TMI Blog1963 (9) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee 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 the other being speculative business. The income of the assessee from these sources was determined by the Income-tax Officer at the following figures for the assessment years 1958-59,1959-60 and 1960-61: Source Assessment year 1958-59 (S.Y. 2013) Assessment year 1959-60 (S.Y. 2014) Assessment year 1960-61 (S.Y. 2015) Rs. Rs. Rs. Property profit 1.369 Profit 1,258 Profit 1014 Ready business profit 28,449 Loss 2,497 Loss 21,197 Speculation business loss 6,26,606 Loss 5,416 Profit 6,19,784 For the assessment year 1958-59, there was a loss of ₹ 6,26,606 but it was loss in speculative business and the Income-tax Officer did not, therefore, set it off aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxed the assessee under section 23(5)(a)(i ) and apportioned the total income amongst the partners under section 23(6) read with section 23(5)(a)( ii) the share coming to each partner on such apportionment being a profit of ₹ 1,99,867. The assessee being aggrieved by the order passed by the Income-tax Officer preferred an appeal to the Appellate Assistant Commissioner, but the Appellate Assistant Commissioner confirmed the view taken by the Income-tax Officer 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 assessment years 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 ₹ 6,19,784 from speculative business in the assessment year 1960-61. It is this view of the Tribunal which is challenged before us on behalf of the Commissioner in this reference. The question which arises for consideration is a question of some importance particularly having regard to the fact that after the amendment of section 23(5)(a) by the Finance A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nesses against profits in other businesses where several businesses are carried on by an assessee. But it is now well-settled by the decision of the High Court of Bombay in Commissioner of Income-tax v. 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. v. Commissioner of Income-tax [1953] 23 ITR 82, that all businesses constitute one head under section 10 and in order to determine what are the profits and gains of business under section 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to 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 first 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 v. Commissioner of Income-tax [1957] 31 ITR 7. 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 profit in non-speculative business for the purpose 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 specu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 section 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: 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 Income-tax Act is antecedent to the question of the right of the assessee to claim any set-off under section 24. The q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses 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 section 24(1) was thus read by the Bombay High Court as controlling section 10. Chagla C.J., though taking this view, hastened to add that it was not as if this proviso had no connection whatsoever with section 24(1). He observed [1957] 31 ITR 7: 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 section 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 set-off under section 24(1) against another head. Therefore, although in the larger sense the proviso is a substantive enactm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a decision of the Supreme Court in Indore Malwa United Mills Ltd. v. Commissioner of Income-tax [1962] 45 ITR 210 (SC), which also supports us in the view that section 24(1) does not cover loss in speculative business. In that case the question arose in regard to the original first proviso to section 24(1), which dealt with loss sustained by an assessee in an Indian State. Of course the original first proviso dealing with loss in an Indian State was worded differently than the present first proviso dealing with loss in speculative business but construing section 24(1) the Supreme Court held that section 24(1) when it talks of profits and gains has reference to taxable profits or taxable gains ; in other words it has reference to such profits and gains as would be assessable in British India or the taxable territories. The expression loss of profits or gains in section 24(1) was read by the Supreme Court as referring to loss in regard to taxable profits or taxable gains and it was on that basis that the Supreme Court held that the loss suffered by the assessee in that case in the Indian State of Indore which was not liable to be included in its taxable income since it was non-res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vy was made on the partners individually. By the Finance Act, 1956, however, section 23(5)(a) was amended and after the amendment, the section reads as follows: 23. (5) Notwithstanding anything contained in the foregoing subsections, when the assessee is a firm and the total income of the firm has been assessed under sub-section (i), sub-section (3) or sub-section. (4), as the case may be,- (a) in the case of a registered firm, (i) the income-tax payable by the firm itself shall be determined; and (ii) the total income of each partner of the firm, including therein his share of its income, profits and gains of the previous year, shall be assessed and the sum payable by him on the basis of such assessment shall be determined: Provided that if such share of any partner is a loss it shall be set off against his other income or carried forward and set