1. This article analyses the recent landmark decision of the Supreme Court in the case of Snowtex Investment Ltd. v. Pr. CIT [2019] 105 taxmann.com 282 (SC) – referred to as "taxpayer".
The actual issue before the Supreme Court was whether the profits earned by the taxpayer from F&O activities (derivatives business) can be set off against the loss on sale of shares? The issue1 posed before the Supreme Court was "can the profits earned from derivative business be treated as "speculative business" within the meaning of Explanation to section 73 of the Act"?
We have analysed the aforesaid decision without going into a discussion or debate as to whether or not the provisions of the Explanation to section 73 of the Act are ultra-vires the provisions of section 43(5) of the Act?
2. Facts of the case Snowtex Investment Limited v. Pr. CIT
| (1) | This case2 deals with the interpretation of the provisions of the Explanation to section 73 of the Income-tax Act, 1961 ("Act") by the Hon'ble Apex Court. In this case, the taxpayer was a company, an NBFC registered with the Reserve Bank of India, and was engaged in the business of granting of loans and trading in shares and derivatives. In the assessment year 2008-09, the taxpayer had earned interest on loans given, dividends from securities/shares, income from trading in derivatives and incurred loss from trading in shares carried out by way of physical delivery.The taxpayer while filing its tax return had, inter-alia, set-off loss from share trading against income from trading in derivatives. | |
| (1) | The Assessing Officer invoked the provisions of section 733 of the Act, and treated the business of share trading as "speculative business" and loss from share trading as "speculation loss" and denied its set-off from income from derivatives trading (which was treated as business proper).The CIT (A) granted relief by holding that the taxpayer's principal business was that of grant of loans and advances (though it was held that that the derivatives business was non-speculation business/business proper), therefore, treated the taxpayer to be falling within excluded class of companies under the Explanation to section 73 of the Act. The Revenue carried the matter in appeal before the Tribunal which held that the character of income from derivatives trading and sale of share was the same, and on that basis the aggregation of business profits or loss was to be worked out irrespective of whether it was from delivery of shares or derivative transaction. | |
| (3) | The Revenue carried the matter before the Calcutta High Court ("HC") wherein after relying upon an earlier decision of same HC in the case of Asian Financial Services Ltd. v. CIT4, it was held that the profits earned from derivatives trading were not-speculative and thus could not be set off against loss from share trading. Further, the taxpayer contended that the matter might be remanded back to the ITAT since the CIT(A) had provided relief by holding that the principal business of the taxpayer was that of granting of loans and advances. The Calcutta HC, however, by relying upon the decisions5 held that there the appellate court could not reverse a finding without first showing that the finding recorded by the trial court was wrong. In addition, the Calcutta HC also relied upon the admission of the taxpayer that it was engaged in the business of trading in shares to negate its contention. The Calcutta HC also held that the amendment made by Finance Act, 2014 (wherein a company whose principal business is trading in shares is incorporated in the excluded category of companies for the purpose of applicability of section 73) is prospective and not retrospective. |
The taxpayer, being aggrieved by the decision of the High Court approached the Supreme Court for relief. In nutshell, the issue before the Supreme Court was whether loss from share trading (carried out by way of physical delivery) was a speculation loss, and whether the said loss could be set-off from profit from derivatives trading?
2.1 Applicable provisions - Section 43(5)6 of the Act, for the purposes of sections 28 to 41 of the Act, defines a speculative transaction to mean any transaction in which contract for purchase or sale of any commodity including stocks and shares is settled otherwise than by way of actual delivery or transfer of commodity or scrips7. Proviso to section 43(5) exempts certain transaction, inter-alia, derivatives trading from being treated as speculative transactions. Explanation 2 to section 28 of the Act provides that where speculative transactions carried on by the assessee are of such a nature as to constitute a business, the business (hereinafter referred to as "speculative business") shall be deemed to be distinct and separate from any other business.
Section 72(1) of the Act which deals with business loss provides that the business loss (other than loss sustained in speculation business) shall be carried forward to the next assessment year. Section 73(1) of the Act provides that loss sustained in speculation business shall be set off only against profits of any other speculation business. Section 73(2) provides that where such speculation loss cannot be fully set off, the same shall be carried forward8 and set-off against the profits of any speculation business. Explanation to section 73 of the Act inserted by Taxation Laws (Amendment) Act, 19759 on the basis of report of Direct Tax Enquiry Committee, 1971 (commonly referred to as the "Wanchoo Committee report") contains a deeming fiction where certain companies (other than some companies which are in the excluded category – dealt with by para 5 below), shall for the purpose of the section, be deemed to be carrying on speculation business.
