14. Snowtex Investment Ltd. vs.
Pr. CIT; [2019] 414 ITR 227 (SC)
Loss – Set off – Speculative transaction – The assessee having made an
admission on a statement of fact that the principal business activity was
trading in shares and securities, must bind it – The principal business of the
assessee thus not being of granting loans and advances during the assessment
year, the deeming fiction under section 73 was attracted – The provisions which
were contained in the Finance Act (No. 2) 2014 insofar as they amended the
Explanation to section 73, were not clarificatory
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
for the assessment year 2008-09 on 27th September, 2008. By an order
dated 14th December, 2010 the AO recorded that the principal business
activity of the assessee was trading in shares and securities. The loss from
share trading was held to be a speculation loss. The AO further 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 business.
Against the AO’s order for the assessment year 2008-2009, an appeal was
filed before the CIT(A). The CIT(A) rejected the contention of the assessee
that the AO had erred in not allowing the speculation loss to be set off
against profits of trading in futures and options.
The assessee appealed against the decision of the CIT(A). The Income Tax
Appellate Tribunal, by its decision dated 6th 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 who 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 business.
The Revenue appealed before the High Court which, by its judgement dated
22nd 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
options.
On an appeal by the assessee, the Supreme Court noted that the
provisions of section 43(5) were amended by the Finance Act, 2005. Prior to the
amendment, section 43(5) defined a ‘speculative transaction’ to mean a
transaction in which a contract for the purchase or the sale of any commodity
including stocks and shares is settled otherwise than by the actual delivery or
transfer of the commodity or scripts. The impact of the amendment by the
Finance Act, 2005 was that an eligible transaction on a recognised stock
exchange in respect of trading in derivatives was deemed not to be a
speculative transaction. With effect from 1st April, 2006 trading in
derivatives was by a deeming fiction not regarded as a speculative transaction
when it was carried out on a recognised stock exchange. The circular of the CBDT
dated 27th February, 2006 indicated that this amendment was
occasioned by the changes which were introduced by SEBI both at the legal and
the technological level for bringing in greater transparency in the market for
derivatives.
The Supreme Court further noted that section 73 deals with losses from
speculation business. Under sub-section (1) of section 73, a loss computed in
relation to speculation business carried on by an assessee can only be set off
against the profits and gains of another speculation business. The Explanation
to section 73 contains a deeming fiction where certain businesses shall, for
the purposes of that section, be deemed to be speculation businesses. The
Explanation also carves out an exception in respect of certain specified businesses
which shall lie outside the fold of the deeming fiction. Prior to amendment of
the Explanation by the Finance (No. 2) Act, 2014 with effect from 1st
April, 2015, the business of trading in shares carried on by a company was not
excluded from its purview. However, by the amendment which was brought into
force from 1st April, 2015, the Explanation to section 73 further
excluded from the deeming fiction a company whose principal business was
trading in shares or banking.
The Court observed that while, on the one hand, Parliament amended
section 43(5) with effect from 1st April, 2006 as a result of which
trading in derivatives on recognised stock exchanges fell outside the purview
of the business of speculation, a corresponding amendment to the Explanation to
section 73 in respect of trading in shares was brought in only with effect from
1st April, 2015.
The submission which had been urged on behalf of the appellant was that
there was no logical reason to exclude from the purview of speculation business,
trading in shares, whereas trading in derivatives was excluded, from the ambit
of section 43(5) after 1st April, 2006.
The Supreme Court first dealt with the first submission, namely, 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 advances.
The Court noted that there was no dispute about the fact that the
assessee was registered as an NBFC under the provisions of the Reserve Bank of
India Act, 1934. Before the Supreme Court it was urged that the principal
business was of granting of loans and advances. According to the Court, the
correctness of this aspect of the submission was not required to be determined
in the facts of the present case since the High Court had relied upon the
specific admission of the assessee that during the assessment year in question
its sole business was of dealing in shares.
The Supreme Court noted that while the assessee had given loans and
advances of Rs. 11.32 crores during the assessment year, it 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 AO assumed significance. According to the Supreme
Court, the assessee had made an admission on a statement of fact which must
bind it. Thus, 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 was attracted. Hence, the finding of the High
Court on the first aspect could not be faulted.
So far as the second submission which was canvassed in the course of the
hearing of the appeal was concerned, the Supreme Court held that it was
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 1st April, 2015, that it should
be given retrospective effect.
