K.N. Wanchoo, C.J.
1. This is a reference under Section 66(1) of the Income Tax Act (hereinafter called the Act) by the Income-tax Appellate Tribunal. The question, which has been referred to this Court for opinion, is this:
'Whether on the facts and in the circumstances of this case, the asscssec was entitled to set off the loss of Rs. 13,588/- which accrued or arose to the assessee at its Gulabpura shop in Rajasthan, an Indian State against its business income accruing or arising in British India under any of the provisions of the Indian Income-tax Act?'
2. The facts which have been stated by the Appellate Tribunal are these. The assessment year under consideration is 1949-50. The assesses is a Hindu undivided family resident in Beawar in the former State of Ajmer and derives income from property, managing agency commission, Edward Mills, and dividends and also carries on business at Kekri, Bijainagar, Gulabpura, Jainagar, Bombay and Hansi. The assessee's head-office is at Beawar. During the previous year under consideration, the asscssec suffered a loss in its business in specula-tion and arhat at its branch shop at Gulabpura situate in Rajasthan, then an Indian State. This loss is claimed to set off against its other business income in what was British India which amounted to Rs. 8,578/-.
The Income-tax Officer did not agree with this claim of the assessee and held that the loss having arisen outside British India could not be set ott against British Indian income. The Appellate Assistant Commissioner, however, held that the loss of Rs. 13,588/- suffered in Gulabpura shop could be set off against business income arising in British India as business income had to be computed as a whole. There was a second appeal to the Appellate Tribunal by the Income-tax Deportment (hereinafter called the Department) which was dismissed Thereupon the Department made an application under Section 66(1) for reference of the question of law arising in the case to the High Court and that is how the question set out above has been referred to us.
3. The answer to the question depends upon the interpretation of the first proviso to Section 24(1) of the Act as it stood in the year in dispute. The relevant provision is as follows:
'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 exempt from tax, such loss shall not be set off except against profits or gains accruing within an Indian State and exempt from tax under the said provisions.'
4. The leading case on the point is Commissioner of Income-tax Bombay City v. Murlidhar Mathurawalla Mahajan Association : 16ITR146(Bom) . The basis of that judgment was that section 24(1) only duals with the right of an assessee who has made a loss under one head enumerated in Section 6 to set off that loss against a profit made by him under a different head under Section 6, Different businesses do not constitute different heads under the Act.
All businesses wherever carried on constitute one head which falls under Section 10 of the Act 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 under the same head. It is only when he proceeds to set off a loss under business head against a profit under some other head that Section 24 comes into operation. Consequently where an assessee has a business in what was British India and another in an Indian State and loss is incurred in the business in an Indian State, it could be set off against profits realised in British India.
5. The conclusion was that Section 24(1) deals with only setting off losses against profits under different heads and, therefore, the first proviso must also be confined to cases where different heads are con-cerned and cannot come into play where the question is of setting off losses under one head in an Indian State against profits under the same head in British India. This view was taken on the principle of law that a proviso cannot expand the scope of the main section to which it is a proviso.
6. This view has been followed by a number of other High Courts. The Nagpur High Court took the same view in Mohanlal Hiralal v. Commissioner of Income-tax, C. P. and Berar . The Punjab High Court followed suit in Commissioner of Income Tax, Punjab v. Hira Mal Naraindas . The Hyderabad High Court held the same view in Commissioner of Income Tax. Hyderabad v. Baliram Santhoba . The Travancore-Cochin High Court followed suit in Indo Mercantile Bank Ltd. v. Commissioner of Income-tax : 29ITR619(Ker) . Madras High Court also came to the same conclusion in Parasram Jetha-nand v. Commissioner of Income-tax, Madras : 29ITR818(Mad) .