Explanation to section 73 of the Act provides that where the business of a company other than a company:
| (a) | whose gross total income consist mainly of income chargeable under the head "income from securities" or "Income from house property" or "capital gains" and "Income from other sources"; or | |
| (b) | the principal business10 of which is granting of loans or advances or banking ; or | |
| (c) | the principal business of which is business of trading in shares (this is brought by way of an amendment through Finance Act, 2014) |
consists in purchase and sale of share of other companies, such company shall be deemed to be carrying on a speculation business to the extent to which the business consists of sale and purchase of shares. On a plain reading of the aforesaid provisions, the business of trading in shares (whether by way of physical delivery or otherwise) shall be regarded as "speculation business" (before amendment by way of Finance Act, 2014), and, therefore, losses arising in such business can be set off against the profits of another speculation business.
For the purpose of this article, the companies mentioned in a, b, and c above are referred to as excluded category/class of companies (which means the companies which are exempted from the rigours of Explanation to section 73 of the Act).
From the reading of the order of the Supreme Court in the case of the taxpayer, it seems that the aforesaid case was argued only on two grounds before the Hon'ble Apex Court, and the reasons for rejection of the contentions of the taxpayer have been given below:
2.2 Issue 1:Whether the principal business of the taxpayer is grant of loans and advances?
2.2.1 Arguments of the taxpayer - It was argued that since the taxpayer is an NBFC, the principal business of the taxpayer is grant of loans and advances, and, therefore, Explanation to section 73 of the Act is not applicable.The said contention was sought to be substantiated on the ground that out of total funds available with the company of Rs 13.48 crores, the funds deployed by the taxpayer as loans and advances were to the tune of Rs 11.32 crores (approx. 84%), and it was not income from interest but deployment of funds which should have a bearing in determination of principal nature of business.
2.2.2 Decision of the Supreme Court - The Apex Court relied upon a specific admission of the taxpayer that its sole business was of dealing in shares.The Apex Court also noticed that since majority of the loans and advances were given interest free, it was held that the specific admission of the taxpayer should, in this context, bind the taxpayer.On this basis, the finding of the High Court that it was not in the principal business of loans and advances was affirmed by the Apex Court.Therefore, it was held that the business of the taxpayer, being trading in shares, was a speculation business.
2.2.3 Analysis of the decision - It is submitted that the Supreme Court completely ignored the following two vital facts/findings which are discussed in the impugned order of the Calcutta High Court:
| (a) | the CIT(A) held that the primary business of the taxpayer was of grant of loans and advances; and | |
| (b) | that the aforesaid factual issue was not adjudicated upon by the Tribunal11. |
Before the Calcutta HC, the taxpayer sought for remand of the matter to the Tribunal to decide the said factual issue.The said request of the taxpayer was brushed aside by the Calcutta HC by holding that the finding of the CIT(A) was wrong in as much as it was recorded without showing that the Assessing Officer was wrong.
It is a trite law that a HC cannot disturb the findings of fact under section 260A of the Act, unless such findings are ex-facie perverse and unsustainable and exhibit a total non-application of mind by the Tribunal to the relevant facts of the case, and evidence before the Tribunal.
In the instant case, the Kolkata Tribunal, in ITO v. Snowtex Investment Ltd. [2015] 64 taxmann.com 157 (Kol. - Trib.) passed in the case of the taxpayer, however, noted as under:
"2.13. We also find that that the Learned AO had completed the scrutiny assessment u/s 143(3) of the Act for the Asst Year 2010-11 on 14.2.2013 wherein the transactions in share trading has not been considered by invoking the Explanation to Section 73 of the Act in view of the fact that the advances have been given by the assessee. This goes to prove that the stand taken by the assessee in the assessment year under appeal, that it is a non-banking finance company engaged in the business of granting loans and advances gets further strengthened by the subsequent conduct of the Learned AO."
It is submitted that the Tribunal, in the underlying order itself, had given a categorical finding that that the taxpayer was an NBFC engaged in the business of granting of loans and advances and that the said fact was accepted by the Revenue in the assessment for the subsequent assessment year.It could be said that the Tribunal had applied its mind to the facts of the case, and then impliedly held that the principal business of the taxpayer was that of granting of loans or advances.
