1961-VIL-80-P&H-DT

Equivalent Citation: [1962] 45 ITR 248

PUNJAB HIGH COURT

Income-Tax Reference No. 3 of 1960

Dated: 14.11.1961

COMMISSIONER OF INCOME-TAX

RAM SARUP

For the Applicant : D. N. Awasthy and H. R. Mahajan

For the Respondent : D. C. Gupta

Bench

Falshaw, Mehar Singh And Grover, JJ.

JUDGMENT

Grover, J.

For the assessment year 1954-55 Messrs. Ishar Dass Harnam Dass had been assessed as Hindu undivided family, Ram Sarup being the karta. The income of the assessee was derived from business, house property and share of profits from some firms. Certain speculative business was also carried on in which a loss of Rs 7,628 was incurred. The assessee wanted this loss in speculation to be set off against the profits from business and share income from firms in which the assessee was a partner. This claim was not accepted by the Income-tax Officer according to whom the loss in speculation could be set off only against the profits, if any, from speculation business of the seceding year. Having failed in appeal before the Appellate Assistant Commissioner, the assessee approached the Tribunal who held that the set-off claimed could be allowed against the other profits computed under section 10 and that the first proviso to sub-section (1) of section 24 of the Income-tax Act did not control the terms of the former section. At the instance of the Commissioner of Income-tax, the Tribunal has referred the following question to us for opinion under section 66(1) of the Act:

"Whether on a true interpretation of section 10 and sub-section (1) of section 24 and the first proviso thereto, the assessee was entitled to claim a set-off of the loss suffered by it in speculation business against the profits of the assessee in a business other than a business consisting of speculative transaction?"

The second proviso to section 24 which was inserted by section 3 of the Finance Act, 1953, is 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 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."

Its ambit and scope came up for consideration before the Bombay and Madhya Pradesh High Courts in Keshavlal Premchand v. Commissioner of Income-tax [1957] 31 I.T.R. 7 and Commissioner of Income-tax v. Ramgopal Kaniyalal [1960] 38 I.T.R. 193. The Bombay bench which consisted of Chagla C.J. and Tendolkar J. expressed the view that the legislature in enacting the socalled 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 has been provided is that when these profits and gains are 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 a speculative transaction. The proper function of a proviso and the principles applicable thereto were fully considered as also the scheme of the Income-tax Act, and the contention of Mr. Palkhivala that when the legislature referred in the proviso to the computation of profits and gains chargeable under the head "profits and gains of business, profession or vocation" it was referring to the loss to ascertained for the purpose of a set-off under section 24(1) was repelled. In the Madhya Pradesh case [1960] 38 I.T.R. 193 an opinion has been expressed that the express words in the aforesaid proviso imply that it governs section 10 of the Act and modifies the method of computation under the section. The learned Madhya Pradesh judges went to the extent of saying that if the proviso were to operate only within the field of the main provision it would in that case be more or less meaningless. The decisions of the Bombay and Madhya Pradesh High Courts would lead to the result that either the proviso in question should be read as a proviso to section 10 or that is should be treated as a substantive provision and not confined to its function as a proviso to section 24(1) where the legislature has expressly placed it. The approach of the Bombay High Court has been the subject-matter of comment in The Law and Practice of Income-tax by Kanga and Palkhivala, fourth edition, and according to the learned authors of that book that decision requires reconsideration because a proviso has to be read as an independent substantive enactment only where restricting it to the cases dealt with by the main enactment would render the proviso meaningless and the proviso in question can be given due meaning and effect by confining its operation to the substantive part of section 24(1). This is so with regard to cases where the assessee claims to set off a business loss against income under any other head under sub-section (1) and the effect of the proviso is to prevent the set-off in such a loss in speculative transactions in the case of business against income under any other head. On the other hand another learned author, namely, V.S. Sundaram, in his work The Law Of Income-tax in India, eighth edition, states at page 780:

"Speculative transactions.--In 1953 a proviso to section 24(1) was inserted to restrict the set-off of speculative losses. It modifies, to the extent set out in the proviso, the computation under section 10 itself. The speculative transactions in the nature of business are separated (their profits or losses however being arrived at in accordance with section 10) and the net loss if any 'shall not be taken into account'. That need not however mean that this balance of speculative loss cannot be carried forward and set off against the speculative profit of the next year and so on, under section 24(2). The result of the explanation in making the speculation business a separate and distinct business seems to be to allow the carry forward and set off against future profits in speculation."