off in accordance with the provisions of section 24 : . It will be seen that even after the amendment, the position is the same, but with this material difference that income-tax at specially low rates is now assessable on a registered firm, though no super-tax is assessable on it. The partners of a registered firm a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under this proviso and the partners alone were, entitled to have the amount of such loss set off under section 24. Of course if this contention of the learned Advocate-General were correct, nothing more need be said about the present case for in that event the assessee being a registered firm, it would not by reason of proviso (c) to section 24(2) be entitled to tell the taxing authorities that its speculative losses of previous years should be carried forward and set off against its speculative profit of the assessment year. The taxing authorities would in that event tell the assessee that those losses were liable to be apportioned amongst the partners under the second proviso to section 24(1) and were in fact so apportioned and they cannot, therefore, be allowed to be carried forward and set off against the assessee's speculative profit for the assessment year. But we do not think this contention of the learned Advocate-General can be sustained. It sins against the fundamental rule of construction that a proviso must be construed with reference to the principal matter to which it stands as a proviso. It treats the second proviso to section 24(1) as if it were an independent e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed in regard to the second proviso: Ordinarily the principle of construction is clear that the proper function of a proviso is to except and deal with a case which would have otherwise come within the general language of the substantive part of the enactment; and ordinarily, therefore, we must interpret proviso 2 as being limited to that purpose only. But it is argued that the first proviso to this sub-section which deals with the loss sustained in speculative transactions has been held by a decision of a Division Bench of this court, to which I was a party, in Keshavlal Premchand v. Commissioner of Income-tax [1957] 31 ITR 7 , to be itself a substantive enactment and not a proviso and equally the second proviso should also be held to be a substantive enactment and not a proviso. Now, when one looks at the decision in Keshavlal's case (supra), we clearly set out the well recognised canon of construction of a proviso; but we were in the main influenced by the clear words of the first proviso in coming to the conclusion that it was a substantive enactment. The words that we emphasised were 'in computing the profits and gains chargeable under the head profits and ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he construction of section 23(5)(a), where also we have said that the total income which can be apportioned amongst the partners for their individual assessment cannot take into account speculative loss so that speculative loss would not be apportioned amongst the partners for the purpose of their individual assessment even under section 23(5)(a). That takes us to section 24(2). When the assessment of an assessee is completed it may be that after applying the provisions of section 24(1) there is a loss incurred by an assessee. What is to happen to such loss ? Is the assessee not to get the benefit of such loss in the subsequent years ? Section 24(2) enables an assessee under certain circumstances and subject to certain limitations to carry forward such loss and set it off against his profit in the subsequent years. Now what is the loss which can be thus carried forward and set off and under what circumstances and subject to what limitations can this be done ? In order to answer this question it is necessary first to examine the language of section 24(2). We may point out here that section 24(2) has undergone changes from time to time and we shall have occasion to refer to some o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation. Now, this premise would clearly be satisfied by a loss of profits or gains sustained by an assess see in speculative business. It is important to note that the words used in the section are in any business .... Let us then consider whether there is anything else in the section which restricts the generality of this premise and confines the applicability of the section to loss other than speculative loss. The second premise is described by the words ... and the loss cannot be wholly set off under sub-section (i), so much of the loss as is not so set off or the whole loss where the assessee had no other head of income . Considerable controversy turned on these words and we shall examine the merits of that controversy presently. But before we do so we must refer to clause (1) of the section. That clause says in relation to the loss which can be carried forward under the section that if the loss is a loss in speculative business, it shall be set off only against the profits and gains, if any, of any speculative business carried on by the assessee in the subsequent year. This clause clearly shows that the loss dealt with in section 24(2) covers speculative loss and that specul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the second proviso to section 24(1) and had in fact been so apportioned, the assessee was not entitled by reason of proviso (c) to section 24(2) to carry forward those losses and to set them off against its profits. This contention was, as we have already mentioned, sought to be supported by the learned Advocate-General by two decisions. The first decision