7. The only dissentient voice is that of the Allahabad High Court. It held in Mishrimal Gulab-chand of Beawar, In re : 18ITR75(All) that a loss under one head arising in an Indian State could not be set off against profits under the same head arising in British India on the ground that Section 14(2)(c) of the Act exempted profits arising in an Indian State from being used to reduce the losses arising in British India. This case, however, did not deal with the proviso because it referred to a period when the proviso was not in force. The matter came up before the Allahabad High Court in another case Raghunath Prasad v. Commissioner of Income-tax, U. P. and Ajmer Merwara, Lucknow : 28ITR45(All) . That Court followed its own earlier decision, though by now the proviso was available. The Court, however, did not base its decision on the interpretation of the proviso and preferred the view which had been expressed in the earlier decision on the basis of Section 14(2)(c) of the Act.
8. If the weight of decisions were the only consideration, it is certainly against the Department. It has, however, been contended on behalf of the Department that the High Courts, which have held the view that this proviso cannot be used where the set off is claimed under the same head have not considered the question from the angle that the proviso may be treated as a substantive provision in itself. It is conceded that, generally speaking, a proviso cannot expand the scope of the main provision. But it is contended that there are occasions when, though a provision appears as a proviso, it is in reality a substantive provision in itself and should be used as such. It is urged that this proviso is of this exceptional kind and should be treated as a substantive provision in itself.
If it is so treated, there would be no difficulty in holding that the loss arising in an Indian State under one head be set off against profits arising in British India even under the same head. It is conceded on behalf of the assessee that if this proviso is read as a substantive provision in itself, the contention raised on behalf of the Department would be well founded and the loss under one head in an Indian State could not be set off against a profit under the same head in British India. 'But learned counsel for the assessee contends that this proviso is not of that exceptional kind and it should be confined only to cases of setting off all losses against profits arising against different heads which are dealt with under Section 24(1) to which this is a proviso.
9. The first question that arises is whether a proviso can in exceptional circumstances be treated as a substantive provision by itself. In this connection, reference may be made to Rhondda Urban District Council v. Taff Vale Rly. Co., 1909 AC 253 decided by the House of Lords. The only question there was whether a certain part of S, 51, which was framed as a proviso to preceding sections, could be read as a fresh enactment. Lord Loreburn observed as follows in that connection at page 268:
'It is true that Section 5.1 is framed as a proviso upon preceding sections. But it is also true that the latter half of it, though in form a proviso, is in substance a fresh enactment, adding to and not merely qualifying that which goes before,'
10. The same view was expressed in the matter of Crown Flour Mills Delhi, (S) in these words:
'Ordinarily a proviso is designed to restrict rather than to enlarge the provision to which it is appended but this is not an inflexible rule and there are cases in which the language might well lead one to the conclusion that the Legislature intended to exercise its enacting power. If after a careful examination of the proviso, the provision to which it is attached, and the Act as a whole, the Court comes to the conclusion that the Legislature intended to create a liability, it is the duty of the Court to give effect to the intention even though it is embodied in a proviso. The substance and not the form must be looked at.'
11. There is no doubt, therefore, that in exceptional cases, a proviso may be a fresh substantive enactment and not merely something which is restricting the main provision to which it is attached. We have, therefore, to see whether in this case the first proviso to Section 24 is a fresh substantive enactment or not. We may say with respect that all the cases, to which we have referred above, have not considered this aspect of the matter at all. In order to determine whether the proviso is a substantive enactment, we have to look at the scheme of the Act and the intention of the Legislature so far as it can be found out from the various provisions of the Act.
12. Now Section 3 of the Act is the charging section. Then comes Section 4 which lays down what is the total income of any person and Section 4(1)(b)(ii) lays down that any income accruing or arising to the as-sessee beyond British India during the previous year shall be taken into account. Section 6 provides for six heads of income and one of the heads is profits and gains of business, profession or vocation. Then come Sections 7 to 12 which provide for computation of income under various heads. Section 10 deals with profits and gains of business, profession or vocation and lays down how those profits would be calculated.
