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PETITIONER: COMMISSIONER OF INCOME-TAX, GUJARAT

       Vs.

RESPONDENT: KANTILAL NATHUCHAND SAMI

DATE OF JUDGMENT: 11/10/1966

BENCH: BHARGAVA, VISHISHTHA BENCH: BHARGAVA, VISHISHTHA SHAH, J.C. RAMASWAMI, V.

CITATION:  1967 AIR  632            1964 SCR  (6) 813  CITATOR INFO :  F          1969 SC 209  (4)  D          1969 SC1485  (2,5,7)

ACT: Indian  Income-tax, 1922, s. 24--Registered  firm  suffering loss in speculation business for two years-Such loss whether to  be apportioned among,partners or to be  carried  forward and  set off against profit in speculation business  in  the subsequent year.

HEADNOTE: The respondent firm had income from property, ready business in kappas, and also speculation business.  It was registered under  s.  26A of the Indian Income-tax Act, 1922,  for  the assessment  years  1958-59,  195960  and  1960-61.   In  the accounting periods relating to the assessment years  1958-59 and  1959-60  the  firm suffered  loss  in  the  speculation business.  The Income-tax Officer did not set off this  loss against  the income from property and ready kappas  business but  apportioned it between the, partners of the  firm.   In 1960-61 there was profit in the speculation business and the firm claimed that the loss in that business in the preceding two  years  should,  be set off  against  the  said  profit. According  to the firm the Income-tax Officer was  wrong  in apportioning  the speculation loss between the  partners  in 1958-59  and  1959-60.   The plea was not  accepted  by  the Income-tax Officer or the Appellate Assistant  Commissioner. But  the Tribunal in further appeal, and the High  Court  in reference under s. 66A accepted it.  The Revenue appealed to this Court. HELD  : (i) The principal clause of s. 24(1) lays down  that if there be a loss of profits or gains in any year under any of  the heads in s. 6, that loss has to be set  off  against the income profits or gains of the assesses under any  other head in that year.  The first proviso to the clause  however lays  down an exception to the above rule, namely, that  the losses  sustained in speculative transactions are not to  be taken  into  account  in computing  the  profits  and  gains chargeable  under the head ’profits and gains  of  business, profession or vocation,’ except to the extent that they will be  set off against profits and gains in any other  business

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which  itself consists of speculative transactions.  In  the present case the Income-tax Officer was clearly right in the assessment years 1958-59 and 1959-60 in not setting off  the losses in the speculative business against the income earned in  those years either from property or from ready  business in Kappas. [816 D-H]  (ii) The Income-tax Officer however erred in  -apportioning the  said speculation loss in the years 1958-59 and  1959-60 between  the  partners and in not carrying  it  forward  and setting it off against the profit in speculation business in 1960-61. The  second proviso to s. 24(1) in so far as it  deals  with registered Arms lays down that any loss which cannot be  set off  against the income profits and gains of the  registered firm  is to be apportioned between the partners of the  firm and they alone are entitled to have the amount set off under this  section.  Clearly the word ’any loss’ here must  refer to the loss computed for purposes of the principal clause of s.  24(1) taken with the first proviso, and  will  therefore not comprise in it the loss in speculative business which is not  to be taken into account under the first  proviso.   If this part of the second proviso were interpreted to  include within  it the loss in speculative business Which is not  to be taken into account under the first 814 proviso,  the effect of giving a wider meaning to the  words ’any loss’ in it would be that the same loss in  speculative business  would,  after apportionment, be  set  off  against income profits and gains under other heads in computing  the total income of the partners.  The result would be that  the effect of the first proviso would be nullified by this  part of the second proviso. [817 E-H] Proviso  (c)  to s. 24(2) envisages the  existence  of  loss which has not been apportioned between the partners and this clearly  strengthens the view that the second proviso to  s. 24(1)  does  not  cover loss  in  speculative  business  and consequently does not permit that loss to be apportioned be- tween the partners. [820 E-F] Section 23(5)(a) of the Act also could not help the Revenue. Under  the  first proviso to s. 23 (5) (a) the  share  of  a partner  in  a loss is required to be set  off  against  his other  income, or carried forward and set off in  accordance with the provisions of s. 24, This proviso however does  not refer  to  the  loss  incurred  by  a  registered  firm   in speculative  business which is not to be taken into  account when computing the total income of the registered firm under s. 23(1), (3) and (4) of the Act. [818 H]

