2016 (12) TMI 407 - HC - Income Tax

Speculation Loss - Trading in future and options - AO not allowing loss to be set off with the Profit of Share Trading in future and option segment - whether amendment is curative in nature and should be deemed to have a retrospective operation? - Held that - In the case before us, we are concerned with the assessment year 2008-09 and the amendment carving out an exception in the explanation to Section 73 for the companies, which have dealings in shares as their principal business, was made effective only on 1st April, 2015, that is to say, almost 8 years after the assessment year under consideration. We, as such, are not inclined to take notice of the earlier submission. Further, it appears from the Memorandum explaining the provisions in the Finance Bill, 2005 (by which, inter alia, clause (d) to the proviso in sub-section (5) of section 43 was proposed to be inserted) that the Legislature deliberately refrained from enacting a corresponding amendment to the explanation in section 73. The submission that the amendment introduced on 1st April, 2015 is curative has not impressed us for the simple reason that the amendment to Section 43(5) was made by the legislature with effect from 1st April, 2006. For long 9 years they allowed that situation to continue not because of any accidental error or omission on their part. That was a well considered step. We are, as such unable to hold that the amendment made with effect from 1st April, 2015 shall have a retrospective effect on the plea that it is curative in nature. That can only be done by legislature and not by us. In the year 2006, dealings in derivatives ceased to a speculative transaction. But dealings in shares by a company, whose principal business was dealing in shares, were deliberately retained within the ambit of speculative transaction and has ultimately been lifted only in the year 2015. It cannot be said that this was a step to remedy any unintended consequences. The fact that in 2006 dealings in derivatives were treated as deemed business, but the dealings in shares were not similarly treated, is a pointer to show that the legislature intended to treat them differently. There is, as such no question of any unintended consequence. We are, as such, unable to hold that the amendment is curative in nature or for that reason has a retrospective effect.

Issues Involved:

1. Whether profit from trading in future and options can be held as speculation profit and set off against speculation loss from trading of shares.
2. Interpretation of speculative transaction under Section 43(5) of the Income Tax Act, 1961.
3. Aggregation of share trading loss and profit from derivative transactions before applying Explanation to Section 73 of the Income Tax Act, 1961.
4. Validity and application of the Income Tax Appellate Tribunal's order.

Issue-wise Detailed Analysis:

1. Whether profit from trading in future and options can be held as speculation profit and set off against speculation loss from trading of shares:

The assessee earned ?2,26,12,178 from trading in derivatives (future and options) and incurred losses of ?1,71,52,934 from share trading. The Assessing Officer (AO) denied the set-off, stating that derivative trading is not speculative as per Section 43(5)(d), which excludes such transactions from being deemed speculative. The AO concluded that losses from share trading could not be set off against profits from derivatives, treating the share trading loss as speculation loss.

2. Interpretation of speculative transaction under Section 43(5) of the Income Tax Act, 1961:

The Tribunal held that the meaning of speculative transaction in Section 43(5) is only for Sections 28 to 41 and does not apply to other sections. The CIT (A) supported this by noting that the principal business of the assessee was granting loans and advances, thus not falling under the speculative business definition as per Explanation to Section 73.

3. Aggregation of share trading loss and profit from derivative transactions before applying Explanation to Section 73 of the Income Tax Act, 1961:

The Tribunal allowed the aggregation of share trading loss and profit from derivative transactions before applying the Explanation to Section 73. It concluded that the character of income from both activities is the same, and aggregation should be done before applying the Explanation to Section 73.

4. Validity and application of the Income Tax Appellate Tribunal's order:

The Tribunal's decision was challenged on the grounds of non-application of mind and being arbitrary. The High Court referred to its previous judgment in Asian Financial Services Ltd. v. Commissioner of Income-tax-3, Kolkata, which held that income from trading in derivatives is business income and does not fall under Section 73. The High Court found that the CIT (A) did not show the AO's findings were wrong and reversed the decision without proper reasoning. The High Court also rejected the argument that the amendment to Explanation to Section 73, effective from 1st April 2015, should be applied retrospectively, stating that such amendments are not curative and cannot be applied retrospectively unless explicitly stated by the legislature.

Conclusion:

The appeal was admitted, and the High Court answered the first question in the negative and the third question in the affirmative, indicating that profits from derivatives cannot be set off against share trading losses under the speculative transaction definition. The second and fourth questions were deemed unnecessary to answer. The Tribunal's order was found lacking in proper application of law and reasoning, leading to the appeal's success.

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