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Commissioner of Income-tax, Gujarat Vs. Kantilal Nathuchand - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 2 of 1963
Judge
Reported in[1964]53ITR420(Guj)
ActsIncome Tax Act, 1922 - Sections 23(5), 24(1) and 24(2)
AppellantCommissioner of Income-tax, Gujarat
RespondentKantilal Nathuchand
Appellant Advocate J.M. Thakore, Adv.
Respondent Advocate K.H. Kaji, Adv.
Cases ReferredRex v. General Commissioner of Income Tax
Excerpt:
direct taxation - set-off claim - sections 23 and 24 of income tax act, 1922 - whether loss suffered by registered firm in speculative business in one year can be carried forward and set off against profit of firm in speculative business in subsequent years -speculative loss cannot be apportioned amongst partners under second proviso to section 24 (1) - registered firm entitled to carry forward and set-off loss suffered in speculative business under section 24 (2). - - 1. a short but interesting question of law arise on this reference. but it is now well-settled by the decision of the high court of bombay in commissioner of income-tax v. palkhivala was based on the well-known rule of construction that ordinary a proviso must be read relation to the principle matter to which it stands.....bhagwati, j. 1. a short but interesting question of law arise on this reference. the question is whether loss incurred by a registered firm in speculative business is liable to be apportioned amongst the partners or is the registered firm entitled to carry it forward and to set it off against profit is speculative business during the subsequent years. the determination of the question depends primarily on the true interpretation to be put on the provisions of section 24 of the income-tax act, but certain other sections of the act also require to be considered. in order to appreciate how the question arises, it is necessary to briefly recapitulate the facts as stated by the tribunal in the statement of the case. the assessee is a firm consisting of three partners. the assessee was granted.....
Judgment:

Bhagwati, J.

1. A short but interesting question of law arise on this reference. The question is whether loss incurred by a registered firm in speculative business is liable to be apportioned amongst the partners or is the registered firm entitled to carry it forward and to set it off against profit is speculative business during the subsequent years. The determination of the question depends primarily on the true interpretation to be put on the provisions of section 24 of the Income-tax Act, but certain other sections of the Act also require to be considered. In order to appreciate how the question arises, it is necessary to briefly recapitulate the facts as stated by the Tribunal in the statement of the case. The assessee is a firm consisting of three partners. The assessee was granted registration under section 26A for the assessment years 1958-59, 1959-60 and 1960-61, the corresponding previous years being Samvat years 2013, 2014 and 2015. The assessee during the accounting years, Samvat years 2013, 2014 and 2015, derived income from property and also carried on two businesses, one being ready business in cotton and other being speculative business. The income of the assessee from these sources was determined by the Income-tax Officer at the following figures for the assessment years 1958-59, 1959-60 and 1960-61 :

----------------------------------------------------------------------Source Assessment Assessment Assessmentyear 1958-59 year 1959-60 year 1960-61(S.Y. 2013) (S.Y. 2014) (S.Y. 2015)----------------------------------------------------------------------Rs. Rs. Rs.Property profit 1,369 Profit 1,258 Profit 1,014Ready business profit 28,449 Loss 2,497 Loss 21,197Speculation business 6,26,606 Loss 5,416 Profit 6,19,784loss----------------------------------------------------------------------

2. For the assessment year 1958-59, there was a loss of Rs. 6,26,606 but it was loss in speculative business and the Income-tax Officer did not, therefore, set it off against income from ready business in cotton or income from property having regard to the first proviso to section 24(1) and determined the total income of the assessee at Rs. 29,818, made up of Rs. 28,449 being income from ready business in cotton and Rs. 1,369 being income from property. The Income-tax Officer then applied section 23(5)(a) since the assessee was a registered firm and apportioned amongst the partners the total income of Rs. 29,818. The Loss of Rs. 6,26,606 was also apportioned by the Income-tax Officer amongst the partners relying on the second proviso to section 24(1). The same course was followed by the Income-tax Officer for the assessment year 1959-60. The Income-tax Officer, again, having regard to the first proviso to section 24(1), did not take into account the loss of Rs. 5,416 in speculative business and determined the total income of the assessee at a loss of Rs. 1,239 after setting off the income of Rs. 1,258 from property against the loss of Rs. 2,497 in ready business in cotton and apportioned both the loss of Rs. 1,239 representing the total income of the assessee and the loss of Rs. 5,416 in speculative business against the partners. When it came to the assessment year 1960-61, the assessee raised a contention that the previous losses of Rs. 6,26,606 and Rs. 5,416 were not liable to be apportioned amongst the partners and that the assessee was entitled to have those losses carried forward and set off against the profit of Rs. 6,19,784 from speculative business in the assessment year 1060-61. The Income-tax Officer rejected this contention on the ground that the losses even though they be losses from speculative business were liable to be apportioned amongst the partners and that the partners alone were entitled to have the amounts of the losses set off by reason of the second proviso to section 24(1). The Income-tax Officer accordingly computed the total income of the assessee at Rs. 5,99,601 after adjusting the loss of Rs. 21,197 in ready business in cotton against the profit of Rs. 6,19,784 in speculative business and adding the income of Rs. 1,014 from the property. On this occasion the first proviso to section 24(1) did not apply since there was profit as distinguished from loss in speculative business during the assessment year. The Income-tax Officer then taxed the assessee under section 23(5)(a)(i) and apportioned the total income amongst the partners under section 23(6) read with section 23(5)(a)(ii) the share coming to each partner on such apportionment being a profit of Rs.1,99,867. The assessee being aggrieved by the order passed by the Income-tax Officer preferred an appeal to the Appellate Assistant Commissioner, but the Appellate Assistant Commissioner confirmed there view taken by the Income-tax Officer and dismissed the appeal. The matter was then carried in appeal before the Tribunal. The Tribunal upheld the contention of the assessee and held that the losses in speculative business for the assessment year 1958-59 and 1959-60 were not liable to be apportioned amongst the partners and that the assessee was entitled to have them set off against the profit of Rs. 6,19,784 from speculative business in the assessment year 1960-61. It is this view of the Tribunal which is challenged before us on behalf of the Commissioner in this reference.

