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PETITIONER: COMMISSIONER OF INCOME-TAX, U.P.

       Vs.

RESPONDENT: JAGANNATH MAHADEO PRASAD, ETC.

DATE OF JUDGMENT: 02/08/1968

BENCH: GROVER, A.N. BENCH: GROVER, A.N. SHAH, J.C. RAMASWAMI, V.

CITATION:  1969 AIR  209            1969 SCR  (1) 537  CITATOR INFO :  RF         1970 SC1588  (7)

ACT: Income-tax Act (11 of 1922), s. 24(1), first  proviso--Scope of--Loss  from  speculative  transactions--Set  off  against profits and gains when permissible.

HEADNOTE:     The   assessee,  an  individual,  derived  income   from various.  sources including commission agency  business  and shares in partnership firms.  In arriving at the net  profit for the assessment year 1953-54, he claimed his share of the loss ’from one of the firms in which he was a partner, as  a set  off against profits from other business.  The loss  was the result of speculative transactions.  The Department  and Tribunal  held against him. On a reference, the  High  Court held  in  favour  of the assessee on  the  basis.  that  the observations of this: Court, in Commissioner of  Income-tax, Gujarat  v. Kantilal Nathu Chand,  [1967] 1 S.C.R.  813;  63 I.T.R. 318 (S.C.) namely: that under the first proviso to s. 24(1)  of  the Incometax Act, 1922,  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,  are obiter. In appeal to this Court,     HELD:  The observations in Kantilal Nathu Chand’s  case, cannot  be regarded as obiter, because the question  of  the applicability  of  the proviso directly arose in  the  ease. The  proviso  says  in unequivocal  terms  that  any  losses 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 or gains  in any  other business consisting of speculative  transactions. If this is read with Explanation I, according to which where the speculative transactions carried on are of such a nature as to  constitute a business the business shall be deemed to be  distinct and separate from any other business, no  other view is possible. [541 G-H; 542 A-B]     Keshavlal  Pramchand  v. Commissioner   of   Income-tax, Ahmedabad,  31  I.T.R.  7,   Commissioner   of    Income-tax

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Nagpur   v. Ram  Gopal Kanhaiyalal, 38 I.T.R.  193,  Manohar Lal Munshi Lal v. Commissioner of  Income-tax, New Delhi, 44 I.T.R.  618,  Commissioner of Income-tax v. Ram  Swarup,  45 I.T.R.  248,  Jummar  Lal  Surajkaran  v.  Commissioner   of Income-tax 47 I.T.R. 80.9, Hanuman Inves’tment  Company   v. Commissioner of Income-tax, 48 I.T.R. 915 and Joseph John v. Commissioner of Income-tax, 51 I.T.R. 322, approved.

