAT MAY NOT BE THE CAS E, BECAUSE, THERE CAN BE SITUATIONS WHEREIN BUSINESS 'A' MAY CO NSTITUTE 45% OF THE TURNOVER AND BUSINESS 'B' MAY CONSTITUTE 47% OF THE TURNOVER AND BALANCE 8% MAY BE SOME OTHER BUSINESS OR OTHER INCOME IN YEAR ONE. IN YEAR TWO, IT MAY JUST BE TH E OPPOSITE, I.E., BUSINESS 'B' MAY CONSTITUTE 45% AND BUSINESS 'A' MAY CONSTITUTE 47% OF THE TURNOVER. THEN CAN IT BE SAI D THAT IN YEAR ONE, BUSINESS 'B' IS THE PRINCIPAL BUSINESS AND IN YEAR TWO, BUSINESS 'A' IS THE PRINCIPAL BUSINESS. THE POINT WE ARE TRYING TO DRIVE HOME IS THAT IN A CASE LIKE ABOVE, WILL TH E PRINCIPAL BUSINESS KEEP CHANGING FROM YEAR TO YEAR, THAT IS, IF ONE GOES MERELY BY THE TURNOVER CRITERION. THE ISSUE POSES A PROBLEM BECAUSE AS PER THE DECISION OF THE SPECIAL BENCH TH E COMPOSITION OF TOTAL INCOME WILL NOT BE THE CRITERI ON IF THE ASSESSEE'S CASE FALLS WITHIN THE SECOND EXCEPTION. IS IT THEN THAT ONE TAKES AN OVERALL VIEW OF THE COMPANY, SAY, THE COMPOSITION OF GROSS RECEIPTS. THE DEPLOYMENT OF FUNDS IN EACH SEGMENT OF BUSINESS, THE STEPS TAKEN BY THE COMPANY TO STEP UP ANY OTHER BUSINESS, AS IN THE CASE BEFORE US AND SO ON. ONE ALSO NEEDS TO CONSIDER AS TO WHY A COMPANY CANNOT HAVE MORE THAN ONE PRINCIPLE BUSINESS. MANY OTHER QUESTIONS MAY CROP UP WHILE CONSIDERING THE ABOVE QUESTIONS. ALL SUCH QUESTION S NEED TO BE ADDRESSED TO AND WHICH HAVE NOT BEEN CONSIDERED BY THE REVENUE AS THEY HAVE GONE BY THE INCOME CRITERION O NLY AND WHICH CRITERION, AS PER THE DECISION OF THE SPECIAL BENCH. CANNOT BE APPLIED WHEN ONE IS CONSIDERING THE MATTE R UNDER SECOND EXCEPTION IN THE EXPLANATION TO SECTION 73 O F THE ACT. SINCE WE DO NOT HAVE THE VIEWS OF THE REVENUE ON TH IS ASPECT OF THE MATTER, WE DEEM IT PROPER TO RESTORE THE ISSUE BACK TO THE 4 ITA NOS. 1384-1386 & 1289/HYD/2012 M/S. REDDY'S LABORATORIES LTD. ============================ FILE OF THE ASSESSING OFFICER WITH THE DIRECTION TO CONSIDER IT AFRESH KEEPING IN VIEW THE DECISION OF THE SPECIAL BENCH AND ALSO THE QUESTIONS POSED BY US ABOVE. THE ASSESSING OFFICER SHALL GIVE DUE OPPORTUNITY OF BEING HEARD TO THE AS SESSEE IN THIS REGARD.' 3. THE ASSESSING OFFICER WHILE PASSING CONSEQUENTIAL O RDER RE-EXAMINED THE ENTIRE ISSUE. THE ASSESSEES PRINC IPAL BUSINESS IS NOT COVERED BY ANY EXCEPTION AND HE TRE ATED THE LOSS ON BUYING AND SELLING OF SHARES AS SPECULATION LOSS. ON APPEAL, THE CIT(A) OBSERVED THAT THE PRINCIPAL BUSI NESS OF THE ASSESSEE COMPANY IS NOT ADVANCING LOANS AND BUYING AND SELLING OF SHARES IS NOTHING BUT SPECULATION BUSINE SS OF THE ASSESSEE AS THE PRINCIPAL BUSINESS OF THE ASSESSEE IS MANUFACTURE, SALE, DEAL IN EXPORT AND IMPORT IN ALL TYPES OF CHEMICALS AND DRUGS. THE CIT(A) CONFIRMED THE ORDE R OF THE ASSESSING OFFICER. AGAINST