This is a reference under Section 66(1) of the Indian Income-tax Act, referring the following two questions at the instance of the Commissioner. They are; "(1) Whether on the facts of the case the loss suffered by the assessee of Rs. 76,973 in the Indian State could be set off against the profits accruing or arising in British Indian under the proviso to Section 24(1) of the Indian Income-tax Act (2) Whether on the facts of the case and in view of the provisions contained in Section 14(2)(c) of the Income-tax Act, loss of Rs. 76,973 which accrued or arose to the assessee from business carried on in the Indian State could be taken into account in computing the profits of the business carried on by the assessee in British India during the relevant accounting period in spite of the fact that no income, profits or gains from the Indian State had been received in British India ?" 2. There are two provisos to Section 24(1) Neither the statement of the case nor the appellate order of the Tribunal specifies any of them.
Since the first proviso disallows set-off of loss and since that proviso was specifically considered in the decision relied on by the Appellate Tribunal, we take it that the first proviso was intended. The question is otherwise not happily worded. The words "having regard to" should have appeared in place of "under" in this question. In order to bring out the true meaning we reframe the question thus :- "Whether on the facts of the case the loss of Rs. 76,973 suffered by the assessee in the Indian State could be set off against the profits accruing or arising in British India, having regard to the first proviso to Section 24(1) of the Indian Income-tax Act ?" 3. The last portion of the second question, viz., "in spite of the fact that no income, profits or gains from the Indian State had been received in British India" is not borne out by the statement of the case; nor has it any basis on the record. As is apparent from the order of the Income-tax Officer for the assessment year in question, a sum of Rs. 29,352 was added as income from the Indian State brought into British India. This amount was included in the total income of the assessee under Section 16(1)(a) for the preceding assessment year. It appears that on the day this statement of the case was prepared there was another case before the Tribunal in which the income from the Indian State was not received in British India. Since the two question referred to here arose in that case, the addition to this second question was made evidently through inadvertence.
4. The assessee is a limited liability company carrying on the business of working collieries and mines both in and outside taxable territories. Its registered office is at Nagpur. In the "previous year" ending March 31, 1944, for the assessment year 1944-45 it suffered a loss of Rs. 76,973 in the two mines Gorumahisani and Badampahar in the Indian States, and a sum of Rs. 29,352 was included in the total income as foreign income brought into British India which was taken for rate in the preceding year. The accounts of the businesses in the Indian States were always kept separate from the accounts of the business in British India. In computing the assessable income for the assessment year 1944-45, the assessee claimed to deduct this loss from the British Indian Income. Following Commissioner of Income-tax, Bombay v.Murlidhar Mathurawalla Association, the Appellate Tribunal allowed this deduction.
5. The first question for decision is whether the first proviso to Section 24(1), added on April 12, 1944, by Act XI of 1944, is applicable to the assessment year 1944-45. The Finance Act for 1944-45 came into force on the April 1, 1944. In Maharajah of Pithapuram v.Commissioner of Income-tax, Madras, their Lordships of the Privy Council observed :- ".....it should be remembered that the Indian Income-tax Act, 1922, as amended from time to time, forms a code, which has no operative effect except so far as it is rendered applicable for the recovery of tax imposed for a particular fiscal year by a Finance Act. This may be illustrated by pointing out that there was no charge on the 1938-39 income either of the appellant or his daughters, nor assessment of such income, until the passing of the Indian Finance Act of 1939, which imposed the tax for 1939-40 on the 1938-39 income and authorised the present assessment. By sub-section (I) of Section 6 of the Indian Finance Act, 1939, income-tax for the year beginning on the April 1, 1939, is directed to be charged at the rate specified in Part I of Schedule II and rates of super-tax are also provided for, and by sub-section (3) it is provided that for the purposes of this section and of Schedule II, the expression total income means total income as determined for the purposes of income-tax or super-tax, as the case may be, in accordance with the provisions of the Indian Income-tax Act, 1922'. This can only refer to the Indian Finance Act, 1939, and necessarily includes the alterations made by the Amending Act, which had already come into force on the April 1, 1939." The assessment for the year 1944-45 must therefore be made according to the Indian Income-tax Act in force on April 1, 1944. The first proviso therefore does not apply to the assessment for that year. See also Mishrimal Gulabchand of Beawar, In re.