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 676 of 1965.     Appeal from the judgment and order dated September 13, Appel from the judgment and  order dated September 13,16,  1963 of the Gujarat High Court in Income-tax Reference No.  2  of 1963. B.  Sen,  T.  A.  Ramachandran, S.   P.  Nayyar  and  R.  N. Sachthey, for  the appellant. K.  R.  Chaudhuri, and K. Rajendra Chaudhuri, for  the  res- pondent. Bhargava, J. The respondent is a firm which, for purposes of assessment under the Income-tax Act (hereinafter referred to as  "the Act"), was registered under section 26A of the  Act during  the assessment years 1958-59, 1959-60, and  1960-61.

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The  respondent  was  earning income  from  property,  ready business  in  kappas,  and also  from  speculation  business carried  on an extensive scale.  During the assessment  year 1958-59,  the  income  from property  was  assessed  at  Rs. 1,369/- and from ready business at Rs. 28,449/-.  There  was a  loss of Rs. 6,26,606/- in the speculation business.   The Income-tax Officer, in making the assessment for that  year, charged  tax  on the total of the income from  property  and ready business which amounted to Rs. 29,818/-.  The loss  of Rs.  6,26,606/- was not set off against this profit in  view of  the provisions of the first proviso to S. 24(1)  of  the Act.   This  loss  was,  however,  apportioned  between  the partners by the Income-tax Officer, purporting to act  under the  second proviso to the said subsection.   Similarly,  in the  next  assessment year 1959-60, where there  was  income from  property  and  loss  in  ready  business  as  well  as speculation  business,  no tax was imposed, as the  loss  in ready  business exceeded the income from property.  The  net loss of Rs. 1,239/- worked out on the basis of loss in ready business reduced 815 by  the  income from property, was apportioned  between  the partners.  Further, the speculation loss of Rs. 5,416/-  was also  apportioned between the partners on the same basis  as was  done in the preceding assessment year 1958-59.  In  the assessment year 1960-61, there was an income of Rs.  1,014/- from  property,  and  a  loss of  Rs.  21,197/-  from  ready business.  In addition, there was a profit of Rs. 6,19,784/- in  the speculation business.  Since this year there  was  a profit  in  speculation business, the first  proviso  to  s. 24(1)  did not apply, and the net income of  the  respondent was worked out by taking all the three figures into account. The  respondent  claimed  that  in  the  assessment  of  the respondent’s  income  in  this  year,  the  respondent   was entitled  to  set  off the speculation  losses  of  the  two preceding  assessment years 1958-59 and 1959-60 against  the profits  earned  from  speculation business  in  this  year, urging that the Income-tax Officer in the two earlier  years was  wrong  in apportioning the loss between  the  partners. The plea was that under the second proviso to s. 24(1), this loss  in  speculation  business  could  not  be  apportioned between the partners, and consequently, under s. 24(2),  the respondent  was entitled to carry forward this loss  and  to have it set off against the profit from speculation business under clause (i) of s. 24(2).  This plea was rejected by the Income-tax Officer whose order was up held by the  Appellate Assistant  Commissioner.  On further appeal, the  Income-tax Appellate  Tribunal,  however,  accepted  the  plea  of  the respondent and held that the speculation losses sustained by the respondent in the two preceding assessment years must be adjusted  against the profit earned in the account  year  in question in speculation business.  Thereupon, at the request of the Commissioner of Income-tax, the following question of law  was  referred by the Tribunal for opinion to  the  High Court of Gujarat               "Whether on the facts and in the circumstances               of  the case and on a true  interpretation  of               the  various provisions of the Indian  Income-               tax  Act,  1922, the Tribunal was  correct  in               holding   that  speculation  losses   of   the               Respondent   firm  (assessee  firm)  for   the               assessment years 1958-59 and 1959-60 should be               set off against its speculation profit of  Rs.               6,19,784/-  in its assessment for the  assess-               ment year 1960-61."

