1 REPORTABLE IN SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION Civil Appeal No(s). 4483 OF 2019 (Arising out of SLP(C) No. 20017 of 2017) Snowtex Investment Limited Appellant(s) Versus Principal Commissioner of Income Tax, Central-2, Kolkata Respondent(s) JUDGMENT Dr Dhananjaya Y Chandrachud, J 1 Leave granted. 2 This appeal arises from judgment of Division Bench of High Court of Calcutta dated 22 November 2016 in appeal under Section 260A of Income Tax Act, 1961. 3 appellant was registered as non-banking financial company under Reserve Bank of India Act, 1934. appellant filed its return of income on 27 September 2008. return was processed under Section 143(1) on 8 October Signature Not Verified 2009. On case being selected for scrutiny, notice was issued under Section Digitally signed by MANISH SETHI Date: 2019.05.13 16:56:12 IST Reason: 143(2). By order dated 14 December 2010 assessing officer recorded that principal business activity of assessee is trading in shares and securities. loss from share trading was held to be speculation loss. assessing 2 officer held that in view of 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 profits from business. 4 Against order of assessing officer for assessment year 2008-2009, appeal was filed before CIT(A). CIT(A) held that assessee derived income from trading in derivatives and share business along with dividend and interest and was NBFC. CIT(A) inter alia held that provisions of Section 43(5) came into existence with effect from 1 April 2006 and hence, transactions in futures and options must be treated as business income as distinct from trading in shares. Consequently, CIT(A) rejected contention of assessee that assessing officer had erred in not allowing speculation loss to be set off against profits of trading in futures and options. 5 Revenue appealed against decision of CIT(A). Income Tax Appellate Tribunal1 by its decision dated 6 November 2015 held that claim of assessee for setting off loss from share trading should be allowed against profits from transactions in futures and options, since character of activities was similar. ITAT held that assessee which was in business of share trading had treated entire activity of purchase and sale of shares which comprised both of delivery based and non-delivery based trading, as one composite business. 6 Revenue appealed before High Court which by its judgment dated 22 November 2016 accepted its submission. High Court held that profits 1 ITAT 3 which had arisen from trading in futures and options were not profits from speculative business. Hence loss on trading in shares could not be set off against profits arising from business of futures and options. 7 dispute in present case pertains to assessment year 2008-2009. 8 Mr. R.V. Easwar, learned senior counsel appearing on behalf of appellant has urged two submissions in order to assail decision of High Court. First, it has been submitted that Explanation to Section 73 as it stood prior to its amendment with effect from 1 April 2015 by Finance (No. 2) Act, 2014 contemplated that where any part of business of company, other than company, principal business of which is granting of loans and advances, consists in purchase of shares of other companies, company shall, for purposes of this section, be deemed to be carrying on speculation business. In other words, explanation as it then stood clarified that where principal business of company consists of grant of loans and advances, deeming fiction provided in explanation would not be attracted. In present case, it was urged that principal business of assessee for AY 2008-2009 was of granting loans and advances. This submission was sought to be buttressed on basis of figures drawn from balance sheet of appellant as extracted in order of assessment. Those figures, it has been submitted, indicate that for financial year ending 31 March 2008, following position emerges: (i) total funds available Rs 13.48 crores; (ii) Funds deployed for loans and advances - Rs 11.32 crores (iii) Percentage 84% 4 (iv) Deployed for share business Rs 1.28 crores (v) Percentage 9.5% (vi) Unsecured loans Rs 5.92 crores Consequently, submission which has been urged under first head is that assessee having deployed substantial part of its funds during assessment year for loans and advances, High Court erred in accepting view of assessing officer. It was urged that assessee has certificate as NBFC under provisions of Reserve Bank of India Act 1934. 