THIS THE ASSESSEE IS IN APPEAL BEFORE US. 4. THE LEARNED AR SUBMITTED THAT THE ASSESSEE COMPANY AMENDED ITS MOA IN AUGUST 1994 TO INCLUDE INVESTMEN T AND FINANCE AS ONE OF ITS MAIN OBJECTS. DURING THE MONT H OF JUNE, 1995, MERGER OF STANDARD EQUITY FUND LTD., WHICH IS AN INVESTMENT AND FINANCE COMPANY, TOOK PLACE WITH THE ASSESSEE COMPANY. BEING SO IN THIS ASSESSMENT YEAR UNDER CONSIDERATION THE ASSESSEES PRINCIPAL BUSINESS INC LUDES INVESTMENT AND FINANCING. HE FURTHER DREW OUR ATTE NTION TO THE EARLIER ORDER OF THE TRIBUNAL CITED SUPRA WHERE IN IT WAS MENTIONED THAT THERE CAN BE MORE THAN ONE PRINCIPAL BUSINESS. ACCORDING TO HIM ONE HAS TO CONSIDER OVE RALL VIEW OF THE COMPANY I.E., COMPOSITION OF GROSS RECEIPTS, DEPLOYMENT OF FUNDS IN EACH SEGMENT OF BUSINESS, ET C. HE SUBMITTED THAT DEPLOYMENT OF FUNDS AS FOLLOWS: 5 ITA NOS. 1384-1386 & 1289/HYD/2012 M/S. REDDY'S LABORATORIES LTD. ============================ FIGURES IN RS. CRORES 31.3.1995 31.3.1996 31.3.1997 31.3.1998 TOTAL FIXED ASSETS 45 67 87 109 308 CAPITAL WIP 5 8 13 7 33 INVESTMENT + LEASING 106 (102+4) 83 (80+3) 77 51 317 5. HE CONTENDED THAT THE ABOVE CHART SHOWS THE FUNDS DEPLOYMENT WAS MADE IN INVESTMENT AND FINANCING ACT IVITIES AS ONE OF THE MAIN OBJECT AND FURTHER STANDARD EQUI TY FUND LTD., WHOSE MAIN BUSINESS IS ONLY INVESTMENT AND FI NANCING, IS MERGED WITH THE ASSESSEE COMPANY IN JUNE, 1995. AC CORDING TO HIM, THE FUND DEPLOYED IN INVESTMENT ACTIVITIES IS ABOVE 50% AND INVESTMENT AND FINANCING ACTIVITIES ARE ONE OF THE PRINCIPAL OBJECTS AND EARLIER ORDER OF THE TRIBUNAL IF APPLIED IN TRUE SENSE THIS ISSUE BEFORE THE TRIBUNAL HAS TO BE DECIDED IN FAVOUR OF THE ASSESSEE. HE RELIED ON THE ORDER OF THE TRIBUNAL IN THE CASE OF AMON PORTFOLIOS PVT. LTD. VS. DCIT ( 92 ITD 324) WHEREIN IT WAS HELD THAT THE CBDT CIRCULAR NO. 204 DATED 24 TH JULY, 1976 ASSUMES SIGNIFICANCE AS CONTEMPORANEOUS EXPOTIO IN THE RELEVANT CONTEXT AND THE INTERPRETATION OF T HE EXPLANATION TO SECTION 73. IT SHOULD TAKE INTO CON SIDERATION THE OBJECTIVE BEYOND ITS INTRODUCTION AS WAS HIGHLI GHTED BY THE SAID CIRCULAR. FOR THIS PROPOSITION IT WAS RELI ED UPON THE JUDGEMENT OF SUPREME COURT IN THE CASE OF K.P. VERG HESE VS. ITO (131 ITR 597). HE SUBMITTED THAT ACCORDING TO THE TRIBUNAL, THOUGH DEEMING PROVISION WAS TO BE CONSTR UED STRICTLY, THE CONSTRUCTION OF THE SECTION COULD NOT EXCLUDE CONSIDERATION SUCH AS THE OBJECTIVE FOR WHICH IT WA S INTRODUCED. SINCE THERE WAS NO MATERIAL TO SHOW TH AT THE ASSESSEE AS A COMPANY, CONTROLLED BY A BUSINESS HOU SE, AND THAT THE SHARE TRANSACTIONS HAD BEEN EFFECTED WITH A VIEW TO MANIPULATE AND REDUCE TAXABLE INCOME, THE TRIBUNAL HELD THAT 6 ITA NOS. 1384-1386 & 1289/HYD/2012 M/S. REDDY'S LABORATORIES