3. The question which arises for consideration is a question of some importance particularly having regard to the fact that after the amendment of section 23(5)(a) by the Finance Act, 1956, a registered firm is now assessable to income-tax on its total income at specially low rates if such total income exceeds a certain limit. When a registered firm has incurred loss in speculation, is the registered firm entitled to carry it forward and set it off against its speculative profit in the subsequent years or is the loss liable to be apportioned amongst the partners so that the partners alone get the benefit of the set-off of the loss against their speculation profit The question is primarily one of construction and is certainly not free from difficulty. arising as it does on one of construction and is certainly not free from difficulty, arising as it does on one of the least happily drafted sections in an Act not remarkable for perspicuity. It may be possible but we doubt whether it would be easy to compress into one singly section more fertile opportunities for doubt and error. But fortunately, a way is shown through the tangled confusion of the provisions of this section by a decision of the High Court of Bombay and if this way is followed, much of the difficulty which appears to beset the path of construction will disappear. The decision we refer is the decision of the Bombay High Court in Keshavlal Premchand v. Commissioner of Income-tax [1957] 31 I.T.R.7.). We shall presently consider this decision, but before we do so, it is necessary to refer to a few provisions of the Act in order to see what is the scheme of taxation embodied in the Act.

4. 'Total income' is defined in section 2(15) to mean total amount of income, profits and gains referred to in section 4(1) computed in the manner laid down in the Act. This definition is an important one since the charge of tax is levied by section 3 on the total income of the previous year of an assessee and it, therefore, runs through almost every section of the Act. Section 4(1) defines the scope of the total income with reference to the factor of residence. Section 6 lays down the heads of income chargeable to income-tax and for each head appropriate rules are provided in sections 7 to 128 for computing the amount of income. The heads are at present six in number and amongst them is the head 'Profits and gains of business, profession or vocation. Section 10 lays down the rules for computing the income of the assessee under the head 'Profits and gains of business profession or vacation.' 'There is no specific provision in the section for adjustment of losses in one or more business against profits in other business where several business are carried on by an assessee. But it is now well-settled by the decision of the High Court of Bombay in Commissioner of Income-tax v. Murlidhar Mathurawalla Mahajan Association ([1948] 16 I.T.R. 146), a view which has also received the approval of the Supreme Court in Anglo-French Textile Co. Ltd., v. Commissioner of Income-tax ([1953] 23 I.T.R. 82; [1953] S.C.R. 448), that all businesses constitute one head under section 10 and in order to determine what are the profits and gains of business under section 10 an assessee is entitled to show all the profits and adjust against those profits, losses incurred by him under the same head. In other words, while profits or losses of each distinct business may be computed separately, the tax is chargeable under the head 'Profits and gains of business, profession or vocation' on the aggregate of profits of all the business after adjusting the profits of one or more businesses against the losses, if any, in other businesses. This view really gives effect to the principle that income tax is one tax and not a collection of taxes on different items of income. The same principle must obviously apply also to computation of income under other heads. Now having computed the profits and gains under the different heads, they would all have to be aggregated to make up the total income of the assessee chargeable to tax. If there is a loss under one head, it must be allowed to be set off against income under other heads and for that provision is made in section 24(1). This provision is the logical consequence of the same principle, namely, that income-tax is only one tax and there are not as many taxes as there are heads of income. Section 24(1) in so far as it is material for the purpose of the present discussion is in the following terms :

'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 heads in that year :

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 extend of the amount of profits and gains, if any, in any other business consisting of speculative transactions : Provided further that where the assessee is an unregistered firm which has not been assessed under the provisions of clause (b) of sub-section (5) of section 23 in the manner applicable to a registered firm, any such loss shall be set off only against the income, profits and gains of the firm and against the income, profits and gains of any of the partners of the firm; and where the assessee is a registered firm any loss which cannot be set off against other income, profits and gains of the firm shall be apportioned between the partners of the firm and they alone shall be entitled to have the amount of the loss set off under this section.'

5. It is clear from the main enactment contained in section 24(1) that where an assessee sustains a loss under any of the heads mentioned in

section 6, he is entitled to have the amount of the loss set off against his income, profits or gains under any other head. Section 24(1) thus deals with set-off between different heads and by the very nature of things it comes into play when income is computed under each of the different heads by applying the appropriate mode of computation and it is found that there is a loss under one or more of the heads by applying the appropriate mode of computation and it is found that there is a loss under one or more of the heads and there is a profit in order to arrive mat the total income assessable to tax. The first proviso enacts that in computing the profits and gains chargeable under the head 'profits and gains of business, profession or vacation', any loss sustained in speculative transactions. What is the precise scope of the firs t proviso and which is the provision on which it impinges came to be considered by a Division Bench of the High Court of Bombay in Keshavlal Premchand v. Commissioner of Income-tax ([1957] 31 I.T.R. 7.). There the question which arose was whether an assessee who incurred loss in speculative business in the year of account was entitled to adjust this loss against his profits and gains of business chargeable to tax. The contention of Mr. Palkhivala who appeared on behalf of the assessee was that speculative business was as much business as non-speculative business and that in arriving at the income from business under section 10 under the head 'profits and gains of business, profession or vocation 'the assessee was entitled to adjust this loss against his profit in non-speculative business. The revenue relied on the first proviso to section 24(1) and said that this proviso declared that in computing the profits and gains chargeable to tax under the head 'Profit and gains of business, profession or vocation' any loss sustained in speculative business shall not be taken into account and that in arriving at the income from business was, therefore, not liable to be taken into account and could not be adjusted against the profit in non-speculative business. Mr. Palkhivala rejoined to this contention of the revenue by pointing out that section 24(1) applied only to a case where an assessee claimed to right to set off loss suffered by him under one head against profit earned by him under another head and had not application where an assessee claimed to adjust loss against profit under the same head and that since in that case the assessee was claiming to adjust his loss in speculative business against his profit in non-speculative business under the same head, he was not seeking to some within the ambit of section 24(1) and the first proviso to section 24(1) had, therefore, no application. It was only if a right was claimed by an assessee under