9 second limb of submissions, which is in alternative, is that provisions of Explanation to Section 73 were amended so as to bring trading in shares within its purview by Finance (No. 2) Act 2014. It was urged that this amendment should be construed to be retrospective, though Parliament has brought it into force with effect from 1 April 2015. In this regard, it was submitted that insofar as trading in derivatives is concerned, provisions of Section 43(5) were amended by Finance Act, 2005 to provide that eligible transaction in respect of trading in derivatives of securities carried out on recognised stock exchange shall not be deemed as speculative transaction. It was urged that there was clear anomaly in provisions of law. anomaly, it was submitted, consisted in fact that delivery based trading in shares was treated as speculative business until amendment to Explanation to Section 73 was brought into force on 1 April 2015. On other hand, what was essentially speculative and non-delivery based, namely, trading in derivatives on recognised stock exchanges was removed from purview of business of speculation with effect from 2006-2007. Reliance has been placed on Circular of 5 CBDT dated 27 February 2006 explaining provisions of Finance Act, 2005 and on Circular dated 21 January 2015 explaining provisions of Finance (No. 2) Act, 2015. Hence, it is urged that even though Parliament brought into force amendment to Explanation to Section 73 with effect from 1 April 2015, this would not affect judicial authority of this Court to indicate that amendment must, by its very nature, be regarded as retrospective having regard to intent and purpose of amendment. Reliance was placed on decisions of this Court in Allied Motors (P) Ltd. v. Commissioner of Income Tax, Delhi2 and in Commissioner of Income Tax v. Alom Extrusions Ltd.3. 10 On other hand, it has been urged on behalf of Revenue by Mr Arijit Prasad that in evaluating what constitutes principal business of assessee within meaning of Explanation to Section 73, High Court has relied on two significant circumstances. first circumstance is admission of assessee before assessing officer to effect that share trading was sole business of assessee during assessment year in question. second circumstance is that while assessee had received interest on loans of Rs 2,21,917, it had paid out interest of Rs 62,84,111.60. Revenue has urged that figures from balance sheet of assessee would indicate that while assessee had borrowed unsecured loans to tune of Rs 5.92 crores and had given loans and advances of Rs 11.32 crores, this included interest free lending of Rs. 9.58 crores. In this background, High Court came to conclusion that principal business for assessment year was not granting of loans and advances. This finding was supported on above two 2 (1997) 3 SCC 472 3 (2010) 1 SCC 489 6 grounds. 11 On second issue of claim of retrospectivity, it was urged that though Court has power in appropriate case, based on intent of legislature to hold that amendment is retrospective, position in this case is quite distinct. In present case, it was submitted that when provisions of Section 43(5) were amended with effect from 2006 by Finance Act 2005, legislature took note of provisions of Section 73. Yet it did not consider it appropriate to make corresponding amendment in Explanation to Section 73 and it is only nine years thereafter that amendment to latter provision was introduced. Hence, it was urged that intent of legislature was not to make amendment to Explanation to Section 73 retrospective. 12 Reliance has been placed on decisions of this Court in Commissioner of Income Tax (Central)-I, New Delhi v. Vatika Township Private Ltd.4 and on judgment of three judge Bench of this Court in Vijay Industries v Commissioner of Income Tax5. 13 These submissions now fall for consideration. 14 provisions of Section 43(5) were amended by Finance Act, 2005. Prior to amendment, Section 43(5) defined speculative transaction to mean transaction in which contract for purchase or sale of any commodity including stocks and shares is settled otherwise than by actual delivery or transfer of commodity or scrips. impact of amendment by Finance Act, 2005 was that eligible transaction on recognised stock 4 (2015) 1 SCC 1 5 (2019) 4 SCC 184 7 exchange in respect of trading in derivatives was deemed not to be speculative transaction. With effect from 1 April 2006, trading in derivatives was by deeming fiction not regarded as speculative transaction when it was carried out on recognized stock exchange. 15 circular of CBDT dated 27 February 2006 indicated that this amendment was occasioned by changes which were introduced by SEBI both at legal and technological level for bringing in greater transparency in market for derivatives. Explaining reason for amendment, Circular states: 3.10 Excluding trading in derivatives on recognised stock exchanges from ambit of speculative transactions Existing provisions of clause (5) of section 43 define speculative transaction to mean transaction in which contract for purchase or sale of any commodity including stocks and shares is settled otherwise than by actual delivery or transfer of commodity or scrips. proviso to section 43(5) lists out certain transactions which are not deemed to be speculative transactions. Systemic and technological changes introduced by SEBI have resulted in sufficient transparency in stock markets and have to large extent curbed scope for generating fictitious losses through artificial transactions or shifting of incidence of loss from one person to another. screen based computerized trading provides for audit trail. In wake of these developments, present distinction between speculative and non-speculative transactions, in respect of trading in derivatives of securities is losing relevance. Finance Act, 2005 has, accordingly, amended section 43(5) to provide that eligible transaction in respect of trading in derivatives of securities carried out on recognised stock exchange shall not be deemed as speculative transaction. notification prescribing rules and conditions to be fulfilled by stock exchange to be recognized by Central Government for purposes of section 43(5) [i.e., Rules 6DDA and 6DDB of Income-tax Rules, 1962] has been published in Official Gazette on 1st July, 2005 vide S. O. No. 932(E). Applicability: From A.Y. 2006-07 onwards. 