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The High Court upheld the view of the Tribunal and  answered the  question in favour of the respondent.  This appeal  has now  been  brought up to this Court by the  Commissioner  of Income-tax on certificate granted by the High Court under s. 66A(2) of the Act. The  answer  to  the question referred  to  the  High  Court obviously  depends  on  the  interpretation  of  the  second proviso to s. 24(1) of 816 the Act.  In interpreting this provision, the purpose of  s. 24(1)  and (2) has to be kept in view.  Under the  Act,  the Income-tax  Officer has to determine the total income of  an assessee  under  section 23(1), (3) or (4) of the  Act.   In determining  this total income under all the  various  heads enumerated in s. 6 has to be taken into account.  Sections 7 to 10 & 12 lay down the principles on which the income under these  various  heads  is to be computed.  In  the  case  of income from business, profession or vocation, the income has to be computed under s. 10(1) of the Act.  Section 10(2)  of the  Act lays down certain deductions which have to be  made in computing the profits and gains from business, profession or  vocation.  It is during this computation to be  made  by the  Income-tax  Officer  under s. 23  of  the  income  from business, profession or vocation in accordance with s. 10(1) of  the Act that the Income-tax Officer is further  required to  apply the provisions of s. 24.  Section 24 is,  thus,  a provision  laying  down the manner of computation  of  total income.  The principal clause of s. 24(1) lays down that  if there be a loss of profits or gains in any year under any of the  heads mentioned in section 6, that loss has to  be  set off  against  the income, profits or gains of  the  assessee under  any other head in that year.  If this  provision  had stood by itself without any provisos, the result would  have been  that all losses incurred by an assessee under  any  of the  heads  mentioned  in s. 6  would  be  adjusted  against profits under all other heads, and then the total income  of the  assessee would be worked out on that basis.  The  first proviso to this sub-section, however, lays down an exception to this general rule contained in the principal clause.  The exception  relates  to income from  business  consisting  of speculative  transactions,  and places the  limitation  that losses  sustained in speculative transactions are not to  be taken  into  account  in computing  the  profits  and  gains chargeable  under the head "Profits and gains  of  business, profession or vocation", except to the extent that they will be  set off against profits and gains in any other  business which  itself  consists of  speculative  transactions.   The effect  of  the  proviso is that if  there  are  profits  in speculative  business,  those profits are  added  to  income under  other  heads  mentioned  in  S.  6  for  purposes  of computing  the  total  income of the assessee  in  order  to determine  the  tax under s. 23 of the Act.   On  the  other hand,  losses  in speculative business are not to  be  taken into account when computing the total income, except to  the extent  to  which they can be set off against  profits  from other speculative business.  The first proviso, thus clearly limits  the  applicability  of the principal  clause  of  s. 24(1); and, when applied, it governs the manner in which the total income of the assessee is to be computed.  In the case before  us, the Income-tax Officer was clearly right in  the assessment years 1958-59 and 1959-60 in not setting off  the losses in the speculative business against the income earned in  those years either from property or from ready  business in kappas. 817