Naturally, one of the most important principles for arriving at profits and gains of business is to deduct losses from profits and then arrive at what may be called net profits under that head. Then we come to Section 14(2)(c). It gives exemption of a general 'nature and at the relevant time provided that no tax would be charged 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 what was British India in the previous year by or on behalf of the assessee, Or are assessable under Section 42.
This provision was made in 1941. Under this provision, a person having sources of income both In British India and in an Indian State was under certain circumstances not to pay income-tax on the profits accruing in an Indian State in British India except that under Section 16, the profits were taken into account in determining the rate of income-tax, Then we come to Section 24(1) and the first proviso with which we are concerned. This proviso was added in 1944. The reason for adding this proviso appears to us to be obvious.
The Legislature had already provided that profits accruing in an Indian State and not brought into British India would be exempt from Indian Income-tax. It is equally obvious that by this proviso it was intended that as profits were not being subjected to Indian Income-tax, the losses arising in an Indian State should not be taken into account at all for purposes of reducing the profits earned in British India. The proviso thus appears to us to be supplementary to the exemption granted under Section 14(2)(c) and provided that losses of profits or gains accruing in an Indian State shall not be set off except against profits or gains accruing or arising within an Indian State and exempt from tax under the said provision.
The proviso refers specifically to Section 14(2)(c) and the intention of the Legislature clearly must have been that just as profits arising in an Indian State were not liable to Indian Income-tax if they were not brought into British India, the losses arising in an Indian State should also not be set off against profits arising in British India and should only be set off against income profits and gains arising in an Indian State.
13. The basis of the decisions in the cases which follow the leading Bombay case is that as this proviso appears under section 24 (1) which deals with set off between different heads, it could not be used to forbid a set off under the same head which would otherwise be made under Section 10. It seems to us that this is precisely what the Legislature intended, viz., that losses arising in an Indian State under the head of business should not be set off against profits arising in British India under the same head. It is remarkable that the proviso speaks only of a loss of profits or gains.
The word 'income' is missing from the proviso. Section 6, on the other hand, which deals with heads speaks of heads of income, profits and gains and item (iv) in Section 6 specifically mentions profits and gains of business profession or vocation and Item (vi) mentions capital gains. The other four items refer to income. The proviso, therefore, was apparently dealing only with these two heads which speak of profits or gains and specifically prohibited a loss under these two heads arising in an Indian State from being set off except against profits or gains accruing or arising within an Indian State and exempt from tax under the provisions of Section 14(2)(c).
The intention, therefore, seems to have been that if a businessman, who has business in an Indian State, kept his profits in an Indian State and thus got the exemption of Section 14(2)(c) he should when he incurs losses in an Indian State, be allowed set off against the exempted income and no other. Of course, if he brings the income into British India in any year, he should be entitled to the set-off of losses accruing in an Indian State in that year in view of Section 10, before the income brought into British India would be liable to tax.
The Legislature thus obviously intended that if a business-man was avoiding payment of Indian Income-tax by keeping his profits arising in an Indian State there, he should not be allowed the advantage of setting off his Indian State losses against his income from business in British India and should only get that set off if he also brought the profits arising in an Indian State to British India. Otherwise what would happen would be that a business-man would keep his profits in the Indian State and escape Indian Income-tax, but his losses in an Indian State would be set off against income arising from business in British India. That would be giving him an unfair advantage which he apparently nad from 1941 to 1944. It was only in 1944 that the legislature realised that this unfair advantage was being taken of the law as it stood till then and enacted this proviso.
14. It is said that the place where the proviso has been put in the Act under Section 24(1) must restrict it only to those cases where the set off is claimed as against different heads of income and that it should not be read as a substantive enactment. It is also urged that if intention of the Legislature was that it was a substantive provision, it would not have been placed as a proviso to section 24(1) which deals with the subject of set off with respect to different heads of income. The mere fact, however, that the proviso has been placed under Section 24(1) is not sufficient to confine it to what is contained in Section 24(1) in the circumstances of this case which we have pointed out above.