16 Section 73 deals with losses from speculation business. Under sub- 8 Section (1) of Section 73, loss computed in relation to speculation business carried on by assessee can only be set off against profits and gains of another speculation business. Explanation to Section 73 contains deeming fiction where certain businesses shall, for purposes of section, be deemed to be speculation businesses. Explanation also carves out exception in respect of certain specified businesses which shall lie outside fold of deeming fiction. Prior to amendment of Explanation by Finance (No. 2) Act 2014 with effect from 1 April 2015, business of trading in shares carried on by company was not excluded from its purview. However, by amendment which was brought into force from 1 April 2015, explanation to Section 73 reads as follows: Explanation - Where any part of business of company (other than company whose gross total income consists mainly of income which is chargeable under heads Interest on securities , Income from house property , Capital gains and Income from other sources , or company principal business of which is business of trading in shares or banking or granting of loans and advances) consists in purchase and sale of shares of other companies, such company shall, for purposes of this section, be deemed to be carrying on speculation business to extent to which business consists of purchase and sale of such shares. 17 While on one hand, Parliament amended Section 43(5) with effect from 1 April 2006 as result of which trading in derivatives on recognised stock exchanges fell outside purview of business of speculation, corresponding amendment to Explanation to Section 73 in respect of trading in shares was brought in only with effect from 1 April 2015. 18 submission which has been urged on behalf of appellant is that there was no logical reason to exclude from purview of speculation business, trading in shares, whereas trading in derivatives was excluded, as we have seen, 9 from ambit of Section 43(5) after 1 April 2006. We will consider this aspect of alternative submission subsequently. 19 At this stage, we will deal with first submission which is that Explanation to Section 73, as it stood prior to amendment, excluded from deeming definition of speculation business, situation where principal business of company was granting of loans and advances. 20 In present case, there is no dispute about fact that assessee was registered as NBFC under provisions of Reserve Bank of India Act, 1934. Section 73(1) does not define specifically, circumstances in which principal business of company would be regarded as business of specified description. In present case, principal business was urged to be granting of loans and advances. We cannot accept this submission and are of view that High Court was justified in rejecting it. circumstance, which in our view is of crucial significance, is how assessee construed its own line of business. High Court has extracted what assessee stated before assessing officer namely: in our case share trading is our sole business during assessment year under concern . From above statement of assessee, it is evident that assessee itself stated that share trading was its sole business during assessment year in question i.e. A.Y. 2008-2009. 21 Mr. R.V. Easwar, learned senior counsel submits that while assessee did make this statement before assessing officer, it should not be regarded as 10 conclusive. It was urged that submission of assessee was also rejected on basis that while it had received interest on loans of Rs 2.21 lakhs, it had paid out interest of Rs 62.84 lakhs. submission is that, it is not merely receipt of interest on loans and advances, but deployment of funds which should have bearing in determining principal nature of business. In this context, reliance was placed on view taken by Division Bench of Calcutta High Court in Commissioner of Income Tax v. Savi Commercial P. Ltd.6. High Court, while dealing with provisions of Explanation to Section 73, observed that income alone cannot be taken into account and where activity of granting loans and advances is on larger scale than business of buying and selling shares that would be important indicator. In other words, it was held that profit alone cannot be made distinctive factor. 