section 24(1) that, argued Mr. Palkhivala, the first provision could be invoked to defeat such right, but where as in that case the right claimed was not a right under section 24(1) the first proviso could not be relied upon to negative such right. This connection of Mr. Palkhivala was based on the well-known rule of construction that ordinary a proviso must be read relation to the principle matter to which it stands as a proviso and must not be construed as if it were an independent enacting clause. The Bombay High Court, while accepting the validity of this rule of construction, observed that though it was undoubtedly true that, prima facie, a proviso should be construed as a proviso and not as a substantive enactment, if it was clear from the language of the proviso that in enacting it what the legislature was aiming at was really not to enact a proviso but a substantive enactment, there was no rule of construction which prevented the court from giving effect to the manifest intention of the legislature. The Bombay High Court, having regard to the language employed, construed the first proviso to section 24(1) as a substantive enactment dealing with the mode of computation of profits and gains under the head.'Profits and gains of business, profession and vocation' and held that what the legislature has provided was that when profits and gains under this head were to be computed, the loss sustained in a speculative business should not be taken into account except to the extent of the amount of profits and gains, if any, in any other speculative business. Chagla C.J., as he then was, analysed the scheme of the Act and observed ([1957] 31 I.T. R. 7, 15.) :

'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.'

6. The learned Chief Justice took the view that the process of computation of income under different heads was antecedent to the question of the right of the assessee to claim set-off under section 24(1) since the section dealt with set-off between different heads and until the income under each of the heads was computed in the manner laid down by the Act, no question of set-off under section 24(1) counld arise and it was in relation to computation of profits and gains under the head 'Profits and gains of business, profession or vocation' that the first proviso provided that loss in speculative business shall not be taken into account in such computation except to the extent of the amount of profit and gains, if any, in any other speculative business. The impact of the first proviso was, therefore, directed against the computation of profits and gains under the head 'profit and gains of business, profession or vocation' and the rule enacted in the first proviso was required to be followed in computing the profits and gains under that head. The rule declared that if there is a loss in speculative business, it must be ignored declared that if there is a loss in speculative business, it must be ignored for the purpose of computation of income from business under section 10 except to the extent of the amount of profits and gains, if any, in other speculative business and should not be permitted to reduce that total income of the assessee chargeable to tax. This provision was obviously made to remedy the mischief arising from businessmen buying speculative losses in order to reduce to their taxable profits. In order to remove this mischief, the legislature provided that an assessee shall not be entitled to reduce his taxable profits by speculative losses. Of course, if there were speculative profits in some other business, speculative losses were permitted to be taken into account to the extent of the amount of such speculative profits, for otherwise an anomalous and inequitable position would arise inasmuch as speculative profits would be included in the computation of income under the head 'profits and gains of business, profession or vocation' : while speculative profits would be included in the computation of income under the head 'profits and gains of business, profession or vacation', while speculative losses would have to be ignored, even though both speculative loss was, therefore required to be ignored in arriving at the total income under the head 'profits and gains of business, profession or vocation.' The first proviso to section 24 (1) was thus read by the Bombay High court as controlling section 10. Chagla C.J., though taking this view, hastened to add that it was not as if this proviso had no connection whatsoever with section 24 (1). He observed;

'It is true that the proviso, as we have construed it, does not deal with the abridgment 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 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 abridgment consists, if one might so put it, in the quantum of profit or loss which can be set off, and the proviso really deals with 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 another head. Therefore, although in the larger sense the proviso is a substantive enactment it cannot be said that the legislative in placing it after section 24(I) in the shape and form of a proviso has done something for which there is absolutely no justification.'