LTD. ============================ LOSS SHOULD BE TREATED AS NORMAL BUSINESS LOSS AND BE ALLOWED TO SET OFF AGAINST OTHER BUSINESS PROFIT OF THE ASS ESSEE. WHILE REPEATING THE ABOVE ARGUMENTS FOR THE A.Y. 1998-99, HE SUBMITTED THAT THE LOWER AUTHORITIES HAVE NOT PROPE RLY CONSIDERED THE SPECIAL BENCH DECISION IN THE CASE O F CONCORD COMMERCIAL PVT. LTD. (95 ITD 117) IN TRUE SPIRIT. FINALLY THE LEARNED AR RELIED ON THE SUBMISSIONS MADE BEFORE TH E CIT(A). 6. ON THE OTHER HAND, THE LEARNED DR SUPPORTED THE ORD ERS OF THE ASSESSING OFFICER AND CIT(A). 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. WE HAVE CAREFULLY GONE THROUGH THE ORDER OF THE TRIBUNAL IN THE CASE OF AMON PORTFOLIO PVT. LTD. IN THAT CASE THE ASSESSEE CLAIMED A LOSS OF RS. 2,94,832 AS NORMAL BUSINESS LOSS. HOWEVER, THE SAME WAS TREATED BY TH E LOWER AUTHORITIES AS SPECULATION LOSS. ON FURTHER APPEAL , THE TRIBUNAL HELD IT AS NORMAL BUSINESS LOSS ON THE REA SON THAT THE ASSESSEE IS A SHARE BROKER AND ALSO INDULGES IN PUR CHASE AND SALE OF SHARES ON ITS OWN ACCOUNT AND THE LOSS WAS RELATING TO THE OWN TRADING. ABSOLUTELY, THERE IS NO MATERIAL BROUGHT ON RECORD BY THE ASSESSING OFFICER TO SHOW THAT THE AS SESSEE IS A COMPANY CONTROLLED BY A BUSINESS HOUSE AND THE SHAR E TRANSACTIONS HAVE BEEN EFFECTED WITH A VIEW TO MANI PULATE AND REDUCE ITS TAXABLE INCOME. IN OTHER WORDS, THE RE IS NO EVIDENCE TO SHOW THAT THE REQUIREMENT OF PARA 19.2 OF THE CIRCULAR NO. 204 DATED 24 TH JULY, 1976 ISSUED BY THE CBDT ARE SATISFIED. BEING SO, THE ORDER OF THE TRIBUNAL REL IED ON BY THE ASSESSEE COMPANY IS HAVING NO CONSEQUENCE TO THE FA CTS OF THE PRESENT CASE. IN THE PRESENT CASE, AS OBSERVED BY THE CIT(A), THE ASSESSEE IS ENGAGED IN THE MANUFACTURE, SELLING, 7 ITA NOS. 1384-1386 & 1289/HYD/2012 M/S. REDDY'S LABORATORIES LTD. ============================ DEALING AND EXPORT AND IMPORT OF ALL TYPES OF CHEMI CALS AND DRUGS. THE PRIMARY FACT SHOWS THAT THE ASSESSEE IS A COMPANY CONTROLLED BY A BUSINESS HOUSE AND AFTER CO NSIDERING THESE FACTS ELABORATELY THE LOWER AUTHORITIES INVOK ED THE RATIO LAID DOWN BY THE SUPREME COURT IN THE CASE OF MCDOW ELL CO. LTD. VS. ITO (154 ITR 148). FURTHER THE CIRCULAR CI TED SUPRA GIVES THE SCOPE AND EFFECT TO THE EXPLANATION TO SE CTION 73 OF THE ACT. FROM THE CIRCULAR IT IS CLEAR THAT THE OB JECT OF THESE PROVISIONS IS TO CURB THE DEVICE BEING RESORTED BY SOME BUSINESS HOUSES TO MANIPULATE AND REDUCE THE TABLE INCOME BY BOOKING SPECULATION LOSS. A PLAIN READING OF TH E SECTION MAKES IT CLEAR THAT THIS SECTION CANNOT BE INVOKED IN A CASE WHERE THERE IS A PROFIT FROM SPECULATION TRANSACTIO NS. IN THE CASE OF AMON PORTFOLIOS PVT. LTD., THE TRIBUNAL NOT DECIDED THE ISSUE WHERE A COMPANY WHOSE MAIN BUSINESS