The learned counsel for the assessee has challenged the correctness of the Bombay and the Madhya Pradesh decisions and has strenuously argued that the proviso under consideration is by no means meaningless and has illustrated the same by taking up figures of income and losses under other heads and under the head "profits and gains of business, profession or vocation". It does not appear that the proviso if confined to section 24(1) would be meaningless and even the Bombay bench did not go to the extent of saying as the Madhya Pradesh High Court observed that if would be rendered meaningless if confined to section 24(1). It is further pointed out by the learned counsel for the assessee that the significance of the other provisions in section 24 relating to speculative transactions and the carrying forward of losses from speculative transactions did not properly engage the attention of the Bombay or the Madhya Pradesh High Courts. In this connection our attention has been invited to Explanation 1 and Explanation 2 which appear after the second proviso to section 24(1). According to the contention canvassed the Explanations as also the subsequent provisions contained in sub-section (2) indicates that the provisions with regard to losses incurred in speculative transactions were being confined to section 24. In this connection in Explanation 2 there is a proviso which employs the language "provided that for the purpose of this section......", and it is urged that after making the main provision with regard to setting off of losses under one head against income, profits and gains, under another head (the heads being those given in section 6), the legislature proceeded to provide for the exceptions to the general rule which had been laid down with regard to the set-off of losses. The first exception was contained in the first proviso relating to speculative transactions which were in the nature of a business and the method in which they could be carried forward was provided in sub-section (2). The other exceptions were contained in sub-section (2)(a) and (2)(b), which related to the head "capital gains". Reliance has been placed on behalf of the assessee on Commissioner of Income-tax v. Indo-Mercantile Bank Ltd. [1959] 36 I.T.R. 1, 7 (S.C.), where the proviso appearing in section 32(1) of the Travancore Income-tax Act was almost similar to another proviso to section 24(1) of the Indian Income-tax Act. An argument was examined where a section framed as a proviso to a preceding section may sometimes contain matter which is in substance a fresh enactment adding and not merely qualifying that which goes before, this being based on Rhondda Urban District Council v. Taff Vale Railway Co. [1909] A.C. 253 At page 7 of the following observations were made:

"The proper function of a proviso is that it qualifies the generality of the main enactment by providing an exception and taking out as it were, from the main enactment, a portion which, but for the proviso would fall within the main enactment. Ordinarily it is foreign to the proper function of a proviso to read it as providing something by way of an addendum or dealing with a subject which is foreign to the main enactment."

Although the Bombay bench was alive to the true functions of a proviso but it must be said with respect that the other provisions contained in section 24 as also the points that have been emphasised by the learned counsel for the assessee did not receive any substantial measure of consideration in the Bombay judgment. The matter involved is one of importance and is likely to arise in a number of other cases. It will be desirable in our opinion that a larger bench should answer the question that has been referred to us. It is consequently directed that the orders of the Hon'ble the Chief Justice may be obtained for constituting a full bench.

MEHAR SING J.--I agree.

[The case was heard by a full bench consisting of Falshaw, Mehar Singh and Grover JJ. and the following judgment was delivered on November 14, 1961].

GROVER J.--The facts are set out in my referring order and need not be restated.

