2019 (5) TMI 1165 - SC - Income Tax

Treatment of loss from share trading - speculative loss OR business loss - set off of speculation loss to be against profits of trading in futures and options - effect of statement of assessee made before AO - scope of amendment made in Explanation to Section 73 by the Finance (No 2) Act 2014 - retrospective OR prospective - HELD THAT - 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 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 u/s 73 would be attracted. Hence, the finding of the High Court, on the first aspect, cannot be faulted. Impact of amendment - 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 effect. 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. No error in the decision of the High Court. The appeal is, accordingly, dismissed.

Summary

Issues Involved:
1. Whether the principal business of the appellant was granting loans and advances or share trading.
2. Whether the amendment to the Explanation to Section 73 of the Income Tax Act, 1961, introduced by Finance (No. 2) Act, 2014, should be applied retrospectively.

Issue-wise Detailed Analysis:

1. Principal Business of the Appellant:
The appellant, registered as a non-banking financial company (NBFC) under the Reserve Bank of India Act, 1934, filed its return of income for the assessment year 2008-2009. The assessing officer classified the appellant's principal business activity as trading in shares and securities, treating the loss from share trading as a speculation loss. The appellant contended that its principal business was granting loans and advances, supported by its balance sheet figures showing substantial funds deployed in loans and advances. However, the High Court rejected this contention, emphasizing the appellant's admission that share trading was its sole business during the assessment year in question. The appellant's significant interest-free lending further supported this conclusion. Consequently, the High Court held that the principal business of the appellant was not granting loans and advances, and the deeming fiction under Section 73 was applicable, making the loss from speculation not capable of being set off against business profits.

2. Retrospective Application of the Amendment to Section 73:
The appellant argued that the amendment to the Explanation to Section 73, effective from 1 April 2015, should be construed as retrospective. This amendment excluded trading in shares from the purview of speculation business. The appellant highlighted an anomaly where trading in derivatives was excluded from speculation business with effect from 1 April 2006, while trading in shares continued to be treated as speculative until the 2015 amendment. The appellant relied on CBDT Circulars and judicial precedents to support its claim for retrospective application. However, the court rejected this argument, noting that the legislature did not amend the Explanation to Section 73 when it amended Section 43(5) in 2005. The court emphasized that the amendment to Section 73 was intended to take effect from 1 April 2015, and there was no indication of legislative intent for retrospective application. The court cited relevant case law to support its conclusion that the amendment was not clarificatory and could not be applied retrospectively.

Conclusion:
The Supreme Court upheld the High Court's decision, affirming that the appellant's principal business was share trading, not granting loans and advances, and the loss from speculation could not be set off against business profits. The court also held that the amendment to the Explanation to Section 73, effective from 1 April 2015, was not retrospective. Consequently, the appeal was dismissed, and the High Court's judgment was affirmed.