WAS NOT T HAT OF BANKING OR GRANTING OF LOANS AND ADVANCES OR THAT A COMPANY WHOSE GROSS TOTAL INCOME DID NOT CONSIST OF INTERE ST ON SECURITIES, INCOME FROM HOUSE PROPERTY, CAPITAL GAI NS, INCOME FROM OTHER SOURCES INCURS LOSS ON THE PURCHASE AND SALE OF SHARES. ACCORDING TO THE EXPLANATION TO SECTION 73 SUCH LOSS WOULD BE DEEMED TO BE A SPECULATIVE LOSS OF THE COM PANY WHICH COULD NOT BE DEDUCTED FROM ANY OTHER BUSINESS OF THE ASSESSEE. HENCE THE SAID DECISION IS NOT APPLICABL E TO THE FACTS OF THE PRESENT CASE. 8. A SPECULATION TRANSACTION AND THE LOSS ARISING OUT OF THE SPECULATIVE TRANSACTION HAVE TO BE CONSIDERED IN TH E LIGHT OF PROVISIONS OF SECTION 73 ALONG WITH THE EXPLANATION TO THAT SECTION. THIS PROVISION TREATS THE SPECULATIVE TRA NSACTION CARRIED ON BY THE ASSESSEE AS DISTINCT AND SEPARATE BUSINESS IF THE NATURE OF SUCH TRANSACTION IS SUCH THAT, IT CON STITUTES A 8 ITA NOS. 1384-1386 & 1289/HYD/2012 M/S. REDDY'S LABORATORIES LTD. ============================ BUSINESS. THIS IS PROVIDED UNDER EXPLANATION 2 TO SECTION 28 OF THE ACT. LIKEWISE, THE DEFINITION OF THE TERM SPECULATIVE TRANSACTION IS PROVIDED IN SECTION 43(5) OF THE AC T IN A SUBSTANTIVE MANNER. THE AMBIT AND SCOPE OF SPECULA TIVE TRANSACTION AND SPECULATIVE LOSS NEED TO BE CONFINE D WITH THE LIMIT PROVIDED BY THE LAW CONTAINED IN THE ABOVE ME NTIONED PROVISIONS. BUT, FURTHER TO TAKE CARE OF ANY DEVICE THAT MAY BE ATTEMPTED BY BUSINESS HOUSES CONTROLLING GROUP OF C OMPANIES FOR THE PURPOSE OF REDUCING THE TAX INCIDENCE, THE LAW AS EMENDED BY EXPLANATION TO SECTION 73 OF IT ACT, 196 1. THE SAID EXPLANATION IS A DEEMING PROVISION WHEREBY THE TRANSACTIONS OF A COMPANY DEALING IN PURCHASING AND SALE OF SHARES SHALL BE TREATED AS SPECULATIVE TRANSACTION, SUBJECT TO TWO EXCEPTIONS. THE SAID EXPLANATION READS AS FOLL OWS: 'EXPLANATION.WHERE ANY PART OF THE BUSINESS OF A C OMPANY [OTHER THAN A COMPANY WHOSE GROSS TOTAL INCOME CONS ISTS MAINLY OF INCOME WHICH IS CHARGEABLE UNDER THE HEAD S INTEREST ON SECURITIES, INCOME FROM HOUSE PROPERTY, CAPI TAL GAINS AND INCOME FROM OTHER SOURCES], OR A COMPANY THE PRINCIPAL BUSINESS OF WHICH IS THE BUSINESS OF BANKING OR THE GRANTING OF LOANS AND ADVANCES CONSISTS IN THE PURCHASE AND SAL E OF SHARES OF OTHER COMPANIES, SUCH COMPANY SHALL, FOR THE PUR POSES OF THIS SECTION, BE DEEMED TO BE CARRYING ON A SPECULA TION BUSINESS TO THE EXTENT TO WHICH THE BUSINESS CONSIS TS OF THE PURCHASE AND SALE OF SUCH SHARES. 9. THE TRANSACTION OF PURCHASE AND SALE OF SHARES WOUL D BE HELD AS SPECULATIVE BUSINESS ONLY IF THE COMPANY WA S HIT BY THE EXPLANATION TO SECTION 73 OF THE ACT. THE IMPL ICATION OF THE EXPLANATION IS THAT IF A COMPANY INCURS A SPECU LATION LOSS IN A MANNER DEEMED IN THE EXPLANATION SUCH LOSS SHA LL NOT BE SET OFF EXCEPT AGAINST PROFIT AND GAINS, IF ANY, OF ANOTHER SPECULATION BUSINESS. 