1. This is an appeal by the assessee challenging the order of the Commissioner (Appeals), by which he has sustained the order of the ITO, rejecting the claim of the assessee for setting off of business loss against income from speculation business.
2. From the order of the ITO, it is seen that the assessee derives income from speculation business, apart from income from regular business and income from other sources. Before the ITO, the assessee claimed for setting off of carried forward business loss of the assessment year 1974-75 against income from speculation business earned during the assessment year. The ITO did not accept the claim as in his view the carried forward business loss could be set off only against any other business income and that as per Explanation 2 to Suction 28 of the Income-tax Act, 1961 ('the Act'), the income from speculation transaction shall be deemed to be distinct and separate from any other business. Against the action of the ITO, the assessee preferred appeal before the Commissioner (Appeals) contending that the speculation business was a distinct business, yet the assessee rightly claimed for setting off of income from speculation business against brought forward business losses of the assessee. It was submitted that speculation business had all along been treated as part of the assessee's business.
It was also argued before the Commissioner (Appeals) that even though speculation constituted a separate and distinct business, there was no denial of the fact that it was a business conducted by the assessee. It was claimed, therefore, that the loss determined under the head of other items of business was clearly allowable against the income of speculation business and consequently such set off was admissible. It was further argued before him on behalf of the assessee that there was a restriction on speculation loss being set off against business income, but there was no bar against speculation income being set off only against losses sustained by the assessee under other head of business, particularly when speculation business was one of the lines of business conducted by the assessee. It was pointed out before him that such set off was given by the ITO for the assessment year 1974-75.
3. The Commissioner referred to the provision of Section 72(1) of the Act which provides for carrying forward and setting off of business losses, not being loss sustained in speculation business. He also referred to Explanation 2 to Suction 28 as mentioned by the ITO, which, according to him, was quite relevant to the issue. He noted that according to the said Explanation, speculation business had to be treated as a distinct and separate entity and that in a broad analysis of the intention of the Legislature in treating such speculation business as a distinct entity, it was possible to demarcate this speculation business as a separate stream altogether, in respect of which the loss sustained was to be set off against future profit obtained in such business. He observed that in case the profit so derived was set off against losses from other head of income, the separate and distinct entity of such business would be obliterated, and such a construction would run counter to the inherent intention of the legislature to keep such separate and distinct entity totally out of the sphere of consideration of carry forward and set off all other business losses. Under such circumstances, the Commissioner (Appeals) declined to interfere with the order of the ITO. Hence, this appeal by the assessee.
4. It is submitted by the assessee's learned counsel that there was no justification for the authorities below to disallow the claim legitimately made by the assessee for the year under appeal. It is submitted by him that the department has admitted that speculation activities of the assessee constituted a separate business of the assessee as being carried on from year to year. It is further argued that there was a common management, common (sic) and unity of control and that apart there was also inter-lacing in the present case and, therefore, the claim of the assessee was valid and sustain-ableon facts and in law. Reference is also made to the decision as rendered by the Hon'ble Supreme Court as reported in B.R. Ltd. v. V.P. Gupta CIT  113 ITR 647. It is also reiterated before us that for the assessment year 1974-75, the ITO has allowed the loss to be set off, as pointed out earlier.
5. It is argued that having accepted that the speculation business of the assessee was a distinct business, the authorities below were not justified in not allowing the business loss during the year to be set off against speculation income earned by the assessee during the year.
It is stressed before us that only speculation loss is not allowed to be set off against business income and not otherwise. At the time of hearing, the assessee's learned counsel refers to different papers of the Paper Bock in order to stress his point of arguments. Briefly speaking, it is urged that the claim of the assessee being proper and valid, the orders of the authorities below may be cancelled and the claim should be allowed in full.
6. On the other hand, the learned departmental representative supports the order of the Commissioner (Appeals). We have perused the orders of the authorities below along with other papers placed before us for our consideration. From the facts as borne out from orders of the authorities below, it is seen that the assessee has been carrying on speculation activities for quite some years, as a saparate business. In fact, from the computation of income made by the ITO, it is seen that the income from speculation business was taken into account along with other income from other heads. The ground for the disallowance of the claim was that the business losses brought forward can be set off only against business income and that the Explanation 2 to Section 28 requires separate and distinct treatment of the speculation activities of the assessee. Suction 28 refers to income chargeable to tax under the head 'Profits and gains of business or profession', which includes any compensation or other payment due or received by an assessee. It also includes income derived by a trade, professional or similar association from specific services. It also includes value of any benefit or perquisite. Explanation 2 to the above section clarifies that where speculative transactions carried on by an assessee are of such a nature as to constitute a business, such business shall be deemed to be a distinct and separate from any other business. The Commissioner (Appeals) has made a broad analysis regarding separate treatment to be given to speculation business as a separate stream altogether. As discussed earlier, according to the Commissioner (Appeals), if a loss incurred in the business was to be set off against speculation income, such separate and distinct entity would be lost.
In our view, this analysis of the Commissioner (Appeals) is not warranted as the above Explanation was for certain clarification regarding speculative transactions carried on by an assessee which should be deemed to be distinct and separate from any other business, if such transactions are of such a nature so as to constitute a business of the assessee. To our mind, the interpretation should be limited to the purpose for which it was intended. In this connection, we may refer to the decision of the Hon'ble Supreme Court of India as reported in CIT v. Cocanada Radhaswami Bank Ltd.  57 ITR 306, with reference to page 312, in which it was held inter alia, that it is well-settled" that a legal fiction is limited to the purpose for which it is created and should not be extended beyond its legitimate field.7. Section 72(1) provides setting off of brought forward business losses against profit and gains, if any, of any business or profession carried on by the assessee and assessable for that year. This provision permits setting off of brought forward business losses against profit, etc., of any business (emphasis is ours). Of course there is a proviso to the effect that the business or profession for which the loss was originally computed, continued to be carried on by the assessee in the year relevant to the assessment year concerned. In the present case before us, there is no material to indicate that the business for which loss was originally brought forward, was discontinued. As indicated earlier, Explanation 2 to Suction 28 directs separate and distinct treatment of speculation transaction as separate from any other business, if such transactions were of such a nature so as to constitute a business. In the present case before us, as could be seen from the orders of the authorities below, speculative activities of the assessee constituted a separate business of the assessee since the past years. Section 72(1)(i) provides for setting off of business losses brought forward against profits, etc., of any business. We, therefore, find no impediment to the assessee's claim for setting off of business loss brought forward being set off against income from speculation business earned by the assessee during the year under appeal.
8. In this connection, it would be useful to refer the decision of the Hon'ble Supreme Court mentioned above, in which it was held, inter alia, that the scheme of income-tax Act is that income-tax is one tax and that Section 6 of the 1922 Act classified the taxable income under different heads for the purpose of computation of the net income of the assessee. It was also observed that though, for the purpose of computation of the income, interest on securities is separately classified, income by way of interest from securities does not cease to be part of income from business, if the securities are part of the trading assets. It was also held, whether a particular income is part of the income from a business falls to be decided not on the basis of the provisions of Section 6 but on commercial principles. The facts of that decided case were similar to the facts of the case before us.
9. Having regard to the entire facts and circumstances of the case and the ratio enunciated in the case mentioned above, we are of the view that the assessee is entitled to succeed in the present appeal. We, therefore, direct that the claim of the assessee on the point should be allowed. The orders of the authorities below are set aside with the direction that the claim of the assessee as discussed above should be accepted.