BHARGAVA, J. - The question referred by the Income-tax Appellate Tribunal for the opinion of this court is :
'Whether, in the circumstances of the case, the losses of Rs. 26,843 in respect of the assessment year 1945-46 and of Rs. 28,224 in respect of the assessment year 1946-47 which were sustained by the assessee in Indian States were rightly allowed by the Tribunal to be adjusted against the profits from transactions in British Indian while computing the assessees income, profits and gains under the head `profits and gains of business profession or vocation ?'
The assessee is a Hindu undivided family carrying on business in grain, both ready and forward, at various places. The headquarters of the assessee are at Hapur. The transactions for purchase and sale are entered into in the various markets within British India as well as in Indian States. In the two assessment years 1945-46 and 1946-47, the assessee earned profits in respect of transactions in British India but during the year 1945-46 a sum of Rs. 26,843 was sustained as loss by the assessee in transactions entered into in Indian States and another loss of Rs. 28,224 was incurred in respect of the assessment year 1946-47. The assessee claimed that these losses should be adjusted towards the income of the transactions in British India. The claim was rejected by the Income-tax Officer and that decision was upheld by the Appellate Tribunal however allowed the claim by the Appellate Assistant Commissioner. In second appeal the Income-tax Appellate Tribunal, however, allowed the claim relying on a decision of the Bombay High Court in Commissioner of Income-tax v. Murlidhar Mathurawalla Mahajan Association. The Tribunal took notice of a decision of this court in Mishrimal Gulab Chand of Beawar, In re, and held that that case was distinguishable and not applicable. In these circumstances the Tribunal has referred for our opinion the question quoted above.
On the point raised by this question our attention was drawn to a number of decisions of various High Courts including two decisions of this court. The earlier of those two decisions is the one already mentioned by the Tribunal in its appellate order. Thereafter a second decision given by this court is reported as Raghunath Prasad v. Commissioner of Income-tax. In this latter case, almost all the decisions of the other High Courts, which have been brought to our notice, were discussed and, after discussing all those cases, this court disagreed with the other High Courts and affirmed the earlier decision of this court in the case of Mishrimal Gulab Chand, In re, cited above. In the case of Raghunath Prasad the question whether the loss should be set off was examined in two alternative and separate aspects. One point that came up for examination was, 'Whether the set-off of losses incurred in Indian States against profits earned in British India was barred under the proviso to section 24(1) of the Income-tax Act and on this point the court held that the proviso did bar the claim for such a set-off.' The second point dealt with in that case was that, 'even if the proviso to section 24 did not apply such a claim could not be allowed in view of the provisions contained in section 14(2)(c) of the Income-tax Act as it stood at the relevant time'.
On the first point decided by this court, the view expressed was that even though the main provision in section 24(1) of the Income-tax Act was confined to permit a claim for a set-off of losses incurred under one head mentioned in section 6 against income profits or gains under any other head, the proviso was in wider language and prohibited allowing set-off of losses incurred in an Indian State in respect of income under one head against income earned under the same head in British India.
On the second point, this court held that the effect of the provision contained in section 14(2)(c) of the Income-tax Act was that when computing income profits or gains of a business under section 10, the losses incurred in Indian States in a business could not be taken into account. In one of the judgments delivered in that case, it was said.
