Exploring a recent Supreme Court judgement on the determination of principal business, focusing on amendments and their interpretation. The case delves into the nuances of business law and income tax regulations. Dive into the analysis of this crucial legal battle that sheds light on the complexities of defining principal business activities. An enlightening read for anyone keen on understanding legal intricacies.
Facts
- Assessing officer recorded that the principal business activity of the assessee is trading in shares and securities.
- The dispute pertains to assessment year 2008-2009.
- The CIT(A) held that the assessee derived income from trading in derivatives and share business along with dividend and interest and was an NBFC.
- The assessing officer held that activities pertaining to futures and options could not be treated as speculative transactions.
- The loss from share trading was considered a speculation loss.
- The CIT(A) determined that transactions in futures and options must be treated as business income, distinct from trading in shares, in view of Section 43(5) introduced from 1 April 2006.
- Notice was issued under Section 143(2) for scrutiny of the case.
- The Revenue appealed against the decision of the CIT(A) where the loss from speculation was deemed not capable of being set off against profits from business.
- The appellant, registered as an NBFC under the Reserve Bank of India Act, 1934, filed its return of income in September 2008 which was processed under Section 143(1) in October 2009.
- The High Court held that profits from trading in futures and options were not considered profits from a speculative business.
- The ITAT considered the entire activity of the purchase and sale of shares, including delivery and non-delivery based trading, as one composite business for the assessee.
- The Income Tax Appellate Tribunal allowed the assessee to set off the loss from share trading against the profits from transactions in futures and options, citing the similar character of the activities.
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Arguments
- The petitioner argued that the recent amendment to the Explanation to Section 73 should be interpreted retrospectively, despite being brought into force from 1 April 2015.
- The argument was supported by figures from the balance sheet of the appellant, showing a significant deployment of funds for loans and advances during the relevant assessment year.
- The petitioner contended that the High Court erred in accepting the assessing officer’s view, pointing out anomalies in the treatment of delivery-based trading in shares as speculative until the 2015 amendment.
- It was highlighted that the provisions of law regarding trading in derivatives were amended in 2005, exempting eligible transactions from being deemed speculative.
- The petitioner disputed the conclusive nature of their statement before the assessing officer and referred to relevant CBDT Circulars to support their arguments.
- Two main submissions were made to challenge the High Court’s decision: firstly, regarding the deemed speculation business under Section 73, and secondly, the impact of the 2014 amendment on trading in shares.
- The petitioner emphasized that their principal business for the assessment year was granting loans and advances, holding a certificate as an NBFC under RBI Act 1934.
- The argument was made that despite the 2015 amendment to Section 73, the amendment should be treated as retrospective based on its intent and purpose.
- Previous decisions of the Court were cited to support the argument that the deeming fiction in the explanation would not be attracted if the principal business involves granting loans and advances.
- The High Court has considered two significant circumstances in evaluating what constitutes the principal business of the assessee
- The Revenue, represented by Mr. Arijit Prasad, has argued in favor of their interpretation of the principal business of the assessee
- The High Court’s evaluation has been questioned and supported by arguments presented by both parties
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Analysis
- The High Court was justified in relying on the specific admission of the assessee that its sole business during the assessment year was dealing in shares.
- The Explanation to Section 73, prior to the amendment, excluded a situation where the principal business of a company was granting loans and advances.
- The High Court observed that the activity of granting loans and advances should be on a larger scale than buying and selling shares to be considered the principal business.
- Loss from speculation business can only be set off against profits from another speculation business under Section 73(1).
- The deployment of funds, not just the receipt of interest, is crucial in determining the principal nature of the business.
- Parliament amended Section 43(5) in 2006 taking note of the provisions of Section 73.
- Profit alone cannot be the distinctive factor in determining the principal business of a company.
- The High Court emphasized the importance of the assessee’s admission that share trading was its sole business during the relevant assessment year.
- The Explanation to Section 73 underwent an amendment in 2015 to exclude trading in shares from the deeming provision.
- The High Court found that the principal business of the assessee was not granting loans and advances during the assessment year.
- Parliament did not make the amendment to the Explanation to Section 73 retrospective despite bringing it into force in 2015.
- The amendment was not considered clarificatory and was not intended to have retrospective effect.
- The assessee’s own statement regarding their line of business is crucial.
- A specific amendment was introduced in Section 43(5) in parity with the provisions of Section 73.
- The High Court’s decision on the interpretation of the law was deemed appropriate and cannot be faulted.
- In Commissioner of Income Tax v. Vatika Township Pvt. Ltd., a Constitution Bench of the Court held that the epigraphic amendment suggested the theme or purpose of the amendment.
- In M/s. Vijay Industries case, it was held that Section 80AB provisions introduced in 1980 were not clarificatory in nature.
- The decision in Alom Extrusions case stated that the amendment with prospective effect would not apply to assessment years prior to its enactment.
- The intent of the legislature is the essential test to be applied in interpreting the provisions.
- Section 43(5) previously defined a ‘speculative transaction’ as a transaction where a contract for the purchase or sale of a commodity, including stocks and shares, is settled without actual delivery or transfer.
- This definition excluded transactions where actual delivery or transfer of the commodity or scrips took place.
- The amendment likely made changes to this definition, expanding or altering the scope of what constitutes a speculative transaction.
- The petitioner relied on the decision of the Madras High Court in the case of CIT v. Sairam Estates Pvt. Ltd.
- The Calcutta High Court held that the Madras High Court decision was distinguishable and not applicable to the case at hand.
- The principle enunciated in the Madras High Court case did not apply to the facts of the current case.
- Therefore, the Court did not place reliance on the Madras High Court decision in reaching its conclusion.
- In A.Y. 2008-2009, the loss from trading in shares by the assessee was not able to offset the profits from futures and options trading.
- The amendment was not clarificatory and was not intended to have retrospective effect according to Parliament.
- The profits from the business of futures and options did not constitute profits and gains of a speculative business.
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Decision
- The High Court’s decision was found to have no error based on the reasons provided.
- Any pending application(s) will be considered disposed of.
- No costs will be awarded.
- The appeal has been dismissed in accordance with the findings.
Case Title: M/S SNOWTEX INVESTMENT LIMITED Vs. PRINCIPAL COMMISSIONER OF INCOME TAX, CENTRAL -2, KOLKATA
Case Number: C.A. No.-004483-004483 / 2019