7. This decision of the Bombay High court is binding upon us and it is heartening to find that this view which has been taken by the Bombay High court has now been accepted by a number of other High Court, namely, the Madhya Pradesh High court in commissioner of Income-tax v. Ramgopal Kaniyalal ([1960] 38 I.T.R. 193), the Punjab High court in commissioner of Income-tax v. Hukumchand Dalal ([1962] 44 I.T.R. 614 and commissioner of Income-tax v. Ram Sarup ([1962] 45 I.T.R. 248), the Madras High court in Ramalingam Chettiar v. Commissioner of Income-tax ([1962] 45 I.T.R. 387, the Andhra Pradesh High court in jummarlal surajkaran v. Commissioner of Income-tax ([1963] 47 I.T.R. 809) and the Calcutta High court in Sree Hanuman Investment Co. Ltd. v. Commissioner of Income tax ([1963] 48 I.T.R. 915). On this view the effect of the first proviso is that if there is profit in speculative business, it is liable to be included in the computation of income from business under section 10 but if there is loss in speculative businesses it is liable to be ignored, unless there are two or more speculative businesses in which event the loss in one or more of such businesses would be adjusted against the profit in the other and the resultant balance, if profit, would be liable to be included in the computation of income from business under section 10 and, if loss, would thus not include speculative loss would not figure at all in the income computed under that head. There would be two consequences flowing from this proposition and both in our opinion have material repercussions on the determination of the present controversy between the parties. The first consequence would be that the total income of the assessee chargeable to tax would not include loss in speculative business and the second consequence would be that loss in speculative business would not be included in the income from business in respect of which a set-off can be claimed under section 24(1) and would not form the subject-matter of that section. We may point our here that there is a decision of the supreme court in Indore Malwa United Mills Ltd. Commissioner of Income-tax, which also supports us in the view that section 24(1) does not cover loss in speculative business. In that case the question arose in regard to the original first proviso to section 24(1), which dealt with loss sustained by an assessee i an Indian state. Of course the original first loss sustained by an assessee in an Indian state was worded differently that the present first proviso dealing with loss in speculative business but construing section 24(1) the Supreme court held that section 24 (1) when it talks of profits and gains has reference to taxable profits or taxable gains; in other words it has reference to such profits and gains as would be assessable in British India or the taxable territories. The expression 'loss of profits or gains' in section 24 (1) was read by the Supreme Court as referring to loss in regard to taxable profits or taxable gains and it was on that basis that the Supreme court held that the loss suffered by the assessee in that case in the Indian State of Indore which was not liable to be included in its taxable income since it was non-resident was not covered by section 24(1). On the same reasoning it is clear that the loss referred to in section 24(1) is loss under any of the heads mentioned in section 6 computed for the purpose of arriving at the assessable income and speculative loss is not to be taken into account for the purpose of such computation, it cannot be covered by section 24(1).

8. Having said this much, let us examine the position as regards the assessment of a firm under the Act. A firm is an assessee under section 2(2) and whether or not it is registered under section 26A for the purpose of the Act, its taxable income is computed in its hands as that of an entity by following the procedure set out in sub-section (1), sub-section (3) or sub-section (4) of section 23. Registration of the firm makes no difference as regards the computation of the total income which has to be done in either case in the hands of the firm. But then comes the difference between a registered firm and an unregistered firm as regards the assessment procedure. If the firm is unregistered, the tax payable by the firm itself is determined as in the case of any other entity and the demand or levy is made on the firm itself. On the other hand if the firm is registered, a different procedure is followed and that is set out in section 23(5)(a). Prior to its amendment by the Finance Act, 1956, section 23(5)(a) was in the following terms;

'(5) Notwithstanding anything contained in the foregoing sub-sections, when the assessee is a firm and the total income of the firm has been assessed under sub-section (I) sub-section (3) or sub-section (4), as the case may be, _ (a) in the case of a registered firm, the sum payable by the firm itself shall not be determined but the total income of each partner of the firm, including therein his share of its income, profits and gains of the previous year, shall be assessed and the sum payable by him on the basis of such assessment shall be determined :. . . . . . .'

9. The position, therefore, was that the firm did not itself pay the tax and the tax payable by the firm was, therefore, not determined but each partner's share of total income of the firm computed in accordance with section 16(1)(B) was added to his other income, the tax payable by each partner on the basis of such income (including his share of the firm's total income) was determined and the demand or levy was made on the partners individually. By the Finance Act, 1956, however, section 23 (5)(a) was amended and after the amendment, the section reads as follows :

'23. (5) Notwithstanding anything contained in the foregoing subsections, when the assessee is a firm and the total income of the firm has been assessed under sub-section (1), sub-section (3) or sub-section (4) as the case may be, -

(a) in the case of a registered firm,

(i) the income-tax payable by the firm itself shall be determined and

(ii) the total income of each partner of the firm, including therein his share of its income, profits and gains of the previous year, shall be assessed and the sum payable by him on the basis of such assessment shall be determined : Provided that if such share of any partner is a loss it shall be set off against his other income or carried forward and set off in accordance with the provisions of section 24.. . . .'

10. It will be seen that even after the amendment, the position is the same, but with this material difference that income-tax at specially lowrates is now assessable on a registered firm, through no super-tax is assessable on it. The partners of a registered firm are still liable as before to be charged in their individual assessment to both income-tax and super-tax in respect of their shares of the firm's total income with the result that there is double taxation in the case of a registered firm so far as income-tax is concerned. Partial relief against such double taxation is, therefore, granted by section 14(2) (aa). Now the total income of the registered firm chargeable to tax cannot, for reasons we have already discussed, having regard to the first proviso to section 24(1), include speculative loss. The share of each partner in the total income of the registered firm would not, therefore, include his share in speculative loss sustained by the registered firm. What would be apportioned amongst the partners for the purpose of their individual assessment would be the total income of the registered firm and since this total income would not include speculative loss, speculative loss would be apportioned amongst the partners. If the total income of the registered firm (without taking into account speculative loss) is a loss, such loss would be apportioned amongst the partners for the purpose of their individual assessment and each partner would be entitled to set off his share of such loss against his other income or carry it forward and set it off in accordance with the provisions of section 24. The speculative loss, if any, would remain amortized as it were, unnoticed for the purpose of determining the total income of the registered firm and unapportioned amongst the partners for their individual assessment. Neither the registered firm nor the partners would be entitled to get the benefit of such loss for the particular assessment year. What then is to happen to such loss Is it to be regarded as altogether lost or can it be avoided of for set-off in the subsequent years The answer is provided by section 24(2).

