SRINIVASAN J. - The question that is raised in this reference is the extent to which loss arising from speculative transactions can be set off. The assessee who is a regular dealer in zinc and metal ingots returned an income of Rs. 7,796 for the assessment year 1953-54 after setting off a loss of Rs. 23,162 in two transactions with one Muralidhar Bhagwandas of Bombay. It is not disputed by the assessee that these were speculative transactions, that is to say, that they were forward transactions in zinc and tin ingots which did not involve and which was definitely not even intended to involve any delivery of the goods. The transactions were settled by mere payment of differences. On this point there is no dispute, and the Income-tax Officer definitely found on the basis of the correspondence that was placed before him that these transactions were of a speculative kind. The officer held that the loss in such speculative transactions could be set off only against profits in similar speculative transactions and could not be set off against other income. This view was confirmed both by the Appellate Assistant Commissioner and by the Tribunal when the matter was carried in appeal to it. On the application of the assessee the following question of law has been referred to us :
'Whether the aforesaid loss of Rs. 23,162 in speculation can be set off against the other income of the assessee computed under assessee 10 having due regard to the provisions of the second proviso to section 24(1) ?'
In the argument before us, it has been urged by the learned counsel for the assessee that what he is seeking is not a set-off coming within the scope of section 24(1) of the Income-tax Act, but the adjustment of losses incurred in the course of business against the profits also derived from that business. It is claimed that before the proviso to section 24(1) can be applied the case has to be brought within the main part of the section itself. Section 24(1) enables the assessee to set off losses in any year under any of the heads mentioned in section 6 against his income, profits or gains under any other head in that year. The argument is that the losses that he incurred is under the head of business in section 6; he does not seek to have this loss set off against income or profits under any other head in that section but only asks that this loss should be adjusted against the profits under the same head of business; that being so section 24(1) does not apply with the result that the proviso will not be attracted.
Learned counsel for the assessee concedes that the decisions are against his contention but he maintains that the matter has to be reconsidered in the light of the argument he has advanced. The particular decision in question in Keshavlal Premchand v. Commissioner of Income-tax. In dealing with this decision, Kanga in his Income-tax Act (at page 600) observes :
'The question, however, remains whether such a loss in a business consisting of speculative transactions can be adjusted or set off against profits in any other non-speculative business, profession or vocation under section 10 itself. It is submitted that such a loss can be so adjusted or set off and to such a case this proviso would have no application at all. The words of the proviso, apart from the context, are wide enough to cover such a case. But the proviso would nevertheless not apply because where a loss in any business is sought to be adjusted or set off against the profits of any other business, profession or vocation, such adjustment or set-off is to be made under section 10 itself, and sub-section (1) of this section has no application to such a case since the sub-section applies only to cases where a loss under one head is sought to be set off against profits under another head.......... The Bombay High Court has taken the contrary view in Keshavlal Premchand v. Commissioner of Income-tax that this proviso is a substantive enactment and its effect is to prohibit the adjustment or set-off of loss in speculative business against profits from non-speculative business though such adjustment or set-off is done under section 10 itself and section 24(1) has no application to such a case. It is submitted that this decision requires reconsideration.'
The question, therefore, is whether the principle laid down in the above decision is correct.
In dealing with the argument that since this prohibition against adjustment occurs in the shape of a proviso, it must not be looked upon as a substantive provision, the learned Chief Justice of the Bombay High Court laid emphasis upon the opening words of the proviso 'in computing the profits and gains chargeable under the head profits and gains of business, profession or vocation' and observed that in doing so, the legislature was not referring to the loss to be ascertained for the purpose of a set-off under section 24(1). He proceeded :
'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 proviso that the resultant loss in the business had to be ascertained, then the language used 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 rewrite 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 the 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 a business, profession or vocation.'
The principle of this decision has been followed in Commissioner of Income-tax v. Ramgopal Kaniyalal by the Madhya Pradesh High Court. It would be sufficient to extract the headnote which reads :
'The express words in the first proviso to section 24(1) of the Income-tax Act imply that the proviso governs section 10 of the Act, and clearly modify the method of computation under section 10. A proviso normally operates in the field which is the subject-matter of the main section and its operation should not be extended beyond it, but there may be exceptional cases where a proviso can be construed to operate beyond the main section.'
It is clear, therefore, that the view taken by the department can be supported by authority. We find ourselves in respectful agreement with the view taken by Chagla C.J. of the scope of the proviso. Even if the principal part of section 24(1) is not invoked by the assessee for the purpose of the set-off and he seeks to rely upon the adjustment of profits and losses under the main head of business by the computation of income under section 10 of the Act, this proviso controls such adjustment for the reason that it directs that in effecting such computation of profits under the head of business, losses sustained in speculative transactions shall be dealt with in a special way. The circumstance that this proviso, though it affects section 10 of the Act, has been placed under section 24(1) cannot, in the light of decided cases, be taken to mean that it has no real application to section 10 and that it controls only the main part of section 24(1).
In Commissioner of Income-tax v. Indo-Mercantile Bank Ltd. the Supreme Court had to consider the proper function of a proviso. They observed : 'The territory of a proviso therefore is to carve out an exception to the main enactment and exclude something which otherwise would have been within the section. It has to operate in the same field and if the language of the main enactment is clear it cannot be used for the purpose of interpreting the main enactment or to exclude by implication what the enactment clearly says unless the words of the proviso are such that that is its necessary effect.' The rule is not inflexible that a proviso cannot travel beyond the ambit of the main enactment.
In the result, the question is answered in the negative and against the assessee. The assessee will pay the costs, Rs. 250.
Question answered in the negative.