CHANDRA REDDY C.J. - In compliance with the order of this court under section 66(2) of the Indian Income-tax Act the following questions have been referred to this court for its opinion.
'(i) Whether, on the facts and in the circumstances of the case, the transactions of purchase and sale of 650 bales of gunny bags by the assessee were speculative transaction within the meaning of section 24(1) of the Income-tax Act and
(ii) Even otherwise, whether the assessee is not entitled to a set-off of this loss against his other business income falling under section 10 of the Act ?'
The material facts may be briefly narrated. The assessee carries on business as merchant and commission agent in several commodities, both ready business and forward business being done in such commodities. In the assessment year 1954-55 for which the 'previous year' is the Dewali year ended November 6, 1953, the assessee adjusted a loss of Rs. 28,839 sustained in certain forward transactions relating to new gunnies against the other profits earned in other business. Originally, he had entered into forward contracts for the purchase of 777 bales of gunnies and, under these contracts, the assessee had the option either to take delivery of the goods or to pay the difference on mill contract rate basis at any time before the date of settlement. He took delivery of only 127 bales out of the 777 bales covered under the forward contracts and settled to the difference as above in regard to the balance amounting to Rs. 28,839. He claimed to be entitled to take into account this loss in computing his business profits. The taxing department rejected this contention on the ground that the assessee was not entitled to take into consideration the loss incurred by him in transactions of a speculative nature by reason of proviso (1) to section 24 of the Indian Income-tax Act. This was confirmed on appeal by the Appellate Assistant Commissioner and by the Income-tax Appellate Tribunal on further appeal.
Though the first question relates to the issue whether the loss arose out of speculative business or not, that issue is not pressed before us.
The only point argued by the learned counsel for the assessee is whether the assessee is entitled to have the loss sustained by him in a speculative business set off against income falling under the other items of his business. This question lies in a narrow compass and is easily answered with reference to section 24(1), proviso, of the Indian Income-tax Act. Section 24(1) enacts :
'24. (1) Where any assess sustains a loss of profits or gains in any year under any of the heads mentioned in section 6, he shall be entitled to have the amount of the loss set of against his income, profits or gains under any other head in that year.'
The proviso to this section, which was incorporated in the Indian Income-tax Act in 1953, is to the following effect :
'Provided that in computing the profits and gains chargeable under the head profits and again of business, profession or vocation, any loss sustained in speculative transactions which are in the nature of a business shall not be taken into account except to the extent of the amount of profits and gains, if any, in any other business consisting of speculative transaction.'
It is seen that this proviso lays down the mode in which the profits and gains of business, profession, or vocation should be computed. The purpose of the proviso is that the loss sustained in a speculative business should be set off only against the profits of a business of the same nature under the same head.
The point sought to be presented on behalf of the assessee is that this proviso should come into operation only in cases where the assessee seeks to come within the purview of section 24(1). In other words, the proviso will come into operation only when the relief sought for by an assessee is to set off the speculative loss under the head of business against his income arising under other heads, but where he does not claim the right conferred under section 24(1), the restriction contemplated by this proviso cannot be attracted. It is argued by the learned counsel that the function of a proviso is to carve out of the main section which otherwise would fall within the scope of it and that the provide cannot be construed as operating beyond the main section.
No exception could be taken to this proposition. It is now well settled that the proviso would not operate within the sphere occupied by the main section and should not normally be extended beyond the main section, except for compelling reasons to the contrary. As pointed out by Chagla C.J. in Keshavlal Premchand v. Commissioner of Income-tax, the proviso cannot deal with any field other than the one which is the subject-matter of the main section; it is the duty of the court to give to the proviso as far as possible a meaning so restricted as to bring it within the ambit and purview of the section itself. The learned judge added :
'If a proviso is capable of a wider connotation and is also capable of a narrower connotation, if the narrower connotation brings it within the purview of the section, then the courts must prefer the narrower connotation rather than the wider connotation.'