The question that is to be answered is:

Now, identically this very matter came up for consideration before a bench of the Bombay High Court consisting of Chagla C.J. and Tendolkar J. in Keshavlal Premchand v. Commissioner of Income-tax [1957] 31 I.T.R. 7, 16 and after examining the relevant provisions of the Income-tax Act, 1922, and bearing in mind the principles relevant for determining the proper function of a proviso, the following view was expressed:

"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 the business consisting of a speculative transaction."

The mischief that was sought to be remedied by the legislature in enacting the proviso was also mentioned and judicial notice was taken of the fact that in recent times businessmen have been known to buy speculative losses in order to reduce their profits and clearly the legislature was aiming at that mischief and that mischief could only be removed by preventing the assessee from reducing his profits by these speculative losses, and that was what was exactly done by the legislature in enacting the proviso. The Bombay decision was followed by the Madhya Pradesh High Court in Commissioner of Income-tax v. Ramgopal Kaniyalal [1960] 38 I.T.R. 193. Indeed, a division bench of this court consisting of my Lord Falshaw and Chopra J. in Manohar Lal Munshi Lal v. Commissioner of Income-tax [1962] 41 I.T.R. 618, 620 accepted the reasoning of Chagla C.J. in the Bombay case and followed the same view.

There also the question was whether the assessee firm which had earned profits in its trading accounts but had lost a sum of Rs 20,206 in certain speculative transactions could set off that loss against the profits earned in the other business. After referring to the provisions of sections 6 and 10 and the scheme of Chapter III of the Act followed by Chapter IV and sub-section (1) of section 24 together with the proviso, the question was considered whether the proviso comes into operation only when under section 24 a question arises for setting off losses under one of the heads contained in section 6 against profits earned under other heads or whether it is intended also to apply when income is computed under section 10 under the head "profits and gains of business, profession or vocation." The following observations from that judgment are noteworthy and may be reproduced:

"The main lines of arguments open to an assessee in such a case are clear and two-fold, firstly the general principle well affirmed by authority that where a proviso is inserted in a particular section or sub- section, its application is limited to the provisions of the section or sub- section in question, and secondly, that if it was intended to lay down a principle for computing profits and gains of business, profession or vocation the legislature could have incorporated a suitable amendment in the provisions of section 10 itself. At the same time the words of the proviso appear to be clear and free from any ambiguity whatever and their plain meaning is that in computing the profits and gains from a business, profession or vocation any losses incurred in a speculation business are to be left out of account except to the extent of the amount of profits and gains, if any, in any other business consisting of speculative transactions............"

V.S. Sundaram in his work, The Law of Income-tax in India, eighth edition, at page 780, has expressed a view which is similar to what has been laid down in the aforesaid decisions.

The learned counsel for the assessee has frankly conceded that there is no authority in his favour taking a contrary view but he has relied a great deal on the true and proper functions of a proviso appearing in a section and has stressed the point of view put forward by Mr. Palkhivala before the Bombay bench which has also been embodied in The Law and Practice of Income-tax, fourth edition, by Kanga and Palkhivala. As regards the argument that the effect of the proviso should be limited to the section in which it is to be found, all the three decisions, referred to before, accord full recognition to the general principle that it should be normally so limited but, as has been pointed out, there may be cases in which the language of the proviso is such that the courts would treat it as a substantive enactment. Their Lordships of the Supreme Court in Commissioner of Income-tax v. Indo-Mercantile Bank Ltd. [1959] 36 I.T.R. 1 (S.C.) made the following observations at page 7 which are noteworthy:

"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 enactments or to exclude by implication what the enactment clearly says unless the words of the proviso are such that that is its necessary effect (vide also Corporation of the City of Toronto v. Attorney-General for Canada [1946] A.C. 32)."

Adverting to the comment in Kanga and Palkhivala's book (page 600) it is necessary to set out in the words of the learned authors the true interpretation of section 24(1) read with the proviso:

"In cases where the assessee claims to set off a business loss against income under another head under sub-section (1), it is clear that the first proviso applies and its effect is to prevent the set-off of such a loss in speculative transactions in the course of business against income under any other head. 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."