'The language of sub-section (1) of section 10 shows that this section lays decided onwn in respect of which profits and gains income-tax is payable by an assessee under the head profits and gains of business profession or vocation. The computation of profits or gains under sub-section (2) of section 10 is confined to the profits or gains which fall within sub-section (1) of that section by the use of the word such. The language of sub-section (1) indicates that it is a general provision making the tax payable in respect of the profits or gains of any business profession or vocation carried on by the assessee. The language of sub-section (2) of section 14 is similar to that of sub-section (1) of section 10 but lays down the contrary rule prescribing the profits or gains in respect of which the tax shall not be payable by an assessee. Clauses (a), (b) and (c) of this sub-section mention three sources of income in respect of which the tax is not payable. This sub-section is therefore, clearly a special provision which apparently conflicts with the general provision contained in sub-section (1) of section 10. Under sub-section (1) of section 10, the tax is made payable in respect of profits or gains of any business, profession or vocation carried on by the assessee which would include income, profits or gains accruing or arising to him even within a Part B State, but the latter is not liable to be taxed under clause (c) of sub-section (2) of section 14. Clause (c) of sub-section (2) of section 14 is therefore, a special provision in respect of the same income profits or gains which are also covered by the general provision in sub-section (1) of section 10. In such a case the principle of generalia specialibus non derogant become applicable... The application of this principle to the case before us necessarily leads to the conclusion that when income profits or gains of a business have to be computed in order to determine whether the tax is payable in respect of it the computation under section 10 must be made after applying the special provision laid down in clause (c) of sub-section (1) of section 14 and, consequently, whenever income is computed under sub-section (2) of section 10, the income, profits or gains covered by clause (c) of sub-section (2) of section 14 cannot be taken into account. If the income profits or gains cannot be taken into account so also the losses must also be disregarded.'
It is to be noticed that, in giving this decision, the court explained the scope of section 10 which is the only section that lays down the method of computing income, profits or gains of a business for purposes of charging it to tax and held that, in making computation under this section, effect must also be given to the exception contained in section 14(2)(c). It was further held that in section 10 itself, the expression 'income, profits or gains' must be interpreted to include the word 'losses' also in as much as if there is more than one business being carried on by the same assessee and he happens to make profits in some business and loss in others, the income for purposes of section 10(1) has to be computed by taking into account not only profits but also the losses, so that losses are really in the nature of negative profits. The same interpretation was applied to the word 'profits and gains' used in section 14(2)(c) and it was held that, when the exception contained in this provisions is applied at the time of computing the income under section 10(1), not only profits but also losses incurred in an Indian State must be excluded. Losses were to be excluded as they were in the nature of negative profits.
It was, however, contended before us that in that decision given by this court in the case of Raghunath Prasad v, Commissioner of Income-tax 1 this court did not consider the effect of the other relevant sections of the Income-tax Act, viz., sections 2(15), 3, 4 and 6, which have been considered by other courts. It, however, appears to us that those provisions do not, in any way, affect the reasoning which was accepted by this court in that case.
Section 2(15) of the Income-tax Act contains the definition of 'total income' as meaning total amount of income, profits and gains referred to in sub-section (1) of section 4 computed in the manner laid down in this Act. This definition very clearly shows that total income does not include all income, profits and gains referred to in sub-section (1) of section 4, but only those which are computed in the manner laid down in the Income-tax Act. In the case of income, profits and gains of a business, the general method of computation is laid down in section 10 and then there is an exception contained in section 14(2)(c). Consequently, 'total income', and defined in section 2(15), will include profits and gains of a business as computed under section 10(1) after applying the provisions of section 14(2)(c).
Section 3 is the charging section and it lays down that 'income-tax shall be charged for any year.... in accordance with, and subject to the provisions of this Act in respect of the total income of the previous year of every individual....' This charging section also, therefore, when laying down that tax is to be charged in respect of the total income, makes this charge subject to a condition, viz., that the charge is to be subject to the provisions of the Income-tax Act. Similarly, section 4(1), which lays down what is to be included in the total income of the previous year, also contains the qualifying clause that the items mentioned therein are to be included subject to the provisions of the Act. Sections 3 and 4 are, therefore, subject to other provisions of the Act and, consequently, the words 'total income' used in these two sections have to be interpreted with reference to its definition contained in section 2(15) and, as we have indicated eaarlier, the definition of 'total income' in section 2(15) means, in respect of income from business to be included in total income, the profits and gains as computed under section 10(1) of the Act which will be subject to the provisions of section 14(2)(c) of the Act. It is to be noticed that in section 4 itself there is sub-section (3) which, at the relevant time, contained as many as 20 items of income which had to be excluded in computing the total income mentioned in sub-section (1) of section 4. These exceptions laid down in sub-section (3) of section 4 makes it clear that, whenever total income has to be computed for purposes of charging it to tax, it must be computed after taking into account all other provisions of the Act, so that, in computation, the items mentioned in sub-section (3) of section 4 will have to be excluded and, similarly, when making computation under section 10(1) in respect of income, profits or gains of a business, it will be necessary to exclude the items mentioned in section 10(2) of the Acts as well as the profits and gains which might have to be excluded under section 14(2)(c).
