Supreme Court rules on tax treatment for share trading losses

The Supreme Court upheld the High Court's decision, affirming that the appellant's principal business was share trading, not granting loans and advances, and the loss from speculation could not be set off against business profits. The court also held that the amendment to the Explanation to Section 73, effective from 1 April 2015, was not retrospective. Consequently, the appeal was dismissed, and the High Court's judgment was affirmed.

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Issues Involved:
1. Whether the principal business of the appellant was granting loans and advances or share trading.
2. Whether the amendment to the Explanation to Section 73 of the Income Tax Act, 1961, introduced by Finance (No. 2) Act, 2014, should be applied retrospectively.

Issue-wise Detailed Analysis:

1. Principal Business of the Appellant:
The appellant, registered as a non-banking financial company (NBFC) under the Reserve Bank of India Act, 1934, filed its return of income for the assessment year 2008-2009. The assessing officer classified the appellant's principal business activity as trading in shares and securities, treating the loss from share trading as a speculation loss. The appellant contended that its principal business was granting loans and advances, supported by its balance sheet figures showing substantial funds deployed in loans and advances. However, the High Court rejected this contention, emphasizing the appellant's admission that share trading was its sole business during the assessment year in question. The appellant's significant interest-free lending further supported this conclusion. Consequently, the High Court held that the principal business of the appellant was not granting loans and advances, and the deeming fiction under Section 73 was applicable, making the loss from speculation not capable of being set off against business profits.

2. Retrospective Application of the Amendment to Section 73:
The appellant argued that the amendment to the Explanation to Section 73, effective from 1 April 2015, should be construed as retrospective. This amendment excluded trading in shares from the purview of speculation business. The appellant highlighted an anomaly where trading in derivatives was excluded from speculation business with effect from 1 April 2006, while trading in shares continued to be treated as speculative until the 2015 amendment. The appellant relied on CBDT Circulars and judicial precedents to support its claim for retrospective application. However, the court rejected this argument, noting that the legislature did not amend the Explanation to Section 73 when it amended Section 43(5) in 2005. The court emphasized that the amendment to Section 73 was intended to take effect from 1 April 2015, and there was no indication of legislative intent for retrospective application. The court cited relevant case law to support its conclusion that the amendment was not clarificatory and could not be applied retrospectively.

Conclusion:
The Supreme Court upheld the High Court's decision, affirming that the appellant's principal business was share trading, not granting loans and advances, and the loss from speculation could not be set off against business profits. The court also held that the amendment to the Explanation to Section 73, effective from 1 April 2015, was not retrospective. Consequently, the appeal was dismissed, and the High Court's judgment was affirmed.

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