9 ITA NOS. 1384-1386 & 1289/HYD/2012 M/S. REDDY'S LABORATORIES LTD. ============================ 10. BUT, THE EXPLANATION HAS PROVIDED TWO EXCEPTIONS. THE FIRST EXCEPTION IS AVAILABLE IN THE CASE OF A COMPA NY WHOSE GROSS TOTAL INCOME CONSISTS MAINLY OF INCOME WHICH IS CHARGEABLE UNDER THE HEAD INTEREST ON SECURITIES, INCOME FROM HOUSE PROPERTY, CAPITAL GAIN AND INCOME FR OM OTHER SOURCES. THE SECOND EXCEPTION IS IN THE CASE OF A COMPANY WHOSE PRINCIPAL BUSINESS IS BUSINESS OF BANKING OR GRANTING LOANS AND ADVANCES. 11. THE FIRST CATEGORY OF EXCEPTION IS IDENTIFIED BY TH E COMPOSITION OF ITS GROSS TOTAL INCOME. IF THE GROS S TOTAL INCOME OF THE COMPANY MAINLY CONSISTS OF INCOME FAL LING UNDER THE ABOVE MENTIONED HEADS, EXPLANATION TO SEC TION 73 DOES NOT APPLY. IF THE GROSS TOTAL INCOME OF THE C OMPANY IS MAINLY MADE UP OF INCOME UNDER THE HEAD PROFIT AND GAINS OF BUSINESS OR PROFESSION IT IS HIT BY THE MISCHIEF O F EXPLANATION TO SECTION 73. THEREFORE, THE FIRST EXCEPTION IS M ADE ON THE BASIS OF THE COMPOSITION OF ITS GROSS TOTAL INCOME. THE SECOND EXCEPTION IS CONCERNED, THE THRUST IS MADE ON THE N ATURE OF BUSINESS CARRIED ON BY THE COMPANY. IF THE COMPANY IS CARRYING ON AS ITS PRINCIPAL BUSINESS, THE BUSINESS OF BANKING OR GRANTING OF LOANS AND ADVANCES, EXPLANATION TO S ECTION 73 DOES NOT APPLY. THE COMPANY IS EXCLUDED FROM THE A MBIT OF EXPLANATION ON THE BASIS OF NATURE OF PRINCIPAL BUS INESS CARRIED ON BY IT. THE TWO KINDS OF EXCEPTIONS PROV IDED IN EXPLANATION TO SECTION 73 ARE BASED ON TWO INDEPEND ENT TESTS LAID DOWN IN THE EXPLANATION ITSELF. THEREFORE, WE HAVE TO SEE THE APPLICABILITY OF THE EXCEPTIONS PROVIDED IN THE EXPLANATION. AS SEEN FROM THE FACTS OF THE PRESENT CASE, THOUGH THE ASSESSEE MADE A PLEA THAT THE IT IS CARRYING ON MUL TIPLE BUSINESS AS PRINCIPAL BUSINESS, BUT THE FACTS DO NO T SUPPORT 10 ITA NOS. 1384-1386 & 1289/HYD/2012 M/S. REDDY'S LABORATORIES LTD. ============================ THE PLEA OF THE ASSESSEE. IN OUR OPINION, IN THE P RESENT CASE THE ASSESSEES PRINCIPAL BUSINESS IS TO MANUFACTURE , SELL, DEAL, EXPORT AND IMPORT OF ALL TYPES OF CHEMICALS AND DRU GS AND NOT ADVANCING OF LOANS. FOR CLARITY WE WILL REPRODUCE THE DATA FOR A.Y. 1997-98 YEAR ENDING ON 31.3.1997: (RS. IN 000) INCOME 1996-97 1998-99 SALES 24,99,359 33,16,200 OTHER INCOME 23,874 35,663 TOTAL 25,23,233 33,51,863 12. IN THE A.YS. 1997-98 AND 1998-99 THERE IS NO INCOME FROM SALE OF INVESTMENT BUT ONLY LOSS. SAME IS THE POSITION FOR A.Y. 1999-2000. THIS INCOME OF THE ASSESSEE DO ES NOT CONSIST MAINLY OF INCOME CHARGEABLE UNDER THE HEAD INCOME FROM OTHER SOURCES IN