Supreme Court clarifies Speculative Business Loss Set-Off Rules for NBFCs: Snowtex Investment Ltd. vs. PCIT (2019)

Date of the Judgment: 30 April 2019

Citation: (2019) INSC 438

Judges: Dr. Dhananjaya Y Chandrachud, J and Hemant Gupta, J.

Can a company engaged in share trading set off its losses against profits from trading in derivatives? The Supreme Court of India addressed this question in a recent case involving Snowtex Investment Limited. The core issue revolved around whether the company’s share trading activities should be considered a speculative business, and if so, whether losses from such activities could be adjusted against profits from futures and options trading. The judgment was delivered by a bench comprising Justice Dr. Dhananjaya Y Chandrachud and Justice Hemant Gupta, with the opinion authored by Justice Dr. Dhananjaya Y Chandrachud.

Case Background

Snowtex Investment Limited, a Non-Banking Financial Company (NBFC), filed its income tax return on 27 September 2008 for the assessment year 2008-2009. The return was initially processed under Section 143(1) of the Income Tax Act, 1961. Subsequently, the case was selected for scrutiny, and a notice was issued under Section 143(2). The assessing officer determined that the company’s primary business was trading in shares and securities. The officer classified the loss from share trading as a speculation loss and disallowed its set-off against profits from futures and options trading, citing Section 43(5)(d) of the Income Tax Act, 1961, which excludes futures and options from being treated as speculative transactions.

Timeline

Legal Framework

The case primarily revolves around the interpretation of Section 43(5) and Section 73 of the Income Tax Act, 1961.

✓ Section 43(5) of the Income Tax Act, 1961 defines a “speculative transaction.” Before its amendment in 2005, it included any transaction for the purchase or sale of commodities, including stocks and shares, settled without actual delivery. However, the amendment by the Finance Act, 2005, with effect from 1 April 2006, excluded eligible transactions in derivatives carried out on a recognized stock exchange from being considered speculative transactions. The relevant portion of the section reads as follows:

“a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips”

✓ Section 73 of the Income Tax Act, 1961 deals with losses from speculation business. Sub-section (1) states that losses from a speculation business can only be set off against profits from another speculation business. The Explanation to Section 73 provides a deeming fiction, stating that certain businesses are considered speculation businesses. Before its amendment by the Finance (No. 2) Act, 2014, effective from 1 April 2015, the business of trading in shares was not excluded from this deeming fiction. The amended explanation reads:

“Where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads “Interest on securities”, “Income from house property”, “Capital gains” and “Income from other sources”, or a company the principal business of which is the business of trading in shares or banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.”

Arguments

Appellant’s Arguments:

• The appellant contended that the Explanation to Section 73 of the Income Tax Act, 1961, as it stood before the 2015 amendment, did not apply to companies whose principal business was granting loans and advances. The appellant argued that its primary business was granting loans and advances, not share trading. This argument was supported by the fact that the company had deployed a substantial portion of its funds for loans and advances, specifically 84%.
• The appellant argued that the amendment to Section 73 should be considered retrospective. They highlighted that while trading in derivatives was excluded from the definition of speculative business in 2006, trading in shares was not until 2015. This, they argued, created an anomaly that should be rectified by giving retrospective effect to the 2015 amendment. The appellant relied on the decisions in Allied Motors (P) Ltd. v. Commissioner of Income Tax, Delhi [ (1997) 3 SCC 472 ] and Commissioner of Income Tax v. Alom Extrusions Ltd. [(2010) 1 SCC 489] to support this claim.

Respondent’s Arguments:

• The respondent argued that the High Court correctly determined that the principal business of the assessee was not the granting of loans and advances. This argument was supported by the assessee’s admission before the assessing officer that share trading was its sole business during the assessment year. The respondent also pointed out that the assessee had paid out significantly more interest than it had received, indicating that its lending activities were not its primary business.
• The respondent contended that the amendment to Section 73 was not intended to be retrospective. They argued that the legislature was aware of the provisions of Section 73 when it amended Section 43(5) in 2005, yet it did not make a corresponding amendment to Section 73 until 2015. The respondent relied on the decisions in Commissioner of Income Tax (Central)-I, New Delhi v. Vatika Township Private Ltd. [(2015) 1 SCC 1] and Vijay Industries v. Commissioner of Income Tax [(2019) 4 SCC 184] to support this position.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court addressed the following issues:

1. Whether the High Court was correct in holding that the principal business of the assessee was not the granting of loans and advances.
2. Whether the amendment to the Explanation to Section 73 of the Income Tax Act, 1961 by the Finance (No. 2) Act 2014 with effect from 1 April 2015 should be given retrospective effect.