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Then  comes  the second proviso, and it is  clear  from  the language  of  this proviso that it does not  deal  with  the computation  of the income of the assessee for  purposes  of determining  the  total  income.  This  second  proviso  was incorporated  in  order to indicate the personality  of  the assessee for the purpose of applying the principal clause of s.  24(1)  taken  together  with  the  first  proviso.    No difficulty could arise in applying the principal clause  and the  first  proviso  together in the  case  of  individuals, companies,  Hindu undivided families, etc.; but a  provision was  needed  for cases where the assessee happened to  be  a firm.   This necessity arose because of the  special  manner laid  down  in s. 23 itself for assessing the  income  of  a firm.  That section lays down different rules for assessment of unregistered firms and registered firms.  In the case  of an  unregistered  firm,  the total income  computed  by  the Income-tax  Officer for determining the tax can be  assessed by  apportioning  that  income  between  the  partners,  and determining the tax payable by each partner on the basis  of such assessment, including his income from other sources, as laid  down in s. 23(5)(b) of the Act.  In  the  alternative, the Income-tax Officer may choose to assess an  unregistered firm  as  a  unit by itself, and in that case,  the  tax  is determined  as  payable by the firm as a unit, so  that  the provisions  of  s.  23(5)(b) are not  applied.   The  second proviso to s.  24(1) lays down that in such a case where  an unregistered firm is     not  assessed under the  provisions of clause (b) of sub-section (5) of     s.  23,  "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." It is clear  that the  expression "any such loss" in this part of  the  second proviso can only refer to the loss computed for purposes  of applying  the  principal clause of s. 24(1)  taken  together with  the first proviso.  That will, therefore, be the  loss suffered  by the unregistered firm in businesses other  than speculative business.  The loss incurred in the  speculative business  by the unregistered firm is, thus, to be  ignored. If this part of the second proviso were to be interpreted as laying  down  that the loss mentioned therein  includes  the loss from speculative business, the effect would be that the provision contained in the first proviso would be completely nullified.   The  effect of the first proviso is  that  when setting  off  the loss of profits and gains under  one  head against  income, profits and gains under any other  head  in accordance  with the principal clause, the loss suffered  in speculative business is not to be taken into account and  is to  be kept apart.  If the word "loss" in the first part  of the  second proviso were to be interpreted as including  the loss in speculative business also, the result would be  that the loss excluded under the first proviso would be  included in the assessment of total income under the second  proviso. In  the circumstances, the only interpretation that  can  be placed  on  the words "any such loss" in this  part  of  the second proviso is that this expression refers to the loss as 818 determined for purposes of the principal clause of s.  24(1) read  with the first proviso, and, thus, does  not  comprise within it loss incurred in speculative business referred  to in the first proviso. Then  comes  the  second part of the  second  proviso  which prescribes  the  personality of the assessee  to  which  the provisions  of  s. 24 are to be applied in cases  where  the assessee  is a registered firm.  Under this part, the  loss, which  cannot be set off against other income,  profits  and

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gains  of the registered firm, is to be apportioned  between the partners of the firm and they alone are entitled to have the amount of the loss set off under this section.  Clearly, in  this part also, the words "any loss" must refer  to  the loss  computed  for purposes of the principal  clause  taken together  with the first proviso, and will,  therefore,  not comprise in it the loss in speculative business which is not to  be  taken  into account under the  first  proviso.   The aspect  of this provision, which is of importance,  is  that under  it,  the Income-Tax Officer is required to  take  two steps.  The first is that the loss, which cannot be set  off against  other income, profits and gains of  the  registered firm,  has  to be apportioned between the  partners  of  the firm,  and  then he has to give effect to the right  of  the partners to have the amounts of the loss set off under  this section.   Once  again, if this part of the  second  proviso were   interpreted  to  include  within  it  the   loss   in speculative  business which is not to be taken into  account under  the  first  proviso, the effect  of  giving  a  wider meaning  to  -the words "any loss" in it would be  that  the same    loss   in   speculative   business   would,    after apportionment, be set off against income, profits and  gains under  other  heads  in computing the total  income  of  the partners.  The result would be that the effect of the  first proviso would again be nullified by this part of the  second proviso.   Consequently, the correct interpretation must  be that  the  words   " any loss" in this  part  of  the second proviso also refer to the loss computed for the purposes  of the  principal  clause of s. 24(1) taken together  with  the first  proviso,  so that it must also exclude  the  loss  in speculative  business which is not to be taken into  account when  computing  the  total income  of  the  assessee.   The language  used in the second proviso, thus, itself leads  to the  conclusion  that the decision arrived at  by  the  High Court was correct, even though on a different reasoning. In  this connection, learned counsel appearing for the  Com- missioner  drew  our attention to the first  proviso  to  s. 23(5)(a) of the Act, under which the share of a partner in a loss is required to be set off against his other income,  or carried   forward  and  set  off  in  accordance  with   the provisions  of  s. 24.  We do not think  that  this  proviso refers  to the loss incurred by a registered firm in  specu- lative  business which is not to be taken into account  when computing  the total income of the registered firm under  s. 23(1), (3) and 819 (4)of the Act.  Section 23(5)(a) clearly applies only to the total income of the firm which has been assessed under  sub- s.  (1),  sub-s. (3) or sub-s. (4) of s. 23,  and  does  not apply to any other income or loss.  If speculative  business of  a firm has resulted in profit, that profit, as  we  have indicated   earlier,  would  be  taken  into  account   when determining the total income of that firm.  But if there  be a  net  loss in all speculative businesses  taken  together, that loss is not to be taken into account when computing the total  income, and consequently, that loss would be  outside the  scope  of s. 23(5)(a) also.  The first  proviso  to  s. 23(5)(a) cannot be, therefore, held to be applicable to loss in  speculative business kept apart under the first  proviso to s. 24(1). Coming  to  sub-section (2) of s. 24 on which  reliance  was placed  by  learned counsel for the  Commissioner,  we  find that, instead of supporting the interpretation sought to  be put  on behalf of the Commissioner on the second proviso  to s.  24(1), it supports the view which we have arrived at  on