One more aspect worth noting in the instant case was that as per the decision of the Special Bench in the case of Dy. CIT v. Venkateswar Investment & Finance (P.) Ltd.12 (later on affirmed by the Delhi High Court13), wherein it had been held that for determination of principal business, "…The decisive factor is the true nature of activities of the company during the relevant period as well as in the past or succeeding periods".Given that the Revenue (in the subsequent year) had accepted that the taxpayer was in the business of grant of loans or advances, the Calcutta HC had got sufficient material to agree with the Tribunal's decision or, in all fairness, had got sufficient reasons to remand the matter to the Tribunal for examination of facts in light of the decision of the Special Bench/Delhi High Court referred to above.
As discussed above, it was held by the Supreme Court14 that since major part of loans was given interest-free and given that the taxpayer itself had admitted before the Assessing Officer that the share trading was the sole business during the year, the said admission had to bind the taxpayer.Prima-facie, the said statement of the taxpayer did not appear to be fully correct as the taxpayer had earned interest from loans granted which, purportedly, was also one of the business activity (albeit not main business activity as held by the authorities/Courts) and, as accepted by the Revenue, derivatives trading was also one more business activity of the taxpayer.
It is a settled law that admission by a person is a good piece of evidence, though not conclusive and the same can be used against the person who makes it.On these bases, this principle that admission should bind the taxpayer cannot be applied to the facts of the instant case as an admission or acquiescence cannot be a foundation for an assessment, where the income is returned under an erroneous impression or misconception of law.It is always open to an assessee to demonstrate and satisfy the authority concerned that a particular income was not taxable in his hands, and it was returned under an erroneous impression of law as held by the Allahabad High Court in the case of Abdul Qayume v. CIT15.
One more aspect that needs to the noted is that the admission of the taxpayer of being into the sole business of share trading is to be understood in a loose sense or to be seen commercially, and not literally.If such an admission is to be followed literally or treated with reverence/accepted as such, then the business of derivative trading (which is also the part of the business of the taxpayer) must also be treated as part of share trading business (being the only business of the taxpayer).Viewed in that context, in such a case, the aggregation of business is to be done (i.e., both the activities are to be treated as one integral business) and the taxpayer was not required to enter into the computation provisions contained in section 73 of the Act, and the question regarding set off of losses with profits would not have arisen.
2.3 Issue 2:Whether the amendment made by Finance Act, 2014 in Explanation to section 73 of the Act to include the principle business of trading in shares is retrospective or prospective?
2.3.1 Arguments of the taxpayer - In case it is held by the Apex Court that the principal business of the taxpayer is trading in shares, the taxpayer argued that the amendment made by the Finance Act, 2014 (by excluding those companies where the principal business is that of trading in shares) is retrospective. It was argued that if the amendment was held to be retrospective, the business of the taxpayer could not be called as "speculative business".In respect of this contention, it was submitted before the Hon'ble Apex Court that trading in derivatives was removed from the definition of speculative transaction in section 43(5) effective FY 2005-06.In juxtaposition of the same, there was anomaly, in law, in as much as the delivery based trading of shares was treated as speculative business until the amendment to the Explanation to section 73 of the Act by way of Finance Act, 2014 was made, and the said anomaly was sought to be cured by way of the amendment (effectively, it was argued that the definition of speculative transaction in section 43(5) was to be read into the provisions of section 73 of the Act).
2.3.2 Decision of the Supreme Court - The Apex Court held - while amending the provisions of section 43(5) of the Act in 2005 (when the derivatives were excluded from the definition of speculative transaction), the Parliament was cognizant of the provisions of section 73 of the Act, and having introduced an amendment to section 73(4)16, the Parliament, would have brought parity with the provisions of section 43(5) of the Act.Since this was not done consciously by the Parliament despite being aware of the same, the said amendment now cannot be said to be not retrospective.
Though the Court recognized that an amendment can be interpreted as clarificatory or retrospective or curative or declaratory, yet in the facts of the case, the Parliament, in its legislative wisdom brought in a specific amendment effective April 1, 2015, and, therefore, the same cannot be held as "retrospective".
2.3.3 Analysis of the decision - It is submitted that the date of commencement of a statute or provision is in the exclusive domain of the legislature and it can bring a legislation retrospectively by expressly providing for the same or prospectively.However, the retrospective application of the statute can be made by express words or by necessary intendment.
