Sabyasachi Mukharji, J. - (1.) This reference relates to the assessment made on the assessee, a firm, for the assessment year 1949-50. The relevant accounting year is R. N. 2005 corresponding to the period 18th April, 1948, to 7th April, 1949. The assessee is a firm, as mentioned hereinbefore. During the relevant accounting year, the assessee had carried on several businesses, some in taxable territories and others in Indian States. In the Indian States, other than the Jaipur State, the assessee had earned a total profit of Rs. 3,01,792. It has been mentioned by the Tribunal that the amount has been wrongly mentioned in the Tribunal's order as Rs. 3,01,798. In the Jaipur State, however, the assessee had suffered a loss of Rs. 1,24,132. In the Indian States, taken together, the assessee had earned a net income of Rs. 1,77,660. In computing the total income of the assessee, the ITO had excluded this net income of Rs. 1,77,660 only as being exempt under Section 14(2)(c) of the I.T. Act, 1922. From the ITO's order, it is not clear whether the assessee had claimed that the amount exempt in terms of Section 14(2)(c) of the Act was Rs. 3,01,792 and not the amount of Rs. 1,77,660, the loss of Rs, 1,24,132 having to be set off against other business income earned in the taxable territories in computation of the income under the head " Profits and gains of business, profession or vocation " under Section 10(1) of the Act. The assessee went up in appeal before the AAC. Before the AAC, a specific claim for exemption of the amount of Rs. 3,01,792 was made and it was contended that the loss of Rs. 1,24,132 had to be separately considered and allowed as deduction in cornputing the income under Section 10 of the Act. The AAC rejected this contention. There was an appeal to the Tribunal. The Tribunal held that under Section 14(2)(c) of the Act what was exempt was the amount of Rs. 3,01,792 and the loss of Rs. 1,24,132 was to be set off in computing the income under the head "Business" arising within the taxable territories under Section 10(1) of the Act and, therefore, allowed the assessee's appeal.
(2.) On an application being made by the revenue, the Tribunal has referred under Section 66(1) of the Indian I.T. Act, 1922, the following question : " Whether, on the facts and in the circumstances of the case, the loss of Rs. 1,24,132 arising in the Jaipur State was to be deducted from the profit of Rs. 3,01,792 arising in other Indian States, and only the net amount of Rs. 1,77,660 was exempt under Section 14(2)(c) read with the first proviso to Section 24(1) of the Indian I.T. Act, 1922 ? "
(3.) Before the merits of the contentions urged on behalf of the revenue in support of this reference are considered, it may be relevant to refer to the relevant provision of Section 14,' as it stood, at the relevant time. Section 14(2) provided as follows : " Section 14. Exemptions of a general nature :...,.. (2) The tax shall not be payable by an assessee--...... (c) 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 British India in the previous year by or on behalf of the assessee, or are assessable under Section 12B or Section 42.";