11. But before we turn to section 24(2), it would be convenient at this stage to examine the scope of the second proviso to section 24(1). The second proviso to section 24(1) also provides for apportionment of loss amongst the partners of a registered firm and the learned Advocate General strongly relied on this proviso and contended that this proviso applied to any loss. Whether speculative or non-speculative and that speculative loss was also, therefore, liable to be apportioned amongst the partners under this proviso and the partners alone were entitled to have the amount of such loss set off under section 24. Of course if this contention of the learned Advocate-General were correct, nothing more need be said about the present case for in that event the assessee being a registered firm, it would not by reason of proviso (c) to section 24(2) be entitled to tell the taxing authorities that its speculative losses of previous years should be carried forward and set off against its speculative profit of the assessment year. The taxing authorities would in that event tell the assessee that those losses were liable to be apportioned amongst the partners under the second proviso to section 24(1) and were in fact so apportioned and they cannot, therefore, be allowed to be carried forward and set off against the assessee's speculative profit for the assessment year. But we do not think this contention of the learned Advocate-General can be sustained. It sins against the fundamental rule of construction that a proviso must be construed with reference to the principal matter to which it stands as a proviso. It treats the second proviso to section 24(1) as if it were an independent enacting clause instead of being dependent of the main enactment. It must be remembered that 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 the effect of the proviso must ordinarily be confined to the subject-matter of the main enactment. The proviso must operate within the sphere occupied by the main enactment and should not ordinarily be extended beyond the main enactment and should not ordinarily be extended beyond the main enactment unless the language completes a contrary conclusion as was the case in regard to the first proviso to section 24(1). No considerations such as those which the Bombay High Court took into account while construing the first proviso as a substantive enactment arise in the case of the second proviso and the principle of construction to which we have referred must apply in construing the second proviso. Section 24(1) deals with set-off of loss under one head against profit under another head and the language of the second proviso is clearly applicable to a case of set-off as between different heads. The second proviso fits in appropriately with the language of the main enactment so as to be a real proviso and it must be construed as dealing with the subject matter of the main enactment. So construed it is clear that what the second proviso says is that if any loss under one head cannot be set off against income, profits and gains under any other head as provided in section 24(1) such loss shall be apportioned amongst the partners of the firm and they alone shall be entitled to have the amount of the loss set off under section 24. The second proviso does not cover speculative loss because as we have already pointed out above, speculative loss is not loss dealt with by section 24. To hold that speculative loss is covered by the second proviso would be to extend the second proviso beyond the field occupied by the main enactment contained in section 24(1) and to treat it as a substantive enactment for which there is absolutely no warrant or justification. That the second proviso cannot be regarded as a substantive enactment but must be construed as a proviso cannot be regarded as a substantive enactment but must be construed as a proviso to the main enactment contained in section 24(1) is also the view taken by a Division Bench of the High court of Bombay in Jamnadas Daga v. Commissioner of Income-tax. Tendolkar J., delivering the judgment of the Division Bench, observed in regard to the second proviso :

'Ordinarily the principle of construction is clear that the proper function of a proviso is to except and deal with a case which would have otherwise come within the general language of the substantive part of the enactment; and ordinarily, therefore, we must interpret proviso 2 as being limited to that purpose only. But it is argued that the first proviso to this sub-section which deals with the loss sustained in speculative transactions has been held by a decision of a Division Bench of this court, to which I was a party, in Keshavlal Premchand v. Commissioner of Income-tax, to be itself a substantive enactment and not a proviso and equally the second proviso should also be held to be a substantive enactment and not a proviso. Now, when one looks at the decision in Keshavlal v. commissioner of Income-tax, we clearly set out the well recognised canon of construction of a proviso; but we were in the main influenced by the clear words of the first proviso in coming to the conclusion that it was a substantive enactment. The words that we emphasised were in competing the profits and gains chargeable under the head 'profits and gains of business, profession or vocation.' We pointed out that the profits and gains of a business, profession or vocation were not computed under section 24 but they were computed under section 10 and, therefore, the words, were quite incapable of an interpretation that the first proviso was a proviso proper to the substantive enactment in section 24(1); and, therefore, were held that it was by itself a substantive enactment. No such consideration arises from the language of the second proviso which we have reproduced. That language is clearly applicable to a set-off as between different heads; and, therefore, in our opinion, the proviso should be restricted to the normal function of a proviso, namely, to exclude from the operative part of section 24(1) something which might otherwise have been included in it.'

12. The Division Bench thus clearly held that the second proviso was a real proviso to the main enactment in section 24(1) and was to be read as confined to the subject-matter of the main enactment. This decision of the Division Bench is binding upon us though, as we have stated above, even if the matter were res integra our view would have been the same. The second proviso being confined to the subject-matter of the main enactment in section 24(1), it is impossible to hold that loss in the second proviso means any loss including speculative loss and that speculative loss can therefore, be apportioned amongst the partners under the second proviso. The loss referred to in the second proviso is the loss dealt with in section 24(1) and that is the loss without taking into account speculative loss. Section 24(1) says that if there is a loss under any head (excluding speculative loss if the head is business), an assessee shall be entitled to have the amount of such loss set off against his income, profits and gains under any other head, but if such loss cannot be set off by reason of non-existence or inadequacy of income, profits and gains, the second proviso declares that it shall be apportioned amongst the partners and the partners shall be entitled to have the amount of such loss set off under section 24. We are therefore, of the view that speculative loss sustained by a registered firm cannot be apportioned amongst the partners under the second proviso to section 24(1). We may point out that this construction which we are adopting harmonizes with the construction with the construction of section 23(5)(a) where also we have said that the total income which can be apportioned amongst the partners for their individual assessment cannot take into account speculative loss so that speculative loss would not be apportioned amongst the partners for the purpose of their individual assessment even under section 23(5)(a).

