Case: Snowtex Investment Limited Vs. Principal Commissioner of Income Tax, Central-2, Kolkata

3. The Appellant was registered as a non-banking financial company under the Reserve Bank of India Act, 1934. The Appellant filed its return of income on 27 September 2008. The return was processed Under Section 143(1) on 8 October 2009. On the case being selected for scrutiny, a notice was issued Under Section 143(2). By an order dated 14 December 2010 the assessing officer recorded that the principal business activity of the Assessee is trading in shares and securities. The loss from share trading was held to be a speculation loss. The assessing officer held that in view of the provisions of Section 43(5)(d), activities pertaining to futures and options could not be treated as speculative transactions. The loss from speculation was held not to be capable of being set off against the profits from business4. Against the order of the assessing officer for assessment year 2008-2009, an appeal was filed before the CIT(A). The CIT(A) held that the Assessee derived income from trading in derivatives and share business along with dividend and interest and was an NBFC. The CIT(A) inter alia held that the provisions of Section 43(5) came into existence with effect from 1 April 2006 and hence, transactions in futures and options must be treated as business income as distinct from trading in shares. Consequently, the CIT(A) rejected the contention of the Assessee that the assessing officer had erred in not allowing the speculation loss to be set off against profits of trading in futures and options5. The Revenue appealed against the decision of the CIT(A). The Income Tax Appellate Tribunal1 by its decision dated 6 November 2015 held that the claim of the Assessee for setting off the loss from share trading should be allowed against the profits from transactions in futures and options, since the character of the activities was similar. The ITAT held that the Assessee which was in the business of share trading had treated the entire activity of the purchase and sale of shares which comprised both of delivery based and non-delivery based trading, as one composite business6. The Revenue appealed before the High Court which by its judgment dated 22 November 2016 accepted its submission. The High Court held that the profits which had arisen from trading in futures and options were not profits from a speculative business. Hence the loss on trading in shares could not be set off against the profits arising from the business of futures and options7. The dispute in the present case pertains to assessment year 2008-2009.

Reasoning: 19. At this stage, we will deal with the first submission which is that the Explanation to Section 73, as it stood prior to the amendment, excluded from the deeming definition of a speculation business, a situation where the principal business of a company was granting of loans and advances20. In the present case, there is no dispute about the fact that the Assessee was registered as an NBFC under the provisions of the Reserve Bank of India Act, 1934. Section 73(1) does not define specifically, the circumstances in which the principal business of a company would be regarded as a business of the specified description. In the present case, the principal business was urged to be the granting of loans and advances. We cannot accept this submission and are of the view that the High Court was justified in rejecting it. The circumstance, which in our view is of crucial significance, is how the Assessee construed its own line of business. The High Court has extracted what the Assessee stated before the assessing officer namely:... in our case the share trading is our sole business during the assessment year under concernFrom the above statement of the Assessee, it is evident that the Assessee itself stated that share trading was its sole business during the assessment year in question i.e. A.Y. 2008-200922. The correctness of this aspect of the submission which has been urged by learned senior Counsel need not be determined in the facts of the present aspect, since we are of the view that the High Court was justified in relying upon the specific admission of the Assessee that during the assessment year in question, its sole business was of dealing in shares. We must also advert to the circumstance that while the Assessee had furnished loans and advances of Rs. 11.32 crores during the assessment year, this included interest free lending to the extent of Rs. 9.58 crores. Having regard to these facts and circumstances, the specific admission of the Assessee before the assessing officer assumes significance. The Assessee made an admission on a statement of fact which in our view, must bind it. In this view of the matter, the principal business of the Assessee was not of granting loans and advances during the assessment year. As a consequence, the deeming fiction Under Section 73 would be attracted. Hence, the finding of the High Court, on the first aspect, cannot be faulted24. While amending the provisions of Section 43(5), the Parliament indeed was cognizant of the provisions which were contained in Section 73(4). The above memorandum indicates that the provisions of Section 73(4) were proposed to be amended so as to reduce the period of carry forward of speculation losses from eight assessment years to four assessment years. Having introduced an amendment to Section 73(4), the Parliament would have, if it intended to bring about a parity with the provisions of Section 43(5) introduced a specific amendment. Parliament, however, did not do so by the Finance Act 2005. It was only with effect from 1 April 2015 that an amendment was brought about to exclude trading in shares from the deeming provision contained in the Explanation to Section 73. Parliament may have had reasons to allow the situation to continue until the amendment was brought into force, including its view in regard to the stability of the stock market. Insofar as this Court is concerned, It would be difficult to hold that the provisions which were contained in the Finance Act (No. 2) 2014 insofar as they amended the Explanation to Section 73 were clarificatory or that notwithstanding the provision by which the amendment was brought into force with effect from 1 April 2015, that it should be given retrospective effect. We reject the second submission29. In M/s. Vijay Industries (supra), decided on 1 March 2019, a three judge Bench of this Court held that the provisions of Section 80AB which were introduced by the Finance (No. 2) Act, 1980 with effect from 1 April 1981 could not be regarded as clarificatory in nature. The Court held that the provision was made with prospective effect and the amendment would not apply to assessment years 1979-1980 and 1980-1981 because the amended provision was brought on the statute book after the assessment years in question30. In conclusion, we therefore, hold that the amendment which was brought by Parliament to the Explanation to Section 73 by the Finance (No 2) Act 2014 was with effect from 1 April 2015. In its legislative wisdom, the Parliament amended Section 43(5) with effect from 1 April 2006 in relation to the business of trading in derivatives, Parliament brought about a specific amendment in the Explanation to Section 73, insofar as trading in shares is concerned, with effect from 1 April 2015. The latter amendment was intended to take effect from the date stipulated by Parliament and we see no reason to hold either that it was clarificatory or that the intent of Parliament was to give it retrospective effect31. The consequence is that in A.Y. 2008-2009, the loss which occurred to the Assessee as a result of its activity of trading in shares (a loss arising from the business of speculation) was not capable of being set off against the profits which it had earned against the business of futures and options since the latter did not constitute profits and gains of a speculative business.