"24(1) Where any assessee 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 off against his income, profits or gains under any other head in that year : Provided that, where the loss sustained is a loss of profits or gains which would but for the loss have accrued or arisen within an Indian State and would Under the provisions of clause (c) of sub-section (2) of Section 14, have been exempted from tax, such loss shall not be set off except against profits or gains accruing or arising within an Indian State and exempt from tax under the said provisions : A proviso is not application unless the enacting clause is applicable to the facts of the case. In M. and S. M. Ry. Co., Ltd. v. Bezwada Municipality, Lord Macmillan says at page 73 :- "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." Section 24(1) provides for the set-off of loss of profits or gains under one head against income, profits or gains under any other head and not a set-off of profit or loss under the same head; and the proviso excludes from the sphere of operation of this sub-section the kind of loss referred to in the proviso. See also Ahmedabad Manufacturing and Calico Printing Co., Ltd. v. Commissioner of Income-tax, West Bengal.
7. There is no substance in the contentions made by the learned Counsel for the Commissioner that the section should be construed in the light of the proviso and that it should be held that the set-off contemplated by Section 24(1) is not only as between two separate heads but even under the same head. This construction is not warranted by the rule of interpretation stated by their Lordships of the Judicial Committee in Bezwada Municipalitys case cited supra. Secondly, the proviso which was not in force cannot be invoked to interpret the section even if it were otherwise permissible. Section 24(1) leaves no doubt that the set-off provided is a set-off of loss under any of the heads of Section 6 against any other head in that section.
8. It appears to have been assumed in the first question that the British Indian income and the profits and gains in an Indian State of which loss is claimed fall under two different heads of Section 6. It therefore follows that the assessee is entitled to set off the loss if this section is applicable. As the first proviso is not applicable to the assessment year in question, the assessee is entitled to set off the loss of Rs. 76,973 against the profits accruing or arising in British India.
9. In our view this assumption is unwarranted. The income of which loss is claimed is income from business. Different businesses do not constitute different heads under the Act. Section 10 which deals with income from business is self-contained. Profits of all businesses after deducting the "allowances permissible under the section constitute profits of the assessee from business." In computing profits the losses have got to be taken into consideration. This has been recognized in Murlidhar Mathurawallas case relied on by the Appellate Tribunal.
10. The first question was thus based on two assumption which are unwarranted and does not arise on the facts of the case.
11. Our answer to the second question is in the affirmative. The provisions of the Indian Income-tax Act which are relevant for the consideration of this question are :- Section 4(1) : "Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which - (a) are received or are deemed to be received in British India in such year by or on behalf of such person, or (i) accrue or arise or are deemed to accrue or arise to him in British India during such year, or Section 16 : "Exemptions and exclusions in determining the total income. - (1) of Section 7, the second and third provisos to Section 8, sub-section (c) in respect of any income, profits or gains accruing or arising to him within an Indian State, unless such income, profits or gains are received or deemed to be received in or are brought into British India in the previous year by or on behalf of the assessee, or are assessable under Section 42." 12. From these sections it follows that the person who is resident in British India is liable to be assessed on the income, profits and gains, from whatever source, in British India or out of British India, and that an income in an Indian State has to be included in his total income liable to tax though income, profits or gains under Section 14(2)(c) are exempt from taxation unless they are received or deemed to be received in or brought into British India in the previous year by or on demonstrate clearly the effect of these sections, behalf of the assessee or are assessable under section 42. Demonsstrate clearly the effectof these sections, let us assume that a is the income arising or accruing in British India, b is the income which has arisen or accrued within an India State, and c the income from an Indian State received or deemed to be received in the account year in British India. We are not introducing Section 42 as it is not necessary for the disposal of this case. Under Section 4(1) read with Section 16(1)(a), a+b+c is the total income liable to tax, but section 14(2)(c) exempts income b from payment of tax, so the resident will have to pay income-tax on a+c at the rate of tax payable on a+b+c. In the event of loss in an Indian State, the total income computed under the Act will be a-b+c and the tax will be paid on this amount as there are no income, gains or profits to which Section 14(2)(c) would apply. If in any year c is not brought into British India, it will be excluded from consideration.
Receipt or non-receipt of c does not affect the result. The assessee in the instant case is therefore entitled to deduct the loss suffered by him in an Indian State in the computation of the total income and this will be taxable income as there is no exemption under Section 14(2)(c).