13. That takes us to section 24(2). When the assessment of an assessee is completed it may be that after applying the provisions of section 24(1) there is a loss incurred by an assessee. What is to happen to such loss Is the assessee not to get the benefit of such loss in the subsequent years Is the assessee not to get the benefit of such loss in the subsequent year section 24(2) enables an assessee under certain circumstances and subject to certain limitation to carry forward such loss and set it off against his profit in the subsequent year. Now what is the loss which can be thus carried forward and set off and under what circumstances and subject to what limitations can this be done In order to answer this question it is necessary first to examine the language of section 24(2). We may point out here that section 24(2) has undergone changes from time to time and we shall have occasion to refer to some of those changes a little later when we deal with some of the decisions cited by the learned Advocate-General in support of his contention. For the moment we shall confine our attention to the language of section 24(2) as it stands today, for that is how it stood at the material time. Section 24(2) is in the following terms :

'24. (2) Where any assessee sustains a loss of profits or gains in any year, being a previous year not earlier than the previous year for the assessment for the year ending on the 31st day of March, 1940 in any business, profession or vocation, and the loss cannot be wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no other head of income shall be carried forward to the following year; and

(i) where the loss was sustained by him in a business consisting of speculative transactions, it shall be set off only against the profits and gains, if any of any business in speculative transactions carried on by him in that year;

(ii) where the loss was sustained by him in any other business, profession or vocation, it shall be set off against the profits and gains, if any, of any business profession or vocation carried on by him in that year provided that the business, profession or vocation in which the loss was originally sustained continued to be carried on by him in that year; and

(iii) if the loss in either case cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following year and so on, but no loss shall be so carried forward for more than eight years;

Provided that - . . . .

(c) nothing herein contained shall entitle any assessee, being a registered firm, to have carried forward and set off any loss which has been apportioned between the partners, under the proviso to sub-section (1), or entitle any assessee, being a partner in an unregistered firm which has not been assessed under the provisions of clause (b) of sub-section (5) of section 23, to have carried forward and set off against his own income any loss sustained by the firm;. .'

14. The first premise on which the section proceeds is that the assessee has sustained a loss of profits or gains in any year, being a previous year not earlier than than the previous year for assessment for the year ending on 31st March, 1940, in any business, profession or vocation. Now, this premise would clearly be satisfied by a loss of profits or gains sustained by an assessee in speculative business. It is important to note that the words used in the section are' in any business.... ...' Let us then consider whether there is anything else in the section which restricts the generality of this premise and confines the applicability of the section to loss other than speculative loss. The second premise is described by the words '... and the loss cannot be wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no other head of income'. Considerable controversy turned on these words and we shall examine the merits of that controversy presently. But before we do so we must refer to clause (1) of the section. That clause says in relation to the loss which can be carried forward under the section that if the loss is a loss in speculative business, it shall be set off only against the profits and gains, if any, of any speculative business carried on by the assessee in the subsequent year. This clause clearly shows that the loss dealt with in section 24(2) covers speculative loss and that speculative loss can be carried forward to the subsequent year and set off against the profits and gains, if any of speculative business carried on during the subsequent year. The general words in which the first premise is couched and clause (1) must, therefore lead, us to the conclusion that speculative loss is covered by the provision for carry forward and setoff contained in section 24(2) Now, from this position the learned Advocate General wanted us to conclude that if the loss contemplated by section 24(2) a General wanted us to conclude that if the loss contemplated by section 24(2) could be speculative loss, it must follow that the words '.... and the loss cannot be wholly set off under sub-section (1), so much of the loss as is not so set off' must be applicable to speculative lass. So far we agree with the learned Advocate-General, but the question is what is the true construction of these words. It is here that our disagreement with the learned Advocate General commences. On the construction of these words the learned Advocate-general submitted and he tried to fortify his submission by relying on two decisions one a decision of the Bombay High court and the other a decision of the Supreme Court, that these words are applicable only to loss to which section 24(1) applies and which is capable of being set off under section 24(1) but which cannot be set off having regard to the in adequacy of income, profit and gains. Taking his stand on this construction, the learned Advocate-General tried to go backwards to arrive at the interpretation of section 24(1) with a view to showing that speculative loss was covered by section 24(1). The argument was that if the correct construction of these words be are clearly applicable, must be covered by section 24(1). The learned Advocate-General contended that section 24(1), therefore applies to speculative loss and speculative loss is, therefore, liable to be apportioned amongst the partners under that proviso. The next step in the argument of the learned Advocate-general was based on proviso (c) to section 24(2) and the contention was that since speculative losses of the previous years were liable to be apportioned amongst the part. ners under the second proviso to section 24(1) and had in fact been so apportioned, the assessee was not entitled by reason of proviso (c) to section 24(2) to carry forward those losses and to set them off against its profits. This contention was, as we have already mentioned, sought to be supported by the learned Advocate-General by two decision. The first decision of the High Court of Bombay in Indore Malwa United Mills Ltd. v. Commissioner of Income-tax and the other was the decision of the Supreme Court in the same case when it went in appeal before the Supreme Court, We have already referred to that decision and it is reported in Before we consider these two decisions relied upon by the learned Advocate-General in support of the construction contended for by him, we would first prefer to deal with the language of section 24(2) itself and see where that language leads us. As we have already pointed out above, section 24(2) applies equally to speculative loss as to any the loss above, section 24(2) applies equally to speculative loss as to any other loss and the words. '...and the loss cannot be wholly set off under sub-section (1), so much of the of the loss as is not so set off' must therefore, apply to speculative loss. Now we have already held for reasons which we have set our approve that speculative loss is not covered by section 24(1) and cannot be set off against any other income profits or gains under section 24(1). It is in the context of this position that we have to see what the words '... and the loss cannot be wholly set off under sub-section (1), so much of the loss as is not so set off' mean in section 24(2). If the construction contended for by the learned Advocate-General were accepted, it would lead to one of two consequences, namely, that either section 24(1) applies to speculative loss and speculative loss is capable of being set off under section 24(1) or that speculative loss is capable of being set off under section 24(1) or that speculative loss is not covered by section 24(2). But both these consequences would be impermissible. The first would be contrary to the plain construction of section 24(1) which is now settled beyond doubt by the decisions of various High courts including the decision of the Bombay High court in Keshavlal Premchand's case and the decision of the Supreme Court in Indore Malwa United Mills case while the second would have the effect of restricting the generality of the opening words of section 24(2) which lay down the first premise for the applicability of the section and would also reduce clause (1) of the section to silence. Neither of these two consequences should be permitted to arise if it is possible to put a construction on the words used which without doing any violence to language or grammar can bring about a situation where sub-section (1) and (2) can both be reconciled and harmoniously read. Such a construction is in our opinion possible and is not excluded by the language used. The words used are '.....and the loss cannot be wholly set off under sub-section (1)'. These words can certainly mean that where the loss cannot be set off under section 24(1) because it is loss to which section 24(1) does not apply and, therefore, not capable of being set off, such loss can be carried forward to the subsequent year. of course, the words 'wholly' and 'so much of the loss, as is not so set off' standing by themselves prima facie seem to suggest that the loss contemplated is los which is capable of being set off, but cannot be wholly set off because of inadequacy of income, profits and gains and so much of the loss as is not so set off is allowed to be carried forward. But it must be remembered that these words were being used by the legislature to deal with losses, speculative as well as non-speculative, and the same of words having been used to deal with both kinds of losses, it would not be right to refuse to apply these words to speculative loss merely because some of the words may not be wholly appropriate in their application to speculative loss. Lord Wrenbury said in relation to the English Income-tax Act-and what he said applies equally in relation to the English Income tax Act-that 'no reliance can be placed upon an assumption of accuracy in the use of language in these Acts' (vide Kensington Income-tax commissioners v. Aramayo). The duty of the court in construing a statute such as this must be, as observed by Viscount Simon in Rex v. General Commissioner of Income Tax for the city of London, to find out 'what the legislature must be taken to have really meant by the expression which it has used, without necessarily attributing to it a precise appreciation of the technical appropriateness of its language.' The legislative intent, in our opinion, is clear and unambiguous and is expressed with sufficient certainly and we would not be justified in defeating it by placing an undue emphasis on the technical appropriateness of the language used by the legislature. The words used by the legislature are sufficiently flexible to admit of application to speculative loss and they can be read to apply to speculative loss without in any way offending grammar or language. Where there is speculative loss and they can be read to apply to speculative loss without in any way offending grammar or language. Where there is speculative loss, can it not be said that it is loss which cannot be wholly set off under sub-section (1) because it cannot be set off at all under section 24(1) or in other words the whole of it cannot be set off under section 24(1) because section 24(1) does not apply to it and that being the position, the whole of the loss can be carried forward The words 'so much of the loss as it not to set off' can certainly refer to the whole of the loss which is not set off under section 24(1) because it is not capable of being so set off'. 'so much' denotes quantity and it is not inappropriate to construe these words in the context as comprising the whole of the loss where the loss is speculative loss. This is the only way in which he ruck in the texture of the section can be straightened out. We are, therefore, of the opinion that the words '....and the loss cannot be wholly set off under sub-section (1), so much the loss as is not so set o