THESE ASSESSMENT YEARS. THE EXPLANATION TO SECTION 73 IS, THEREFORE, VERY MUCH APPLICABLE TO THE ASSESSEE COMPANY AND THE LOSS SUFFERED BY TH E ASSESSEE IN THE PURCHASE AND SALE OF SHARES IS DEEM ED TO BE A SPECULATIVE LOSS OF THE ASSESSEE COMPANY AND SHOULD NOT BE ENTITLED FOR ANY DEDUCTION FROM THE BUSINESS INCOME OF THE ASSESSEE. THE ASSESSEES CONTENTION THAT THE ASSES SEE IS HAVING MULTIPLE PRINCIPAL BUSINESSES IS DEVOID OF M ERIT. THE EVIDENCE BROUGHT ON RECORD BY THE DEPARTMENT AS REC ORDED IN THE ORDERS OF THE LOWER AUTHORITIES TOTALLY GOES AG AINST THE ASSESSEE AND THE LOWER AUTHORITIES PASSED THE CONSE QUENTIAL ORDERS GIVING EFFECT IN CONFORMITY WITH THE TRIBUNA L ORDER CITED SUPRA. ACCORDINGLY, WE DISMISS ALL THE THREE APPEA LS OF THE ASSESSEE IN ITA NOS. 1384 TO 1386/HYD/2011. 13. NOW WE WILL TAKE UP THE REVENUE APPEAL IN ITA NO. 1289/ HYD/2011. THE GRIEVANCE OF THE REVENUE IN TH IS APPEAL 11 ITA NOS. 1384-1386 & 1289/HYD/2012 M/S. REDDY'S LABORATORIES LTD. ============================ IS WITH REGARD TO ALLOWING THE CLAIM OF THE ASSESSE E WITH REFERENCE TO BAD DEBTS. IN THIS ASSESSMENT YEAR UN DER CONSIDERATION, THE ASSESSEE CLAIMED BAD DEBTS WRITT EN OFF AT RS. 15,95,43,000 AND ADVANCES WRITTEN OFF AT RS. 89 ,69,003. THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE PLACIN G RELIANCE ON THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2000-01 IN ITA NO. 621/ HYD/2000 DATED 24.8.2007. HE ALSO PLACED RELIANCE ON THE ORDER OF THE TRIBUNAL SPECIA L BENCH IN THE CASE OF OMAN INTERNATIONAL BANK SAOG. AGAINST THIS THE REVENUE IS IN APPEAL BEFORE US. 14. THE LEARNED DR SUBMITTED THAT THE DEBTS NOT CAME IN TO EXISTENCE IN THE CASE OF BANKING OR MONEY LENDING B USINESS AND THERE IS VIOLATION OF FEMA AND BEING SO, THE WR ITE OFF IN VIOLATION OF ANOTHER LAW OF THE COUNTRY CANNOT BE A LLOWED AS BAD DEBT. 15. ON THE OTHER HAND, THE AR SUBMITTED THAT THE CLAIM OF BAD DEBT U/S. 36 TO THE EXTENT OF RS. 15,76,40,347 IN RESPECT OF CERTAIN SALES MADE TO FOREIGN COMPANIES VIZ., M/ S. ORGANICA REDDY PHARMA, HONG KONG LTD. RS. 6,23,46,786 AND M/S. OOO REDDY BIOMED LTD., RUSSIA AT RS. 9,52,93,561. ACCORDING TO HIM THERE IS APPROVAL FROM RBI TO WRIT E OFF THESE AMOUNTS AND THE SAME HAS TO BE ALLOWED. 16. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. SECTION 36(2)(III) READS AS FO LLOWS: 'SECTION 36(2)(III): ANY SUCH DEBT OR PART OF DEBT MAY BE DEDUCTED IF IT HAS ALREADY BEEN WRITTEN OFF AS IRRE COVERABLE IN THE ACCOUNTS OF AN EARLIER PREVIOUS YEAR (BEING A P REVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR COMMENCING ON THE 1 ST DAY OF APRIL, 1988, OR ANY EARLIER ASSESSMENT YEAR), BUT T HE ASSESSING OFFICER HAD NOT ALLOWED IT TO BE DEDUCTED ON THE GR OUND THAT IT 