Treatment of the Issue by the Court

Authorities

Cases:

Legal Provisions:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

✓ Allied Motors (P) Ltd. v. Commissioner of Income Tax, Delhi [(1997) 3 SCC 472]*: The Court distinguished this case, stating that it was based on a holistic reading of Section 43B, whereas in the present case, the intent of Parliament was clear in bringing the amendment into force from a stipulated date.

✓ Commissioner of Income Tax v. Alom Extrusions Ltd. [(2010) 1 SCC 489]*: The Court distinguished this case, stating that it was based on the intent of the legislature, which was not the case here.

✓ Commissioner of Income Tax (Central)-I, New Delhi v. Vatika Township Private Ltd. [(2015) 1 SCC 1]*: The Court relied on this case to hold that the amendment to Section 73 was not intended to be retrospective, as the legislature was fully aware of the concepts of prospective and retrospective amendments.

✓ Vijay Industries v. Commissioner of Income Tax [(2019) 4 SCC 184]*: The Court relied on this case to hold that the amendment to Section 73 was not intended to be retrospective, as the provision was made with prospective effect.

✓ Commissioner of Income Tax v. Savi Commercial P. Ltd. [(2015) 373 ITR 243]*: The Court did not find it necessary to determine the correctness of this submission, as the assessee’s admission was a crucial factor in determining the principal business.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• The assessee’s admission before the assessing officer that share trading was its sole business.
• The fact that the assessee paid out significantly more interest than it received, indicating that its lending activities were not its primary business.
• The legislative intent behind the amendment to Section 73, which was clearly intended to be prospective, not retrospective.
• The fact that Parliament was aware of the provisions of Section 73 when it amended Section 43(5) in 2005, yet it did not make a corresponding amendment to Section 73 until 2015.

Sentiment Analysis of Reasons Given by the Supreme Court

Fact:Law Ratio

The court’s decision was more influenced by the factual aspects of the case, such as the assessee’s admission and the interest discrepancy, than the legal considerations.

Logical Reasoning

Key Takeaways

• The principal business of a company is determined by its activities and self-declaration, not just by the deployment of funds.
• An admission made by an assessee before the assessing officer is a significant piece of evidence.
• Amendments to tax laws are generally prospective unless expressly stated to be retrospective or clarificatory.
• Trading in shares was considered a speculative business until the amendment to Section 73 in 2015.
• Losses from share trading cannot be set off against profits from futures and options trading, as the latter is not considered speculative.

Directions

No specific directions were given by the Supreme Court in this case.

Specific Amendments Analysis

The judgment discusses the amendments to Section 43(5) and Section 73 of the Income Tax Act, 1961. The amendment to Section 43(5) by the Finance Act, 2005, with effect from 1 April 2006, excluded eligible transactions in derivatives from being considered speculative transactions. The amendment to the Explanation to Section 73 by the Finance (No. 2) Act, 2014, with effect from 1 April 2015, excluded trading in shares from the deeming fiction of speculative business for certain companies. The court held that the latter amendment was not intended to be retrospective and was to take effect from the date stipulated by Parliament.

Development of Law

The ratio decidendi of this case is that the amendment to the Explanation to Section 73 of the Income Tax Act, 1961, by the Finance (No. 2) Act, 2014, was not intended to be retrospective. This clarifies that the treatment of share trading as a speculative business for set-off purposes was to continue until 1 April 2015. The judgment also reinforces the principle that amendments to tax laws are generally prospective unless explicitly stated otherwise. There is no change in the previous position of law, but the court has clarified the interpretation of the amendments to Section 43(5) and Section 73.

Conclusion

The Supreme Court dismissed the appeal, upholding the High Court’s decision. The court held that the principal business of the assessee was not the granting of loans and advances, and the amendment to Section 73 was not intended to be retrospective. Therefore, the loss from share trading, which was considered a speculative business, could not be set off against the profits from futures and options trading. The judgment clarifies the interpretation of the amendments to Section 43(5) and Section 73 of the Income Tax Act, 1961, and reinforces the principle that amendments to tax laws are generally prospective.