JUDGMENT: CIVIL  APPELLATE  JURISDICTION: Civil Appeals Nos,  1761  of 1967.     Appeal  from  the judgment and decree,  dated  the  14th April,  1964  of  the Allahabad  High  Court  in  Income-tax Reference No. 130 of 1960 and Civil Appeal No. 1762 of 1967.     Appeal  from the judgment and decree, dated May 5,  1964 of the Allahabad High Court in Income-tax Reference No.  777 of 1961. 538     B.  Sen,  B.D.  Sharing  and  R.N.  Sachthey,  for   the appellant (in both the appeals).     G.C.  Sharma,  V.C. Rishi and P.K.  Mukherjee,  for  the respondent (in C.A. No. 1761 of 1967). The Judgment of the Court was delivered by     Grover,  J.  The common question which arises  in  these appeals by certificate, is whether speculative losses can be set  off  against profits from any other  business  activity under  s. 10 in spite of the first proviso to. s.  24(1)  of the Income Tax Act, 1922.  The  facts  in C.A. 1761/67 in which the  question  in  the above form was referred, the language of the question  being somewhat different in the other appeal, may be stated.   The assessee  who  is an individual derived  income  from  three sources i.e., property, shares in joint stock companies  and commission agency business and shares in partnership  firms. The accounting year relevant to the assessment year  1953-54 was  the period from October 20., 1951 to October  8,  1952. In the personal business of commission agency, the  assessee returned  a  net profit of Rs. 2,761. In  arriving  at  this figure the net share of loss of Rs. 11,075 from the firm  of Kamta  Prasad Raghunath Prasad in which the assessee  was  a partner,  was  Claimed.  The Income Tax Officer did  not  go into  the details but ignored the figure in the  absence  of information  from  the  Income-tax  Officer  assessing   the aforesaid firm. Before the Appellate ASsistant  Commissioner it  was  submitted  that the actual share of  loss  was  Rs. 13,232 and it included a sum of Rs. 8,669 representing  loss suffered in speculative dealings in silver paid through  the firm Kamta prasad Raghunath Prosad. The Appellate  Assistant Commissioner,   after  examining  the details of  the  loss, directed  the Income Tax Officer to exclude a profit of  Rs. 1,415 from the speculative transactions and to carry forward the  net  loss of Rs. 7,254 for setting it off  against  the income   of  the  assessee  from  speculative  dealings   in subsequent years. Before the Appellate Tribunal there was no dispute about these figures. What was contended was that the loss  of  Rs. 7,254 should be set off  against  profit  from other  business.  The  Tribunal  rejected  this   contention following   the   decision   in   Keshavlal   Pramchand   v. Commissioner  of  Income-tax. Ahmedabad(1).  Thereafter  the assessee  moved the Tribunal for making a reference  to  the High  Court.   The  High Court did not accept  the  view  in Keshavlal  Pramchand’s(1)  case which has been  followed  in several other decisions by other High Courts.

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   Now certain provisions of the Act may be noticed  before the  case law is discussed.  Section 6 gives the  heads   of income (1) 31 LT.R. 7. 539 chargeable to income tax which are six in number.  Section 7 deals  with  the first head "salaries"; Section 8  with  the second head "interest on securities"; section 9 with "income from property" and s. 10 provides for liability to tax under the  head  "profits  and gains of  business,  profession  or vocation"  which  is the fourth head given in s. 6.   It  is unnecessary  to  go  to the 5th and 6th  heads.  Section  24 provides that 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. In the year with  which  we  are concerned in the present case there was a proviso which was, at  that  time, the second proviso but it became  the  first proviso after the enactment of the Taxation Laws  (Extension to Jammu & Kashmir) Act  1954. This proviso, at the material time, stood as follows:                     "Provided further 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 shah 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". In Keshavlal Pramchand’s(1) case the assessee  had  suffered a loss in speculative business carried on by him in the year of account.  His contention was that he was entitled to take this loss into account in arriving at the profits and  gains of   his   business  (of   non-speculative   nature).    Mr. Palkhiwala, who argued the case before the Bombay court, put forward the view that s. 24( 1 ) read with proviso  referred only  to a case  where  the assessee was claiming the  right to  set  off the loss which he had suffered under  one  head against  a profit which he had earned in another head.   The section  therefore  had  no application  when  the  assessee wanted  to adjust or set off a loss against a  profit  under the  same  head.  It was urged by him that the  assessee  in claiming  to.  set  off his  speculative  loss  against  his business  profits under the same head was not  claiming  the benefit of any right conferred by s. 24(1) and therefore the proviso  had  no application.  The argument  was  elaborated further  by  referring to the true nature  and  function  of a  .proviso  which was to except or take  out  a  particular portion  from the field dealt with by the section.   Chagla, C.J., who delivered the judgment of the Bombay Bench, had no difficulty in coming to the conclusion that on the  language of  the  proviso  itself and on the scheme of  the  Act  the Legislature  in enacting the so called proviso was  enacting a  substantive provision dealing with the mode of  computing the profits and gains charge- (1) 31 I.T.R. 7. 540 able   under  the  head  "profits  and  gains  of   business profession  or  vocation"  and  that  the  Legislature   had provided that when profits and gains. were computed 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

