IN THE ITAT HYDERABAD BENCH ‘B’
Dr. Reddy’s Laboratories Ltd.
Versus
Additional Commissioner of Income-tax
IT APPEAL NOS. 1289 & 1384 to 1386 (HYD.) OF 2011
[ASSESSMENT YEARS 1997-98 to 1999-2000]
OCTOBER 31, 2012
ORDER
Chandra Poojari, Accountant Member
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 directed against the order of the CIT(A)-II, Hyderabad dated 26.4.2011 for assessment years 1997-98 to 1999-2000.
2. The common ground in all the three appeals of the assessee is with regard to treatment of loss arising 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 considered this issue elaborately for A.Y. 1997-98 in ITA No. 621/Hyd/2000 and remitted the issue back to the file of the Assessing Officer vide order dated 24th 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 pertinent 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 Explanation 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 income. The test laid down in the case of the second category of company is the nature of the principal business carried on by it. In the first category, where the test is that of the character of gross total income the other test relating to the nature of principal business carried on by it does not apply. Likewise in the second 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 different tests laid down In the said explanation itself. Therefore. the examination of the exceptions provided in Explanation to section 73 is to be done strictly In accordance with the tests laid down In the Explanation.”
In the present case, the learned counsel for the assessee has rested his arguments on the second exception. On the other hand, the revenue has tried to advance its case on the basis of exception. In fact, in all the cases relied upon by the learned Departmental Representative, it is only the first exception which has been considered by the Courts and the Tribunal. In none of the cases, the second exception has come up for consideration. As a matter of fact, even in the case before the Special Bench (supra), the Tribunal laid down the tests for the first exception. However, since it was not concerned with the second exception, the tests for the same have not been laid down and, therefore, our task in this appeal becomes quite onerous. Needless to say, if it was the first exception which was to be considered, the case is undoubtedly caught within the mischief of the Explanation to section 73. However, as mentioned earlier, it is the second exception on which 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 principal business of which is …..”. The question we pose to ourselves is whether the provision contemplates that there can be only one principal business or there can be more than one principal business as well. To our mind, perhaps that may not be the case, because, there can be situations wherein business ‘A’ may constitute 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 the opposite, i.e., business ‘B’ may constitute 45% and business ‘a’ may constitute 47% of the turnover. Then can it be said 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 the 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 the composition of total income will not be the criterion 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 questions need to be addressed to and which have not been considered by the revenue as they have gone by the income criterion only and which criterion, as per the decision of the Special Bench. cannot be applied when one is considering the matter under second exception in the Explanation to section 73 of the Act. Since we do not have the views of the revenue on this aspect of the matter, we deem it proper to restore the issue back to the 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 assessee in this regard.”
3. The Assessing Officer while passing consequential order re-examined the entire issue. The assessee’s principal business is not covered by any exception and he treated the loss on buying and selling of shares as speculation loss. On appeal, the CIT(A) observed that the principal business of the assessee company is not advancing loans and buying and selling of shares is nothing but speculation business 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 order 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 investment and finance as one of its main objects. During the month 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 assessee’s principal business includes investment and financing. He further drew our attention to the earlier order of the Tribunal cited supra wherein it was mentioned that there can be more than one principal business. According to him one has to consider overall view of the company i.e., composition of gross receipts, deployment of funds in each segment of business, etc. He submitted that deployment of funds as follows:
Figures in Rs. Crores