It is a trite law that every statute has, prima-facie, prospective application so far as the substantive rights are concerned or that a statute cannot impose a new burden retrospectively.However, 5 judge bench of the Supreme Court in the case of Vatika Township (P.) Ltd.17 observed that the principle of fairness as observed in L'office Cherifien des Phosphates v. Yamashita Shinnihon Steamship Co. Ltd.18 shall be applied when considering a retrospective application of a statute is intended or not.The Apex Court held that legislations which modified accrued rights or which impose obligations or impose new duties or attach a new disability have to be treated as prospective unless:
| (a) | the legislative intent is clearly to give the enactment a retrospective effect; | |
| (b) | the legislation is for the purpose of supplying an obvious omission in a former legislation or to explain a former legislation. |
Considering the above principles, the question arises as to whether the amendment by Finance Act, 2014 is for the purpose of supplying an obvious omission in a former legislation or to explain a former legislation?
In this regard, it is necessary to refer to the report of the Wanchoo Committee on the basis of which Explanation to Section 73 was introduced by the Taxation Laws (Amendment) Act, 1975, the relevant extracts of which are as under:
"Share dealings by companies
3.44 "A tax avoidance device often resorted to by business houses controlling groups of companies is manipulation of results from dealings in shares of the companies controlled by them. In our opinion, such manipulation in share dealings for the purpose of tax avoidance can be checked effectively if the results of dealings in shares by such companies are treated for tax purposes in a manner analogous to speculation. No doubt, companies whose main business activities centre around investment in shares will have to be left out. Accordingly, we recommend that the results of dealings in shares by companies, other than investment, banking and finance companies, should be treated in a manner analogous to speculation business."
On the perusal of the aforesaid, it is seen that the word investment is appearing in the last sentence as well as penultimate sentence.The penultimate sentence "No doubt, companies whose main business activities centre around investment in shares will have to be left out" clearly provides that where the principal business activity of a company involves dealing in shares, it shall not be treated as speculation business.One can argue that the word "investment" used in the last sentence [which covers only the investment companies as defined in section 109 (deleted) of the Act19] of the Wanchoo Committee report shall be referred for interpretation of the word "investment" appearing in the penultimate sentence. Section 109(ii) does not include a company whose gross total income includes profits from business but the Wanchoo Committee report clearly provides that the companies whose main business activities are that of investment (trading) in shares shall be exempted from the rigours of being treated as doing "speculation business". Viewed in this perspective, it can be said that the amendment made to Finance Act, 2014 by including the companies whose principle business is trading in shares is for the purpose of supplying an obvious omission in the Wanchoo Committee report to this extent (or in the form of explanation to the former legislation), and, hence, can be said to be retrospective in operation.
The aforesaid argument is further strengthened by the usage of words "No doubt" in the Wanchoo Committee report which clearly implies that the said provisions are obviously required to be there in the Act as a matter of equity and it can be said that the object of the current amendment was to supply an obvious omission and to bring the provisions of the Explanation to section 73 of the Act in line with the express recommendation of the Wanchoo Committee report on the basis of which this Explanation was inserted w.e.f April 1, 1977.
2.4 Alternate view or Issue 3 – Whether income from derivatives is speculative? - It is submitted that section 43(5) and section 73 are mutually exclusive and, intend to operate in their respective fields.This view further gets strengthened by words "for the purpose of sections 28 to 41" in section 43 and "for the purpose of this section" in Explanation to section 73, that makes both the provisions compartmentalized, and, hence, the purport of the provisions of section 43(5) cannot be pressed into service for interpretation of section 73 of the Act.This is also the view of the Delhi High Court in the case of DLF Commerical Developers Ltd.20. The aforesaid issue has also been held so in the decisions of the Calcutta High Court in the case of R.P.G. Industries Ltd.21wherein it has been held as under:
"14. Therefore, by virtue of added Explanation given in section 73 of the Act, even the transactions, which are not speculative transactions within the meaning of section 43(5) of the Act, should be deemed to be speculative one if those come within the purview of the Explanation to section 73 of the Act.
15. If we accept the contention of Dr. Pal that the earlier provision defining speculative transaction should prevail even if the case comes within the conditions of the Explanation to section 73, we cannot give effect to the added Explanation at all and the said Explanation added by the Legislature will be a meaningless one."
The Bombay High Court speaking through Chandrachud J., as he then was, in the case of CIT v. Lokmat Newspapers22 negatived the contention of the Revenue that "speculative transaction" in section 43(5) must be read into the provisions of section 73.In this case, it was contended by the Revenue that a business cannot be a speculation business unless there is a speculative transaction which is defined by section 43(5) as not involving an actual delivery of shares.It was held by the Bombay High Court that the definition of speculative transaction as provided in the provisions of section 43(5) cannot be incorporated in section 73 so as to understand the meaning of the phrase "speculation business" as contained in the Explanation 3 to section 73 of the Act.