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speculative transactions. The learned Chief Justice  further referred  to  the  mischief  which  was  aimed  at  by   the Legislature  in  enacting the  proviso.  In   recent   times businessmen were known to buy speculative losses in order to reduce  their profits and the Legislature wanted to  put  an end to that mischief which could only be done by  preventing the   assessee   from reducing his  profits  by  speculative losses.   The.  Bombay decision was followed by  the  Madhya Pradesh High Court in Commissioner     Income Tax, Nagpur v. Ram Gopal Kanhaiya Lal(1)  as  also by the Division Bench of the  Punjab  High  Court  in  Manohar  Lal  Munshi  Lal   v. Commissioner  of  Income’  Tax,  New  Delhi(").  The  matter ultimately went to a Full Bench of the Punjab High Court  in Commissioner  of Income Tax v. Ram Swarup(") in which  after reviewing  the  entire case law and  examining  the  various aspects  relevant to the questio,n the view exp.  ressed  by Chagla,  C.J.  in the Bombay case was accepted  as  correct. Similarly  in  Jummar Lal Surajkaran   v.   Commissioner  of Income Tax(4), Hanuman Investment Company  v.   Commissioner of Income Tax(5), and Joseph’ John v. Commissioner of Income Tax(6),  the  considerations which  prevailed  in  Keshavlal Pramchand’s(7)  case  were accepted as correct.     It would appear that so far as this Court  is  concerned the   matter   now  stands  concluded   by   the   following observations in Commissioner  07  Income’  Tax,  Gujarat  v. Kantilal  Nathu Chand(8):                    "Section 24 is, thus, a provision  laying               clown  the  manner  of  computation  of  total               income.  The principal clause of section 24( 1               )  lays  down  that, if  there.  ben  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               section  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,                (1)  38 I.T.R. 193.                (2) 44 I.T.R. 618.                (3)  45 I.T.R. 248.               (4) 47 I.T.R. 809.                (5)  48 I.T.R. 915.               (6) 51 I.T.R. 322.               (7)  31 I.T.R. 7.               (8) [1967] 1 S.C.R. 813; 63 I.T.R. 318, 321.               541               however,  lays  down  an  exception  to   this               general   rule  contained  in  the   principal               clause.  The exception relates to income  from               business sustained in 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

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             proviso  is  that  if  there  are  profits  in               speculative business, those profits are  added               to  income under the other heads mentioned  in               section 6 for purposes of computing the  total               income  of the assessee in order to  determine               the tax under section 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               section  24  (  1 );  and,  when  applied,  it               governs. the manner in which the total  income               of the assessee is to be corn-. puted.  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". The  learned  counsel for the assessee sought to  press  the reasons which prevailed with the learned Judges of the  High Court  and has sought to characterise the above  observation as  obiter.   It  is neither necessary  to.  deal  with  the reasoning of the High Court nor can that reasoning stand  in view of what has been laid down in Kantilal Nathu Chand’s(1) case  by  this  Court which cannot  be  regarded  as  obiter becau’se  it has been clearly stated  that  the question  of the applicability of the proviso with which we are concerned arose  directly  in that case in respect of  the  assessment years 1958-59 and 1959-60.  The concluding  portion  of  the passage extracted leaves. no room or doubt in this matter.     Moreover  we are of the opinion that where the  language is quite clear and no other view is possible it is futile to go  into  the question whether the proviso to. s.  24(  1  ) operates  as  a substantive provision or only by way  of  an exception  to s. 24( 1 ). The proviso says  in  unmistakable and   unequivocal  terms  that  any  losses   sustained   in speculative  transactions  which  are in  the  nature  of  a business  shall  not  be taken into account  except  to  the extent (1) [1967] 1 S.C.R 813;  63 I.T.R. 318. 542 of  the  amount of profits or gains in  any  other  business consisting of speculative transactions.  This has to be read with   Explanation   (1)  according  to  which   where   the speculative transactions carried on are of such a nature  as to constitute a business the business shall be deemed to  be distinct and separate from any other busi-     In  the  above  view of the matter  the  answer  to  the questions  referred  in  both the appeals  will  be  in  the negative, namely, against the assessee and in favour of  the Department.  The appeals are accordingly allowed with costs. There will be one hearing fee. V.P.S.                                     Appeals allowed. 543