22 correctness of this aspect of submission which has been urged by learned senior counsel need not be determined in facts of present aspect, since we are of view that High Court was justified in relying upon specific admission of assessee that during assessment year in question, its sole business was of dealing in shares. We must also advert to circumstance that while assessee had furnished loans and advances of Rs 11.32 crores during assessment year, this included interest free lending to extent of Rs 9.58 crores. Having regard to these facts and circumstances, specific admission of assessee before assessing officer assumes significance. assessee made admission on statement of fact which in our view, must bind it. In this view of matter, principal business of 6 (2015) 373 ITR 243 11 assessee was not of granting loans and advances during assessment year. As consequence, deeming fiction under Section 73 would be attracted. Hence, finding of High Court, on first aspect, cannot be faulted. 23 That leads Court to second submission which has been canvassed in course of hearing of appeal. provisions of Section 43(5) were amended with effect from 1 April 2006. Finance Act, 2005 contained following memorandum explaining amendment: proposed amendment, therefore, seeks to provide that eligible transaction carried out in respect of trading in derivatives in recognised stock exchange shall not be deemed to be speculative transaction. proposed amendment also seeks to notify relevant rules etc. regarding conditions to be fulfilled by recognised exchanges in this regard. Further it is also proposed to amend sub- section (4) of section 73 so as to reduce period of carry forward of speculation losses from eight assessment years to four assessment years. 24 While amending provisions of Section 43(5), Parliament indeed was cognizant of provisions which were contained in Section 73(4). above memorandum indicates that provisions of Section 73(4) were proposed to be amended so as to reduce period of carry forward of speculation losses from eight assessment years to four assessment years. Having introduced amendment to Section 73(4), Parliament would have, if it intended to bring about parity with provisions of Section 43(5) introduced specific amendment. Parliament, however, did not do so by Finance Act 2005. It was only with effect from 1 April 2015 that amendment was brought about to exclude trading in shares from deeming provision contained in Explanation to Section 73. Parliament may have had reasons to allow situation to continue until amendment was brought into force, including its view in regard 12 to stability of stock market. Insofar as this Court is concerned, It would be difficult to hold that provisions which were contained in Finance Act (No. 2) 2014 insofar as they amended Explanation to Section 73 were clarificatory or that notwithstanding provision by which amendment was brought into force with effect from 1 April 2015, that it should be given retrospective effect. We reject second submission. 25 Even though amendment, including one in context of Finance Act is brought into force with effect from stipulated date, Court may as exercise of statutory interpretation, determine whether amendment is clarificatory or was intended to operate with retrospective effect. Such exercise was carried out by this Court in its decision in Allied Motors (supra). Interpreting provisions of Section 43B, this Court held thus: 10 While interpreting Section 43-B without first proviso some of High Courts, in order to prevent undue hardship to assessee, had taken view that Section 43-B would not be attracted unless sum payable by assesee by way of tax, duty, cess or fee was payable in same accounting year. If tax was payable in next accounting year, Section 43-B would not be attracted. This was done in order to prevent any undue hardship to assessees such as ones before us. Memorandum of Reasons takes note of combined effect of Section 43-B and first proviso inserted by Finance Act, 1987. After referring to fact that first proviso now removes hardship caused to such taxpayers it explains insertion of Explanation 2 as being for purpose of removing any ambiguity about term any sum payable under clause (a) of Section 43-B. This Explanation is made retrospective. Memorandum seems to proceed on basis that Section 43-B read with proviso takes care of hardship situation and hence Explanation 2 can be inserted with retrospective effect to make clear ambit of Section 43-B(a). Therefore, Section 43-B(a), first proviso to Section 43-B and Explanation 2 have to be read together as giving effect to true intention of Section 43-B. If Explanation 2 is retrospective, first proviso will have to be so construed. Read in this light also, proviso has to be read into Section 43-B from its inception along with Explanation 2. 26 decision of Court was intrinsically based on holistic reading of provisions of Section 43-B. memorandum proceeded on basis that 13 Section 43-B read with proviso was intended to alleviate situation of hardship. Hence, Explanation 2 was enacted with retrospective effect to clarify ambit of Section 43-B(a). This Court held that if Explanation 2 is retrospective, first proviso would be similarly so construed. This position was re-enforced by departmental circular. Court, in other words, interpreted intent of Parliament. 