13. In Income-tax Appellate Tribunal, Bombay v. Central Provinces and Berar Provincial Co-operative Bank Ltd., Nagpur, the effect of exemptions under the first and second provisos to Section 8 was considered. The Bank earned an income, say a, from tax-free securities and income b from taxable securities. To earn this whole income the Bank had to pay interest on moneys borrowed, say c. The Income-tax authorities arbitrarily distributed interest paid into c1 in respect of tax-free securities and c2 in respect of taxable securities though there were no separate borrowing for the two kinds of investment. They held that the tax would be assessable on b-c2. The contention of the Bank that b-c was the only assessable income was accepted by this Court.
14. a+b is income from securities. Under the first proviso the assessee is entitled to deduct the interest paid to earn this income. Under the second proviso no tax is payable in respect of income receivable from securities which are declared by the Central Government to be income-tax free. Giving full effect to these provisos the tax in effect is payable on the income from taxable securities b, minus the total interest c paid by the Bank. The contention of the Commissioner that the assessee thus obtained a "double advantage" was considered irrelevant. The Division Bench held :- "There is no reason why the assessee should not get a double advantage if the Act can be so construed. If the language is plain, there is nothing more to be said. If it is ambiguous, then, being a fiscal enactment, it must be so construed because that is the construction which most favours the subject. In our opinion, it can be so construed, and of the two constructions the one contended for by the assessee is the one which strains language least." 15. The learned Counsel for the Commissioner relies on Mishrimal Gulabchand of Beawar, In re, which certainly supports him. The learned Chief Justice who delivered the leading judgment accepted the position that profits and gains of business, profession or vocation are taken as one head; and if the assessee carries on several businesses or had along with it a profession or a vocation then in preparing the profits and loss statement under Section 10 of the Act, the result of all these activities are naturally shown a s total profits and gains after the loss had been deducted. The learned Chief Justice was however persuaded to observe :- "In calculated the profits and gains under the fourth head of Section 6, the Income-tax Officer has to prepare a balance-sheet of the result of the working of such businesses with which the Income-tax Officer is concerned and, if he is not concerned with profits of a business carried on in an Indian State, he is obviously not concerned with the losses of that business, so that if the profits of the business cannot be added the losses of the business cannot be deducted either." (p.
The assumption underlying these observations is that the income from business in an Indian State is to be excluded for all purposes in view of Section 14(2)(c). With the greatest respect we observe that this is a misapprehension probably due to the fact that the attention of the learned Chief Justice was not drawn to Section 4(1) and Section 16(1)(a) of the Act which provide for the inclusion of such income in the total income of the assessee. The learned Chief Justice was probably influenced in his decision by Section 17(1) which is applicable to non-residents while the assessee before him was resident and an ordinary resident of British India. The learned Chief Justice therefore observed that Section 10 would not help the assessee. The learned Counsel also brought to our notice the following further observations of the learned Chief Justice :- "Section 10, therefore, primarily concerns itself with the income of the assessee in respect of which the income-tax is payable." Prior to the addition of Section 14(2)(c) in the year 1941, the tax was payable by a resident on his total income which included the income, profits and gains in an Indian State minus certain exemptions allowed by the Act, and the income from business had to be computed in the manner provided by Section 10 of the Act. It would therefore not be correct to say that the profits and gains from an Indian State are not be correct to say that the profits and gains from an Indian State are not to be computed in the manner provided by Section 10 of the Act.
With the utmost respect we do not agree either with the conclusion or with the reasoning in Mishrimal Gulabchands case.
16. The assessee in that case had urged that he was carrying only one business in British India though the losses were made in an Indian State. That contention was not examined as it did not find place in the statement of the case. In the instant case, although the contention was raised and accepted by the Appellate Assistant Commissioner, the Appellate Tribunal did not examine the case from this point of view and to that extent the decision is defective. It is always desirable to examine the contentions of the assessee and deliver a self-contained order under Section 33(4) giving the findings of fact and the decision on the questions of law arising therefrom.
17. Our answer to the second question therefore is neither Section 14(2)(c) nor the fact that the income, profits, or gains within an Indian State were not received in British India in the relevant accounting period affects the result that the loss of profits or gains in business in an Indian State can be taken into account in computing the profits and gains of business carried on in British India by the assessee who is resident of British India.
18. The result is that the assessee succeeds and will have the costs of this reference. Counsels fee Rs. 200. The Commissioner will pay the costs of the paper book.
A copy of this judgment be sent to the Appellate Tribunal as required by Section 66(5) of the Act.