FALSHAW J. - The question referred to us in this reference under section 66 (1) of the Income-tax Act is whether on the facts and in the circumstances of this case, for the purpose of computing the assessees income, profits and gains under section 10 of the Indian Income-tax Act the loss sustained by him in jobbing transactions was not adjustable against the profits from the brokerage activities of same period by reason of the terms of the first proviso (as inserted by the Finance Act, 1953) to sub-section (1) of section 24 of the Act.
The facts are that during the assessment year 1953-54, for the accounting period ending the 23rd of March, 1953, the assessee, Hukam Chand Dalal, carried on two businesses, one as a broker and the other as a jobber or speculator. During the relevant period his brokerage business showed a profit but losses were sustained in the speculative business.
Section 6 of the Act sets out the heads under which taxable income can accrue, namely salaries, interest on securities, income from property, profits and gains of business, profession or vocation, income from other sources and capital gains. Section 10 (1) provides that the tax shall be 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 carried on by him. The remainder of section 10 sets out the various allowances which are to be taken into consideration in computing such profits or gains.
Section 24 deals with the set-off of losses in computing aggregate income and sub-section (1) reads :
'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.'
Then comes the proviso which is under consideration in this reference. It reads :
'Provided that in computing the profits and gains chargeable under the head profits and gains 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 transactions.'
In the present case the Income-tax Officer and the Appellate Assistant Commissioner have held that this proviso was bar to setting off the losses incurred by the assessee in his speculative business against the profits realised by him from his brokerage business. The Appellate Tribunal, however, held that the proviso to section 24 (1) did not in any way control section 10 of the Act. The learned judicial member of the Tribunal cited in this connection a passage from the judgment of the Bombay High Court in Commissioner of Income-tax v. Murlidhar Mathurawalla Mahajan Association to the effect that all businesses wherever carried on constitute one head which falls under section 10 and in order to determine what are the profits and gains of a business under section 10, an assessee is entitled to show all his profits and set off against those profits losses incurred by him in the same head and it is only when he proceeds to set off a loss under business against a profit under some other head that section 24 comes into operation and various considerations will arise whether he is entitled to such a set-off or not.
It has, however, been pointed out by the learned counsel for the Commissioner that since this decision of the Bombay High Court the wording of the proviso to section 24 (1) has been changed, and the proviso in its present form has again been considered by the Bombay High Court in the case of Keshavlal Premchand v. Commissioner of Income-tax. This is a case similar to the present one in which the assessee sought to set off losses incurred in speculative business against profits realised from his other business. Two questions were referred to the High Court, the first relating to whether the transaction, in which losses had been incurred, was a speculative transaction within the meaning of section 24 (1) of the Indian Income-tax Act, but apparently this question was not pressed, and the only question considered was whether the assessee was entitled to a set-off of the loss against his other business income falling under section 10 of the Act.
The judgment was delivered by Chagla C.J. who pointed out early in the course of his judgment that the wording of the proviso had been changed since the earlier judgment referred to above. It does not seem to me that any useful purpose would be served by citing the whole judgment of the learned Chief Justice and I can only observe that the learned Chief Justice appears to me to have dealt with cogency and clarity with all the arguments advanced by the learned counsel for the assessee. He has expressed agreement with the general principle that a proviso inserted in a particular section, but at the same time he has held, and in my opinion rightly, that in certain circumstances and particularly in the circumstances in which the proviso appears in the part of the legislature.
After pointing out that the matter of computation of taxable income under various heads was dealt with in Chapter III of the Act and that then came Chapter IV which deals with deductions and assessment, he observed :
'.... and then we come to section 24 which deals with set-off of loss in computing aggregate income. It is, therefore, clear that the question of set-off only arises after the profits and gains of a business, profession or vocation have been computed in the manner laid down in Chapter III. The process of computation as understood by the Income-tax Act is antecedent to the question of the right of the assessee to claim any set-off under section 24. The question of set-off only arises when there is a loss under one head, the loss having been arrived at in the manner of computation laid down in Chapter III and there is a profit under another head, the profit having been arrived at in the manner laid down in Chapter III.
Therefore, it is impossible to accept Mr. Palkhivalas contention that when the Legislature referred in the proviso to the computation of profits and gains chargeable under the head 'profit and gains of business, profession or vocation', the Legislature was referring to the loss to be ascertained for the purposes of a set-off under section 24 (1). It was entirely unnecessary to compute the profits and gains of a business, profession or vocation for the purpose of section 24 (1) because that had already been done under section 10 (2). If it was intended to convey by the Legislature would have been very different from the language actually used. Mr. Palkhivala wants to paraphrase the proviso to mean that in the loss suffered in a business if there is any loss due to a speculative transaction then that loss cannot be set-off against another head. Now, to do this is not to paraphrase the proviso but to re-write it and to substitute an entirely different provision for what the Legislature has done. It is clear, therefore, on the language of the proviso itself and on the scheme of the Act, that the Legislature in enacting the so-called proviso was enacting a substantive provision dealing with mode of computing the profits and gains chargeable under the head 'profits and gains of business, profession or vocation,' and what the Legislature provided was that when you compute these profits and gains, the loss sustained in a speculative transaction must not be taken into account except to the extent of the amount of profits and gains, if any, in any other business consisting of a speculative transaction. It is not as if the proviso has no connection whatever with section 24 (1). In one sense it has, because what is available for being set off is the resultant profit or loss under section 24 (1) and the proviso sets out the mode of arriving at the resultant profit or loss in the computation of profits and gains of business, profession or vocation.
Mr. Palkhivala says that the proviso to section 24 (1) can and should only be looked at as an abridgement of the right of set-off given to the assessee under section 24 (1) and that abridgement can only deal with the question of setting off a loss under one head against a profit under another head. It is true that the proviso, as we have construed it, does not deal with the abridgement of the right of the assessee to set off a loss under one head against profit under another head, but it does in one important sense abridge the right of the assessee to set off under section 24 (1) and that abridgement consists, if one might so put it, in the quantum of profit or loss on which the assessee can rely for the purpose of claiming a set-off under section 24 (1) against another head. Therefore, although in the larger sense the proviso is a substantive enactment, it cannot be said that the Legislature in placing it after section 24 (1) in the shape and form of a proviso has done something for which there is absolutely no justification.'
This view has been accepted as correct and followed in the case of Commissioner of Income-tax v. Ramgopal Kaniyalal by Shrivastava and Sharma JJ. of the Madhya Pradesh High Court, and with respect I am of the opinion that it is a correct view and indeed the only possible interpretation of the clear and unambiguous words of the proviso itself. The result is that I would answer the question referred to us by saying that for the purpose of computing the assessees income, profits and gains under section 10 of the Indian Income-tax Act, the loss sustained by him in his jobbing transactions was not adjustable against his profits from the brokerage activities of same period by reason of the terms of the first proviso to sub-section (1) of section 24 of the Act. The assessee will pay the costs of the Commissioner. Counsels fee Rs. 250.
CHOPRA J. - I agree.
Reference answered accordingly.