27 similar line of enquiry has been adopted in subsequent decision of this Court in Alom Extrusions (supra). In that case, while construing provisions of Section 43-B, this Court held: 25. Before concluding, we extract hereinbelow relevant observations of this Court in CIT v. J.H. Gotla (1985)7 which reads as under: (SCC p. 360, para 47) 47. we should find out intention from language used by legislature and if strict literal construction leads to absurd result i.e. result not intended to be subserved by object of legislation found in manner indicated before, and if another construction is possible apart from strict literal construction then that construction should be preferred to strict literal construction. Though equity and taxation are often strangers, attempts should be made that these do not remain always so and if construction results in equity rather than in injustice, then such construction should be preferred to literal construction. test to be applied is essentially one of intent of legislature. 28 In more recent decision in Commissioner of Income Tax v. Vatika Township Pvt. Ltd.8, Constitution Bench of this Court held thus: 42.1. Notes on Clauses appended to Finance Bill, 2002 while proposing insertion of proviso categorically states that this amendment will take effect from 1.6.2002 . These become epigraphic 9 words, when seen in contradistinction to other amendments specifically stating those to be clarificatory or retrospectively depicting clear intention of legislature. It can be seen from same notes that few other amendments in Income Tax Act made by same Finance Act specifically making those amendments retrospective. For example, clause 40 seeks to amend S.92-F. Clause (iii-a) of S.92-F is amended so as to 7 (1985) 4 SCC 343 8 (2015) 1 SCC 1 9 Ed.: As per Oxford Dictionary, epigraphic here means: intending to suggest theme or purpose of amendment 14 clarify that activities mentioned in said clause include carrying out of any work in pursuance of contract. (emphasis supplied). This amendment takes effect retrospectively from 1-4-2002. Various other amendments also take place retrospectively. Notes on Clauses show that legislature is fully aware of three concepts: (i) prospective amendment with effect from fixed date; (ii) retrospective amendment with effect from fixed anterior date; and (iii) clarificatory amendments which are retrospective in nature. 29 In M/s. Vijay Industries (supra), decided on 1 March 2019, three judge Bench of this Court held that provisions of Section 80AB which were introduced by Finance (No. 2) Act, 1980 with effect from 1 April 1981 could not be regarded as clarificatory in nature. Court held that provision was made with prospective effect and amendment would not apply to assessment years 1979-1980 and 1980-1981 because amended provision was brought on statute book after assessment years in question. 30 In conclusion, we therefore, hold that amendment which was brought by Parliament to Explanation to Section 73 by Finance (No 2) Act 2014 was with effect from 1 April 2015. In its legislative wisdom, Parliament amended Section 43(5) with effect from 1 April 2006 in relation to business of trading in derivatives, Parliament brought about specific amendment in Explanation to Section 73, insofar as trading in shares is concerned, with effect from 1 April 2015. latter amendment was intended to take effect from date stipulated by Parliament and we see no reason to hold either that it was clarificatory or that intent of Parliament was to give it retrospective effect. 31 consequence is that in A.Y. 2008-2009, loss which occurred to assessee as result of its activity of trading in shares (a loss arising from business of speculation) was not capable of being set off against profits which 15 it had earned against business of futures and options since latter did not constitute profits and gains of speculative business. 32 For reasons we have indicated, we find no error in decision of High Court. appeal is, accordingly, dismissed. There shall be no order as to costs. 33 Pending application(s), if any, shall stand disposed of. . ................................J. (Dr Dhananjaya Y Chandrachud) ...............................J. (Hemant Gupta) New Delhi April 30, 2019 16 ITEM NO.15 COURT NO.9 SECTION XVI S U P R E M E C O U R T O F I N D I RECORD OF PROCEEDINGS Petition for Special Leave to Appeal (C) No. 20017/2017 (Against Final judgment and order dated 22.11.2016 passed by Hon ble High Court of Calcutta in ITAT No. 199 of 2016) M/S SNOWTEX INVESTMENT LIMITED Petitioner(s) VERSUS PRINCIPAL COMMISSIONER OF INCOME TAX, CENTRAL -2, KOLKATA Respondent(s) Date : 30-04-2019 This petition was called on for hearing today. CORAM : HON'BLE DR. JUSTICE D.Y. CHANDRACHUD HON'BLE MR. JUSTICE HEMANT GUPTA For Appellant(s) Mr. R.V. Easwar, Sr. Adv. Mr. Naveen R. Nath, AOR Ms. Lalit Mohini Bhat, Adv. Mr. Rahul Jain, Adv. Ms. Rubal Bansal, Adv. For Respondent(s) Mr. Arijit Prasad, Sr. Adv. Ms. Rukhmini Bobde, Adv. Mrs. Anil Katiyar, AOR UPON hearing counsel Court made following O R D E R Leave granted. appeal is dismissed in terms of signed reportable judgment. Pending application(s), if any, shall stand disposed of. (MANISH SETHI) (SAROJ KUMARI GAUR) COURT MASTER (SH) BRANCH OFFICER (Signed reportable judgment is placed on file) Snowtex Investment Limited v. Principal Commissioner of Income-tax, Central-2, Kolkata