was a decision of the High Court of Bombay in Indore Malwa United Mills Ltd. v. Commissioner of Income-tax [1959] 35 ITR 271 and the other was the decision of the Supreme Court in the same case when it went in appeal before the Supreme Court. We have already referred to that decision, and it is reported in Indore Malwa United Mills Ltd. v. Commissioner of Income-tax [1962] 45 ITR 210. Before we consider these two decisions relied upon by the learned Advocate-General in support of the construction contended for by him, we would first prefer to deal with the language of section 24(2) itself and see where that language leads us. As we have already pointed out above, section 24(2) applies equally to speculative loss as to any other loss and the words ... and the loss cannot be wholly set off under sub-section (1), so much o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch of the loss as is not so set off is allowed to be carried forward. But it must be remembered that these words were being used by the legislature to deal with losses, speculative as well as non-speculative, and the same set of words having been used to deal with both kinds of losses, it would not be right to refuse to apply these words to speculative loss merely because some of the words may not be wholly appropriate in their application to speculative loss. Lord Wrenbury said in relation to the English Income Tax Act-and what he said applies equally in relation to the Indian Income-tax Act-that no reliance can be placed upon an assumption of accuracy in the use of language in these Acts (videKensington Income Tax Commissioners v. Aramayo [1916] 1 A.C. 215 ; 6 Tax Cas. 613). The duty of the court in construing a statute such as this must be, as observed by Viscount Simon in Rex v. General Commissioners of Income Tax for the City of London [1942] A.C. 402; 24 Tax Cas. 221, to find out what the legislature must be taken to have really meant by the expression which it has used, without necessarily attributing to it a precise appreciation of the technical appropriateness of its l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 24(2) to negative the right of the registered firm under the main enactment in section 24(2) to carry forward its speculative loss and set it off against its profit in the subsequent years. That would be the position on a question of plain construction. But we were told by the learned Advocate-General that such construction would be contrary to what has been laid down by the Bombay High Court [1959] 35 ITR 271 (Bom.) and the Supreme Court in the Indore Malwa United Mills' case (supra) . Turning first to the decision of the Bombay High Court, it is undoubtedly true that the Bombay High Court held in that case that before an assessee can claim to carry forward any loss under section 24(2) the loss must be such as could have been set off initially under section 24(1) and that the condition precedent to the applicability of section 24(2) is that the loss in respect of which a special right is given to carry forward must be loss to which initially section 24(1) must apply. Now in order to appreciate this view of the Bombay High Court-which of course is binding upon us as it stands-it is necessary to see what was the state of the law at the date of the decision which was require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be construed by the Bombay High Court and it was in the context of these provisions that the Bombay High Court took the view that section 24(2) could not be invoked unless the loss which was claimed to be carried forward was loss to which initially section 24(1) applied. In the first place the loss referred to in section 24(2) as it then stood was obviously loss of profits or gains under the head Profits and gains of business, profession or vocation and the import of it could not, therefore, be any different from that in section 24(1). If loss in section 24(1) meant loss other than Indian State loss in the case of a nonresident, loss in section 24(2) could equally not comprise Indian State loss for the words loss of profits or gains ..under the head 'Profits and gains of business, profession or vocation' in section 24(2) could not have a different meaning than the words loss of profits or gains ..under any of the heads mentioned in section 6 which would include the head Profits and gains of business, profession or vocation in section 24(1) and it was, therefore, clear by the very language of section 24(2) as it stood then that unless a loss was covered by sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... often lie in a word or expression depending upon the context in which it is used and it should be the duty of the court to arrive at the true meaning of the words or expression used, having regard to the context in which it occurs. As observed by Judge Learned Hand in one of his classical passage It is true that the words used, even in their literal sense, are the primary and ordinarily the most reliable source of interpreting the meaning of any writing, be it a statute, a contract or anything else. But it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary, but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning. This is what we have attempted to do today and in this the decision of the Bombay High Court referred to by the learned Advocate-General does not stand in our way, for it is based on a section which has undergone a material change since the time at which the Bombay High Court was called upon to construe it. The same observation must also apply to the decision of the Supreme Court in that very case when it ..... 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