COMMISSIONER OF INCOME TAX Vs. KANTILAL NATHUCHAND
LAWS(GJH)-1963-9-18
HIGH COURT OF GUJARAT
Decided on September 13,1963

COMMISSIONER OF INCOME TAX Appellant
VERSUS
KANTILAL NATHUCHAND Respondents

JUDGEMENT

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 S. 24 of the IT 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 S. 26A for the asst. yrs. 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 ITO at the following figures for the asst. yrs. 1958 59, 1959 60 and 1960 61 : For the asst. year 1958 59, there was a loss of Rs. 6,26,606 but it was loss in speculative business and the ITO did not, therefore, set it off against income from ready business in cotton or income from property having regard to the first proviso to S. 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 ITO then applied S. 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 ITO amongst the partners relying on the second proviso Source Asst. year 1958 59 (S.Y. 2013) Asst. yr 1959 60 (S.Y. 2014) Asst. year 1960 61 (SY. 2015) Rs. Rs. Rs. Property profit 1,369 Profit 1,258 Profit 1,014 Ready business profit 28,449 Loss 2,497 Loss 21,197 Speculation business loss 6,26,606 Loss 5,416 Profit 6,19,784 to S. 24(1). The same course was followed by the ITO for the asst. year 1959 60. The ITO, again, having regard to the first proviso to S. 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 asst. yr. 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 asst. year 1960 61. The ITO 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 S. 24(1). The ITO 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 S. 24(1) did not apply since there was profit as distinguished from loss in speculative business during this assessment year. The ITO then taxed the assessee under S. 23(5)(a)(i) and apportioned the total income amongst the partners under s. 23(6) r/w S. 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 ITO preferred an appeal to the AAC, but the AAC confirmed there view taken by the ITO 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 asst. 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 asst. year 1960 61. It is this view of the Tribunal which is challenged before us on behalf of the CIT in this reference.
(2.) THE question which arises for consideration is a question of some importance particularly having regard to the fact that after the amendment of S. 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 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 vs. CIT (1957) 31 ITR 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. "Total income" is defined in S. 2(15) to mean total amount of income, profits and gains referred to in S. 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 S. 3 on the total income of the previous year of an assessee and it, therefore, runs through almost every section of the Act. Sec. 4(1) defines the scope of the total income with reference to the factor of residence. Sec. 6 lays down the heads of income chargeable to income tax and for each head appropriate rules are provided in ss. 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. Sec. 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 CIT vs. Murlidhar Mathurawalla Mahajan Association (1948) 16 ITR 146 a view which has also received the approval of the Supreme Court in Anglo French Textile Co. Ltd. vs. CIT (1953) 23 ITR 82, that all businesses constitute one head under S. 10 and in order to determine what are the profits and gains of business under S. 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 businesses 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 S. 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. Sec. 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 S. 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 in computing the profits and gains chargeable under the head" Profits and gains of business, profession or vocation ", any loss sustained in speculative transactions which are in the nature of a business shall not be taken into account except to the extent of the amount of profits and gains, if any, in any other business consisting of speculative transactions: Provided further that where the assessee is an unregistered firm which has not been assessed under the provisions of cl. (b) of Sub S. (5) of S. 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 not 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." It is clear from the main enactment contained in S. 24(1) that where an assessee sustains a loss under any of the heads mentioned in S. 6, he is entitled to have the amount of the loss set off against his income, profits or gains under any other head. Sec. 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 and there is a profit under the other heads so that the loss can be set off against the profit in order to arrive at 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 vocation", any loss sustained in speculative transactions shall not be taken into account except ot the extent of the amount of profits and gains, if any, in any other business consisting of 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 vs. CIT (supra). 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 non speculative business for the purposes of arriving at the 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 S. 10 under the head "profits and gains of business, profession or vocation "the assessee was entitled to adjust the loss against the profit in non speculative business. The Revenue relied on the first proviso to S. 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 under S. 10, the loss sustained by the assessee in speculative 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 s. 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 come within the ambit of S. 24 (1) and the first proviso to S. 24(1) had, therefore, no application. It was only if a right was claimed by an assessee under S. 24(1) that, argued Mr. Palkhivala, the first proviso could be invoked to defeat such right, but where as in that case the right claimed was not a right under s. 24(1) the first proviso could not be relied upon to negative such right. This contention of Mr. Palkhivala was based on the well known rule of construction that ordinarily a proviso must be read in relation to the principal 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 S. 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 or vocation "and held that what the legislature had 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 ITR 7 (supra) : ' 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 IT Act is antecedent to the question of the right of the assessee to claim any set off under S. 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."
(3.) 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 s. 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 S. 24 (1) could 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 S. 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 the 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 losses would have to be ignored, even though both speculative profits and speculative losses bear the same character. The net 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 S. 24 (1) was thus read by the Bombay High Court as controlling S. 10. Chagla C.J., though taking this view, hastened to add that it was not as if this proviso had no connection whatsoever with S. 24 (1). He observed; (1975) 31 ITR 7 (supra) "It is true that the proviso, as we have construed it, does not deal with the abridgement of the right of the assessee to set off a loss under one head against profit under another head, but it does in one important sense abridge the right of the assessee to set off under S. 24(1) and that abridgement 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 setoff under S. 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 S. 24(I) in the shape and form of a proviso has done something for which there is absolutely no justification." ;


Click here to view full judgement.
Copyright © Regent Computronics Pvt.Ltd.