Finally, section 6, which lays down the various heads of income and profits and gains under which such income, profits or gains are to be charged to tax, is qualified by the opening expression 'save as otherwise provided by this Act'. One of the heads of income enumerated in section 6 is 'profits and gains of business, profession of vocation' and income, profits and gains under this head are to be chargeable to income-tax save as otherwise provided by the Act. If, therefore, under earlier or subsequent provisions of the Act any income, profits or gains falling under the head 'Profits and gains of business, profession or vocation' are made not chargeable to income-tax, they would not be included within the scope of the head as laid down in section 6. Section 6 also, therefore, will not affect the interpretation which was put by this court on sections 10(1) and 14(2)(c) of the Act. On that decision of this court, therefore, the question referred to us should be answered against the assessee.
Our attention has, however, been drawn to a decision of the Supreme Court in Commissioner of Income-tax v. Indo Mercantile Bank Ltd. That was a case under the Travancore Income-tax Act, but that decision by the Supreme Court shows that the provisions of the Travancore Income-tax Act were exactly similar to the provisions of the Indian Income-tax Act except that the judgment does not clearly indicate whether in the Travancore Act there was any provisions which might be identical with the provisions contained in section 14(2)(c) of the Indian Income-tax Act as it stood at that time. In that case the Supreme Court, in giving its decision, made reference to the provisions of the Indian Income-tax Act and, in fact, discussed the law with reference to the Indian Income-tax Act and applied it to the Travancore Act. It was held in that case the the proviso to section 24 of the Income-tax Act would not govern the computation of income in section 10(1) of the Income-tax Act inasmuch as the scope of the proviso has to be limited to the field covered by the main provisions contained in section 24(1) of the Indian Income-tax Act that the main provision only dealt with the question of a set-off of losses under one head of the income against income of profits under a different head. It was further held in that case that, in view of the definition of 'total income', 'total world income' and chargeability of total income under section 3 or the provisions of the section 4 where in the case of a resident 'total income' includes income, profits and gains accruing within or without British India, any losses incurred or arising in an Indian State have be set off against profits and gains of a business earned in British India. In that case, their Lordships of the Supreme Court did not consider the effect of section 14(2)(c) of the Indian Income-tax Act, as it stood at the relevant time, but we think that in spite of the fact that provision was not considered that decision given by the Supreme Court in binding on us and is a declaration of law under article 141 of the Constitution. Consequently, we are bound to follow that decision. In this connection, learned counsel for the Department urged two points before us. One point urged by learned counsel was that the decision of the Supreme Court being on the Travancore Act, it could not be treated as a declaration of law relating to the Indian Income-tax Act and we should not hold ourselves bound by it. We cannot accept this contention because, as we have indicated earlier, their Lordships of the Supreme Court, in declaration the law, actually referred to the provisions of the Indian Income-tax Act, even though the case before them was under the Travancore Act. The second point urged by learned counsel was that the interpretation urged on behalf of the assessee would bring about the anomalous position that profits and gains earned by an assessee in an Indian State and in any business would not be added to the profits and gains of the business earned in British India and would escape taxation unless they are brought into British India or are received or deemed to be received in British India as laid down in section 14(2)(c) of the Income-tax Act, whereas losses arising or incurred in business in any part of an Indian State would have to be given effect to by reducing the taxable income of the business in British India. The fact whether an anomaly like this exists or not may no doubt require consideration for the proper interpretation of the provision of law. But in this case, as we have just stated earlier, that decision of the Supreme Court is binding on us and is not for us to enter into this point raised by learned counsel.
In these circumstances, we answer the question referred to us by the Income-tax Appellate Tribunal in the affirmative. The assessee will be entitled to the costs of this reference which we fix at Rs. 200.
Question answered in the affirmative.