It is important to note that the Andhra Pradesh High Court in the case of CIT v. Sri Venkateswara Rice & Oil Mills23 held that that "speculation business" is to be understood in the normal commercial parlance and the ingredients of the same are totally different. A 'speculative transaction' artificially defined in section 43(5) of the Act does not amount to 'speculation business' as is commercially understood.This is another line of reasoning to say that both the provisions are mutually exclusive and operate in their respective domains.
2.4.1 The Delhi High Court in the case of DLF Commercial Developers Ltd. (supra) held that for the purpose of section 73 of the Act, derivative are to be treated as speculation business.The relevant extracts are reproduced hereunder:
"8……The assessee is no doubt correct in contending that the only definition of derivatives is to be found in Section 43 (5); yet the Court cannot ignore or overlook that the definition - to the extent it excludes such transactions from the mischief of the expression "speculative transactions" is confined in its application. Parliamentary intendment that such transactions are also excluded from the mischief of Explanation to Section 73 (4), however, is not borne out………..
10. It is no doubt, tempting to hold that since the expression "derivatives" is defined only in Section 43 (5) and since it excludes such transactions from the odium of speculative transactions, and further that since that has not been excluded from Section 73, yet, the Court would be doing violence to Parliamentary intendment. This is because a definition enacted for only a restricted purpose or objective should not be applied to achieve other ends or purposes. Doing so would be contrary to the statute……
11. The stated objective of Section 73- apparent from the tenor of its language is to deny speculative businesses the benefit of carry forward of losses. Explanation to Section 73 (4) has been enacted to clarify beyond any shadow of doubt that share business of certain types or classes of companies are deemed to be speculative. That in another part of the statute, which deals with computation of business income, derivatives are excluded from the definition of speculative transactions, only underlines that such exclusion is limited for the purpose of those provisions or sections. To borrow the Madras High Court's expression, "derivatives are assets, whose values are derived from values of underlying assets"; in the present case, by all accounts the derivatives are based on stocks and shares, which fall squarely within the Explanation to Section 73 (4). Therefore, it is idle to contend that derivatives do not fall within that provision, when the underlying asset itself does not qualify for the benefit, as they (derivatives -once removed from it and entirely dependent on stocks and shares, for determination of their value)."
When the Supreme Court in the instant case in para 31 of the order held that "… the loss which occurred to the assessee as a result of its activity of trading of shares (a loss arising from business in speculation) was not capable of being set off against the profits which it had earned against the business of future and options since the latter did not constitute profits and gains of a speculative business", it seems that the Supreme Court had implicitly read the provisions of section 43(5) [in regard to the derivatives] into Explanation 3 to Section 73.Perhaps, the aforesaid decisions, were not were not brought to the notice of the Supreme Court or the contention that the profits from derivatives business is also speculative was not argued.The decision in the instant case is authored by Chandrachud J. who happened to have taken a different view in Lokmat Newspapers case (supra) wherein it was held that provisions of section 43(5) cannot be incorporated in section 73 so as to understand the meaning of the phrase "speculation business".
Further, the Calcutta HC in the case of Asian Financial Services Ltd24 held that speculative loss incurred on account of derivatives trading would be deemed as business loss25 under proviso to section 43(5), and not speculation loss and affirmed that section 73 could not be applied in this case.It is submitted that the decision of the Calcutta HC also impliedly held that the provisions of section 43(5) are to be pressed into operation for the purpose of construction of the expression "speculative business" mentioned in the Explanation 3 to section 73 of the Act which seems to be at odds with the decision of the Bombay HC in Lokmat Newspapers (supra). However, the Supreme Court had granted an SLP26 to the Revenue against the said order of the Calcutta HC which also does not seem to have been brought to the notice of the Supreme Court.
Concluding Remarks
3. On the basis of above, it can be said that trading in derivatives [which is saved artificially for the purpose of section 43(5) from being treated as "speculative" due to deeming provision] is a speculative business in commercial parlance. This seems to be the import of decisions in the case of the Bombay HC in Lokmat Newspapers (supra) and Andhra Pradesh HC in the case of Sri Venkateswara Rice & Oil Mills (supra) and Delhi HC in the case of DLF Commercial Developers Limited (supra). Any loss arising from derivatives trading can be set off against profits earned from trading shares or any income from derivatives trading can also be offset against the loss from trading in shares. However, currently, we have a binding decision of the Supreme Court holding that profits from trading in derivatives is speculative which seems to be at odds with the above jurisprudence.
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