ff' can and do apply to speculative loss even though speculative loss is not loss covered by section 24(1). It would not be right to put a narrow and contracted meaning that speculative loss is covered by section 24(1) when the language of section 24(1) clearly shows that it does not apply to speculative loss and it has in fact been so held by decisions of various High Courts including the decision of the Bombay High Court in Keshavlal Premchand's case and that view is amply supported by the decision of the Supreme Court in Indore Malwa United Mils case We, therefore, adhere to the view that section 24(1) does not apply to speculative loss and speculative loss sustained by a registered firm cannot be apportioned amongst the partners under the second proviso to section 24(1) and that being so, the revenue cannot rely on proviso (c) to section 24(2) to negative the right of the registered firm under the main enactment in section 24(2) to carry forward its speculative loss and set it off against its profit in the subsequent years.

15. That would be the position on a question of plain construction. But we were told by the learned Advocate-General that such construction would be contrary to what has been laid down by the Bombay High Court and the Supreme Court in the Indore Malwa United Mills case Turning first to the decision of the Bombay High court, it is undoubtedly true that the Bombay High court held in that case that before an assessee can claim to carry forward any loss under section 24(2) the loss must be such as could have been set off initially under section 24(1) and that the condition precedent to the applicability of section 24(2) is that the loss in respect of which a special right is given to carry forward must be loss to which initially section 24(1) must apply. Now in order to appreciate this view of the Bombay High Court-which of course is binding upon us as it stands - it is necessary to see what was the state of the law at the date of the decision which was required to be determined and applied by the Bombay High Court was concerned was the assessment year with which the Bombay High Court was concerned was the assessment year 1950-51 and the question was as regards loss sustained by a non-resident assessee in an Indian State for the assessment year 1948-49 which the assessee claimed to carry forward and set off against its profits for the assessment year 1950-51. Section 24(1) during the material period comprised the following proviso :

'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 provisions....'