We may also usefully quote the observations of Lord Macmillan in M. & S. M. Railway v. Bezwada Municipality in this context :
'The proper function of a proviso is to except and deal with a case which would otherwise fall within the general language of the main enactment, and its effect is confined to that case. Where, as in the present case the language of the main enactment is clear and unambiguous, a proviso can have no repercussion on the interpretation of the main enactment, so as to exclude from it by implication what clearly falls within its express terms.'
Therefore, the law is well settled that normally the proviso should be looked upon as a proviso to the section in which it appears and, before the proviso can have application, the section itself must apply and cannot be regarded as an independent enacting clause.
It is equally clear that the legislature may enact a substantive provision in the garb of the proviso and if it appears from the language of the proviso that its application could not be restricted to the main section, the court, must look upon it as a substantive provision if it has a clear meaning.
Having regard to the clear and unambiguous language of the proviso and the scheme of the Act, there can be little doubt that the legislature enacted it as a substantive provision and it modifies the computation of the profits and gains under the head 'profits and gains of business, profession or vocation'. The contention that the intendment of the proviso is to limit the claim to set-off of losses in speculative business against profits arising out of speculative transactions is foreign to other heads. There is no question of making gains in speculation under any of the heads enumerated in section 6 except the head 'business, profession of vocation.' There would be no element of speculation present in items other then number four described in that section. Section 6 of the Indian Income-tax Act sets out the heads of income chargeable to income-tax, one of them being under the fourth head 'profits and gains of business, profession or vocation'. Section to makes the tax payable by an assessee under the head 'profits and gains of business, profession or vocation' in respect of the profits and gains of any business profession or vocation. Section 10(2) provides for certain deductions in calculating the profits and gains from that head.
We shall now come to section 24, which deals with set-off loss in computing the aggregate income. The proviso enables an assessee to set off the loss sustained in speculative business against profits from business, profession or vocation of a speculative nature. The language of this proviso does not leave any scope for the argument that the losses sustained in speculative business could be set off against any other income under the head of business, profession or vocation. It restricts the setting off of speculative losses against profits in speculative business, profession or vocation. If the assessee is permitted to claim a set-off in regard to losses sustained in a speculative business against profits from transactions which are not of a speculative character it would be completely ignoring the proviso. The proviso would become a dead letter as no effect would be given to it if set-off is allowed even as against profits from business, which is not speculative. It would be completely nullifying the object of the proviso.
This view of ours gains support from Keshavlal Premchand v. Commissioner of Income-tax, which contains an elaborate discussion on the topic. In similar circumstances, it was laid down by Chagla C.J., who spoke for the court, that losses in speculative transactions could be set off only against profits and gains in any other business consisting of speculative transactions. There, it was ruled that this proviso amounted to a substantive provision dealing with the mode of computing the profits and gains chargeable under the head 'profits and gains of business, profession or vocation' and that as such it would govern section 10 of the Indian Income-tax Act which deals with computation of profits and gains under the fourth head falling under section 6 of the Act.
This was followed by the Punjab High Court in Commissioner of Income-tax v. Hukam Chand Dalal and Manohar Lal Munshi Lal v. Commissioner of Income-tax. This view was shred by the High Court of Madhya Pradesh in Commissioner of Income-tax v. Ramgopal Kaniyalal. Our attention was not drawn to any decision which has taken a contrary view. Apart from the authority cited above, the language of the proviso does not permit any other conclusion to be reached.
In fine, our answer to the question raised in the reference is that it is not open to an assessee to adjust the loss sustained in speculative business against his income derived from other businesses which are not of a speculative character but he could lay claim to a set-off only against profits got from a business of a speculative nature.
We accordingly answer the question referred to us against the assessee and in favour of the department. The assessee will pay the costs of the department. Advocates fee is fixed at Rs. 200 (rupees two hundred.)
Questions answered accordingly.