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interpretation of the language of s. 24(1) and its provisos. Clause  (1)  of s. 24(2) lays down that where the  loss  was sustained  by  an  assessee  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. This  is a general provision which is applicable to loss  in speculative  business suffered by any assessee, including  a firm, and the limitation that it places is that  speculative loss, kept apart under s. 24(1) and not set off against  the income,  profits and gains of that earlier year, is only  to be  set  off in a subsequent year, if there are  profits  in speculative   transactions  of  the  same  business.    This provision  is  also,  however, governed  by  some  provisos, including proviso (c) which lays down that : "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-s.  (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-s. (5) of s.  23  to  have carried forward and set off against his own income any  loss sustained by the firm." This proviso is again divisible into two parts.  One part relates to the case of an  unregistered firm  and lays down an absolute prohibition against  setting off  of loss carried forward in the assessment of a  partner of  an  unregistered  firm, which has  been  assessed  as  a separate  unit, by omitting to apply the provisions  of  cl. (b)  of  sub-s.  (5) of s. 23. This  part,  thus,  does  not envisage  that,  in the case of such an  unregistered  firm, there  would be any loss which could be apportioned  between the  partners.  In the case of a registered  firm,  however, the  provision made is in different language.  It lays  down that  "nothing herein contained shall entitle any  assessee, being a registered firm, to have carried forward and set off any loss which 820 has been apportioned between the partners, under the proviso to  sub-section (1)." Thus, it prohibits a claim being  made by a registered firm as’ such to set off loss in the  future year  against  profits  in that year, which  loss  has  been apportioned  between  the partners under the proviso  to  s. 24(1).   That loss would be the loss taken into  account  in computing  the  total  income under s. 23  in  view  of  the principal clause of s. 24(1) read with the first proviso  to it and will, thus, exclude the speculative loss which is not taken  into  account.   The language of  this  part  of  the proviso clearly envisages that there could be loss which has not  been apportioned between the, partners of a  registered firm,  so  that  the registered firm can claim  to  have  it carried forward and set off in future years.  Clearly,  that can  only  be  the  loss  in  speculative  business  of  the registered  firm  which  is not  taken  into  account,  when computing the total income of the firm under s. 23, in  view of,  s.  24  (1).   No question could  have  arisen  of  the Legislature  recognising the possibility of a firm  claiming set  off  of  any loss incurred in an earlier  year  if,  as contended  on behalf of the Commissioner, even the  loss  in speculative  business  were to be  apportioned  between  the partners under the second proviso to s. 24(1) On the  inter- pretation sought to be placed on behalf of the Commissioner, loss, other than loss in speculative business, has to be set off against the income, profits and gains under any head  of the  assessee  in  view  of S. 24(1)  read  with  its  first proviso, while loss in speculative business would also  have

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to  be apportioned under the second proviso leaving no  loss unapportioned  between the partners.  The fact that  proviso (c)  to S. 24(2) envisages the existence of loss  which  has not   been   apportioned  between   the   partners   clearly strengthens  our  view that the second proviso to  s.  24(1) does   not   cover  loss  in   speculative   business,   and consequently,  does not permit that loss to  be  apportioned between the partners.  Thus, s. 24(2) also leads to the same conclusion   which   we  have  arrived  at  above   on   the interpretation of the language of s. 24(1). In  view of the reasons given by us above, we are unable  to agree with the reasoning adopted by the Bombay High Court in Commissioner  of Income-tax, Bombay City 1, v. Chimanlal  J. Dalal  and Co.(1), and cannot accept the view of that  Court that  the decision given in the present case by the  Gujarat High Court was incorrect. The appeal, therefore, fails and is dismissed with costs. G.C.                              Appeal dismissed. (1) 57 I.T.R. 285. 821