16. Section 24(2) was also differently worded and there was proviso (a) to that section which also dealt with loss incurred in an Indian State. Section 24(2) and Proviso (a) were as follows :

'24. (2) Where any assessee sustains a loss of profits or gains in any year, being a previous year not earlier than the previous year for the assessment for the year ending on the 31 st day of March, 1940, under the head 'profits and against of business, profession or vocation ' and the loss cannot be wholly set off under sub-section (1), the portion

not so set off shall be carried forward to the following year and set off against the profits and gains, if any, of the assessee from the same business, profession or vocation for that year; and if it cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following year and so on; but no loss shall be so carried forward for more than six years :

Provided that - (a) where the loss sustained is a loss of profits and gains of a business, profession or vocation to which the first proviso to sub-section (1) is applicable, and the profits and gains of that business, profession or vocation are, under provisions of clause (c) of sub-section (2) of section 14, exempt from tax, such loss not be set off except against profits and gains accruing or arising in an Indian State from the same business, profession or vocation and exempt from tax under the said provisions'.

17. These were the provisions which fell to be construed by the Bombay High Court and it was in the context of these provisions that the Bombay High Court took the view that section 24(2) could not be invoked unless the loss which was claimed to be carried forward was loss to which initially section 24(1) applied. In the first place the loss referred to in section 24(2) as it then stood was obviously loss of profits or gains under the head 'profits and gains of business, profession or vocation' and the import of it could not, therefore, be any different from that in section 24(1). If loss in section 24(1) meant loss other than Indian state loss in the case of a non-resident, loss in section 24(2) could equally not comprise Indian State loss for the words 'loss of profits or gains.....under the head 'Profits and gains of business, profession or vocation' in section 24(2) could not have a different meaning than the words 'loss of profitsor gains.....under any any of the heads mentioned in section 6 which would include the head 'profits and gains of business, profession or vocation' in section 24(1) and it was, therefore, clear by the very language of section 24(2) as it stood then that unless a loss was cover by section 24(1) it could not form the subject matter of carry forward and set off under section 24(2). It is significant, to note that when the present first proviso was introduced in section 24(1) by the Finance Act, 1953, with effect from 1st April 1952, taking out speculative loss from the scope and ambit of section 24(1) an amendment was also made in section 24(1), though by another pieces of legislation, namely, the Income-tax Amendment Act 1953, which substituted the words, 'in any business profession or vocation' for the words 'under the head 'profits and gains of business, profession or vocation' in section 24(2). The words 'under the head 'profits and gains of business, profession or vocation' which had the effect of limiting the scope and ambit of the word 'loss' by confining it to the loss referred to in section 24(1) were taken out and instead were introduced the words 'in any business, profession or vocation' so as to release the loss referred to in section 24(2) from the narrow confines to which it was case by the previous words and 'loss' in section 24(2) thereafter included also speculative loss though speculative loss was not included in section 24(1). The fact that 'loss' in section 24(2) includes speculative loss in and was made further clear by the addition of clause (1) in section 24(2) at the time when the legislature made the amendment by the Finance Act, 1956. This Bombay High Court did not have before it section 24(2) in is present form nor was the Bombay High Court concerned with the position as it obtained after the introduction of the present first proviso to section 24(1) and the amendment of section 24(2) by the Income-tax Amendment Act, 1953. It must be remembered that the language of a statute has always to be construed with reference to be context and the same word or expression may convey one meaning in one context and may convey another in a different context. Construction ex Vi termini involves fitting together of words with their context. Words in most cases take their colour from their environment. Barring certain words which are so precise and distinctive as to admit of only one meaning, which are generally technical or scientific words, the majority of words and phrases depend on the context and hence the familiar phrase that they must be construed secundum subject material. A variety of signification may often lie in a word or expression depending upon the context in which it is used and it should be the duty of the court to arrive at the true meaning of the words or expression used, having regard to the context in which is occurs. As observed by judge Learned Hand in one of his classical passage' It is true that the words used, even in their literal sense, are the primary and ordinary the most reliable source of interpreting the meaning of any writing, be it a statute, a contract or anything else. But it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary, but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning.' This is what we have attempted to do today and in this the decision of the Bombay High court referred to by the learned Advocate-General does not stand in our way, for it is based on a section which has undergone a material change since the time at which the Bombay High Court was called upon to construe it. he same observation must also apply to the decision of the Supreme Court in that very case when it went before it in appeal. The supreme Court undoubtedly observed that '......the High Court rightly took the view that for the application of sub-section (2) of section 24, the losses must be such loss as could have been set off under sub-section 24, the losses must be such as loss as could have been set off under sub-section (1) of section 24.' But that again was based on the section as it stood at the material time and the supreme court as a matter of fact quoted the section as it then existed in its entirely before reaching its decision and making the aforesaid observations. we do not think that section 24(2) as it stands to day after the changes it has undergone must be construed time was construed by the Supreme Court in this case.

18. The learned Advocate-General lastly relied on certain anomalies which would arise if we accept the construction suggested on behalf of the assessee. He urged that the result of our accepting this construction would be that, where a registered firm would not get the benefit of setting off his share of the loss of the registered firm is carrying on speculative business, a partner of such registered firm would not get the benefit of setting off his share of the loss of the registered firm in speculative business of his own would have an advantage, for not only would the registered firm get the benefit of carry forward and set-off of the loss incurred in speculative business in the year in which there are speculative profits would stand reduced by reason of such profits being set off by the carried forward loss of the registered by reason of such profits being set off by the carried forward loss of the registered firm. But these are not relevant considerations to be borne in mind in construing a section. Merely because certain anomalies may arise on one construction or the other, that would be no ground for refusing to put upon the section a construction which the section must necessarily bear. Some anomalies are bound to arise whether we adopt one view or the other. Income-tax, as has very often been said, is not cast upon absolutely logical lines and this is certainly not a factor which should deter us in placing upon the sections a constructions which we think is the right construction to be put upon it.

19. In this view of the matter our answer to the question referred to us will be in the affirmative. The assessee will get the costs of the reference from the commissioner.

20. Questions answered in the affirmative.


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