This view can be effectively controverted by what was observed by Chagla C.J. in the Bombay judgment with regard to the process of computation as understood by the Income-tax Act which is antecedent to the right of the assessee to claim any set-off under section 24. According to the learned Chief Justice, the question of set-off under section 24 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 profits having been arrived at in the manner laid down in the same Chapter. As was further pointed out, it was entirely unnecessary to compute the profits and gains of business, profession or vocation for the purpose of section 24(1) because that had already been done under section 10. In view of the clear language employed in the proviso to section 24(1) which expressly relates to computation of profits and gains chargeable under the head "profits and gains of business, profession or vocation" and there being no such rigid rule that a proviso can never be treated as a substantive provision or that a proviso to one section cannot be looked upon as a proviso to another section provided always that the intention of the legislature is clear from the language employed, it is not possible to accede to the contention that has been canvassed before us that the proviso in question should be restricted to section 24(1) alone.

The learned counsel for the assessee has endeavoured to show that the proviso if convinced to section 24(1) is not meaningless and if that be so, its scope should not be extended nor should it be treated as a substantive provision. Even if this suggestion can be substantiated by certain illustrations which were sought to be given but which were not clear and cogent, the question still is what was the intention of the legislature in enacting the proviso. If the intention clearly was to make a substantive provision for the purpose of computing the profits and gains chargeable under head (iv) of section 6, namely, "profits and gains of business, profession or vocation", it would not be open to the courts to confine the operation of the proviso to section 24(1) alone. The reasons given by Chagla C.J. in his judgment for the insertion of the proviso by section 3 of the Finance Act, 1953, and the mischief that was sought to be remedied are weighty and must be borne in mind while interpreting the language of the proviso in question. It is well settled by now that it is legitimate to take into consideration for the purpose of interpretation of a statute the evil which was sought to be remedied. If the mischief which was aimed at was the one suggested by the learned Chief Justice which suggestion has not been controverted by the learned counsel for the assessee, the whole purpose of insertion of the proviso would be defeated by accepting the interpretation sought to be placed on it on behalf of the assessee.

The learned counsel for the Commissioner of Income-tax has called our attention to the changes which have been introduced in the Income- tax Act, 1961, which has been enacted to consolidate and amend the law relating to Income-tax and super-tax. It is pointed out that the Act of 1922 had several anomalies and its provisions were to be found in a scattered manner and at places where certain provisions could not be logically inserted. The attempt in the recent legislation has been to amplify and systematize the various provisions of the income-tax law. In the new section 28 which deals with the head "profits and gains of business, profession or vocation" explanations 2 has been incorporated which explanation originally existed in section 24 of the Act of 1922. Section 73 of the new Act contains an independent and substantive provision in the matter of losses in speculation business. It is in the following terms:

"73. (1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business.

(2) Whether for any assessment year any loss computed in respect of a speculation business has not been wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no income from any other speculation business, shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and--

(i) it shall be set of against the profits and gains, if any, of any speculation business carried on by him assessable for that assessment year; and

(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on............."

According to the learned counsel for the Commissioner of Income- tax, the legislature has accepted the view of the courts contained in the decisions previously mentioned and has incorporated the same in section 73 as a substantive and independent provision. Whatever the position may be with regard to the provisions in the new enactment, it is not permissible to interpret the proviso to sub-section (1) of section 24 of the Act of 1922 with reference to what has been embodied in the new statute. It is only when the aforesaid section in the new Act comes up for interpretation that such a rule can be invoked or applied.

As we are of the opinion that the view which has already been clearly and cogently expressed is unexceptional, we would answer the question referred to us in the negative. The Commissioner of Income- tax shall be entitled to costs which are assessed at Rs 250.

MEHAR SINGH J.--I agree.

FALSHAW J.--I agree.

Question answered in the negative.