We may also point out that the proviso is not placed absolutely unsuitably under Section 24(1). That section deals with set-off of losses under one head against profits under another head. Now in order to make this kind of set off, loss and gain under each head has to be determined. After the loss and gain under each head has been determined, the loss under ono head may be deducted from gain under another head. Now one head may have a number of sources of income, as for example, where a businessman has different kinds of businesses spread over British India and an Indian State.
In order to arrive at his net loss or gain under the head of business one has to take into account all his businesses. After that is done, the next loss, for example under the head of business is arrived at. Now the proviso says that in arriving at the net loss or gain under the head of business for purposes of Act, the losses arising even under the same head in an Indian State will not be taken into account in the circumstances where Section 14(2)(c) applies and the profits have been kept in an Indian State, thus avoiding payment of Indian Income-tax.
The proviso, therefore, is of help in determining the net loss or gain of a business. That net loss or gain in turn may have to be set off against net loss or gain under other heads mentioned in Section 6. Therefore, it cannot, in our opinion, be said that this place was utterly inappropriate for a provision of this kind and, that the proviso must be read as only relating to a set off against different heads as provided under Section 6.
15. We may in this connection refer to Keshav-Jal Premchand v. The Commissioner of Income-tax, Bombay : AIR1957Bom20 . There the new proviso to Section 24(1) which dealt with gains and losses from speculation came up for consideration. The language of that proviso is in some ways different; but the propriety of the proviso being put under Section 24 arose there also, for the proviso was only dealing with one head mentioned in Section 6. The learned Judges, who decided this case were the same who decided Mathurawalla's case : 16ITR146(Bom) . They made the following observations in this connection at p. 23:
'It is true that the proviso 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.'
16. We may say with respect that if this very reasoning had been applied to the proviso winch was dealt with in Mathurawalla's case : 16ITR146(Bom) we are sure that the learned Judge would have come to a different conclusion. These observations show that a proviso can sometimes, though not generally, be considered a substantive enactment. They also show that a proviso of the nature which was being discussed in Keshavlal's case : AIR1957Bom20 was not quite inappropriate under Section 24(1). With all respect to the learned Judges, we feel that the proviso with which we are concerned is also not quite so inappropriate if it was put under Section 24(1). Further the proviso which was being dealt with in Keshav-lal's case : AIR1957Bom20 was considered a substantive enactment. Reading the language of the proviso with which we are dealing here, there can, in our opinion, be no doubt that it is a substantive enactment and the intention of the Legislature was that losses accruing in business in an Indian State should not be set off against profits made under the same head in British India and should only be set off against profits arising or accruing within an Indian State.
The place of the proviso is, in our opinion, not quite inappropriate. Therefore, we have no difficulty in holding that the proviso would apply where the set off is claimed 06 the loss arising in an Indian State against profits arising in British India, even though under the same head. That this was the clear intention of the Legislature we have no doubt. The place where the proviso is put in is not quite inappropriate.
In a larger sense, the proviso appears to us to be a substantive enactment. Therefore, the rule that the proviso cannot expand the scope and extent of the main section to which it is a proviso would not apply to this proviso in the circumstances. The proviso definitely and clearly lays down that where loss arises in an. Indian State, that loss would not be set off against profits in British India and would only be set off against profits arising in the Indian State which are exempt under Section 14(2)(c).
17. Our answer, therefore, to the question referred to us is that on the facts and in the circumstances of this case the assessee was not entitled toset off the loss of Rs. 13,588/- which accrued orarose to the assessee at its Gulabpura shop in Raja-sthan, an Indian State against its business incomeaccruing or arising in British India under any ofthe provisions of the Indian Income-tax Act, in theface of the first proviso to Section 24(1) of the Act, Letthis answer be returned to the Tribunal concerned.