12 ITA NOS. 1384-1386 & 1289/HYD/2012 M/S. REDDY'S LABORATORIES LTD. ============================ HAD NOT BEEN ESTABLISHED TO HAVE BECOME A BAD DEBT IN THAT YEAR;' 17. A DEBT ARISING IN THE COURSE OF BUSINESS ACTIVITY I S TO BE CONSIDERED AS BAD DEBT IF IT IS WRITTEN OFF IN THE BOOKS OF ACCOUNT AS PER THE PROVISIONS OF SECTION 36(2)(III) OF THE ACT. IN THE PRESENT CASE THE ASSESSEE SUBMITTED THAT IT HAD OBTAINED PERMISSION FROM RBI VIDE LETTER DATED 30 TH MARCH, 1999. THE LETTER READS AS FOLLOWS: 'RESERVE BANK OF INDIA SECRETARIAT ROAD, SAIFABAD, HYDERABAD - 500 004 EXP/6076/05.02 98-99 M ARCH 30, 1999 THE BRANCH MANAGER STATE BANK OF INDIA INDUSTRIAL FINANCE BRANCH SOMAJIGUDA HYDERABAD 500082 DEAR SIR, REDUCTION IN INVOICE VALUE DR. REDDY'S LABORATORIES LTD., HYDERABAD PLEASE REFER TO YOUR LETTER 98/82 DATED 31 ST DECEMBER, 1999 ON THE ABOVE SUBJECT. WE CONVEY OUR APPROVAL FOR REDUC TION IN INVOICE VALUE TO THE EXTENT OF US$ 5,328,470/- IN R ESPECT AS PER ENCLOSED LIST. YOU MAY RELEASE THE DUPLICATE GPS OF THE INVOICES CONCERNED AFTER RECEIPT OF THE REDUCED VALUE QUOTIN G THIS REFERENCE ON THE GR DUPLICATE. 2. THE REDUCTION IN INVOICES VALUE IS GRANTED SUBJE CT TO THE CONDITION THAT THE EXPORTER HAS SURRENDERED PROPORT IONATE EXPORT INCENTIVES, IF ANY, AVAILED IN RESPECT OF TH E RELATIVE SHIPMENTS. YOURS FAITHFULLY SD/- (M. CHANDRASHEKARAN) ASST. GENERAL MANAGER' 13 ITA NOS. 1384-1386 & 1289/HYD/2012 M/S. REDDY'S LABORATORIES LTD. ============================ 18. IN VIEW OF THE ABOVE LETTER, THE ASSESSEE COULD CLA IM THAT PORTION OF DEBT AS BAD DEBTS ON FULFILMENT OF THE CONDITIONS LAID DOWN IN THAT LETTER. ACCORDINGLY, IN RESPECT OF BAD DEBTS, WE DIRECT THE ASSESSING OFFICER TO EXAMI NE THIS ISSUE IN THE LIGHT OF THE ABOVE LETTER AND DECIDE T HE ISSUE AFRESH. THE ASSESSEE IS DIRECTED TO ADDUCE NECESSA RY EVIDENCE AS THE ASSESSEE HAS FAILED ON EARLIER OCCA SION TO FURNISH NECESSARY EVIDENCE. THIS ISSUE CANNOT BE C ONSIDERED AS COVERED BY THE EARLIER ORDER OF THE TRIBUNAL IN THE ABSENCE OF NECESSARY EVIDENCE FURNISHED BY THE ASSESSEE. THE REVENUE APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. 19. IN THE RESULT, ALL THE THREE APPEALS OF THE ASSESSE E ARE DISMISSED AND THE REVENUE APPEAL IS ALLOWED FOR STA TISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST OCTOBER, 2012. SD/- (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD, DATED 31 ST OCTOBER, 2012 TPRAO COPY FORWARDED TO: 1. DR. REDDY'S LABORATORIES LTD., 8-2-337, ROAD NO. 3, BANJARA HILLS, HYDERABAD-500 034. 2. THE ADDL. CIT, CIRCLE-1(2), 4 TH FLOOR, AAYAKAR BHAVAN, HYDERABAD. 3. THE ASST. CIT, CIRCLE-1(2), HYDERABAD. 4. THE CIT(A)-II, HYDERABAD. 5. THE CIT-I, HYDERABAD. 6. THE DR B BENCH, ITAT, HYDERABAD
