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  • M.C Desai, C.J
  • R.S Pathak, J.
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Smart Summary

Structured Summary of the Opinion (Pathak, J.)

Factual and Procedural Background

The reference arises under Section 66(1) of the Indian Income Tax Act. The assessee, an individual, derived income from property, shares, commission agency work and as partner in several firms. In his return for the assessment year 1953-1954 he disclosed a net profit computed after setting off a loss from his share in the partnership firm Kamta Prasad Reghunath Prasad. That loss included a sum of Rs. 8,669 claimed as the assessee’s net loss from speculative transactions paid through that firm.

The Income Tax Officer disallowed the loss claimed by the assessee from the firm. The Appellate Assistant Commissioner found that the assessee had suffered a net speculative loss of Rs. 7,254 and directed the Income Tax Officer to carry forward that loss for set-off against speculative profits in subsequent years. On appeal to the Appellate Tribunal the assessee argued that the Rs. 7,254 speculative loss should be set off against profits from other businesses for the purposes of computing profits and gains under Section 10(1). The Appellate Tribunal rejected that claim, relying upon a proviso to Section 24(1).

The matter was referred in the following terms: “Whether the speculation loss can be set off against the profit from any other business activity under Sec. 10 in spite of the first proviso to S. 24(1)?” The opinion notes that due to a legislative amendment in 1954 the textual reference in the Tribunal’s question to the “first proviso” was intended to refer to the proviso which had been the second proviso at the time of the assessment year.

Legal Issues Presented

  1. Whether a loss sustained in speculative transactions can be set off against profits from other business activities for the purpose of computing profits and gains under Section 10(1) despite the proviso to Section 24(1) (the proviso then in force governing treatment of speculative losses under the rule of set-off).

Arguments of the Parties

Assessee's Arguments

  • The proviso to Section 24(1) does not govern the computation of profits and gains for the purposes of Section 10(1).
  • The proviso should be read and applied only when the provisions of Section 24(1) (the set-off provision for losses between heads) are being applied — i.e., at the stage of aggregation/set-off — and not at the earlier stage of computing profits under Section 10(1).

Revenue's (Commissioner’s) Arguments

  • The proviso should be considered at the time the profits and gains are computed under Section 10, not merely when Section 24(1) is applied; in other words, the proviso operates as a substantive rule of computation under Section 10.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Keshav Lal Premchand v. Commissioner of Income Tax, Bombay, (1957) 31 ITR 7 : AIR 1957 Bom 20 Held that the proviso must be construed as a substantive provision operating when profits and gains are computed under Section 10. The court considered this authority and respectfully disagreed: it concluded that the proviso is a limitation on the scope of Section 24(1) (the set-off stage) and does not apply to computation under Section 10.
Commissioner of Income Tax, Nagpur and Bhandara v. Ram Gopal Kaniyalal, 1960-1938 ITR 193 : AIR 1960 Madh Pra 106 Relied upon reasoning underlying Keshav Lal Premchand to support the view that the proviso operates at the Section 10 computation stage. The court noted this decision proceeded almost entirely on the reasoning in Keshav Lal Premchand and did not follow that line of authority for the reasons given in the judgment.
Commissioner of Income Tax v. Ram Saran, 1962-45 ITR 248 : AIR 1962 Punj. 318 (Full Bench) Full Bench took the same view as Keshav Lal Premchand (i.e., proviso applies at Section 10 stage). The court observed the Full Bench decision adopted similar reasoning to Keshav Lal Premchand and rejected that approach in this case.
Jummarlal Surjkaran v. Commissioner of Income Tax, 1963-47 ITR 809 (Andh Pra) Cited as a decision where the learned Judges largely relied upon the considerations in Keshav Lal Premchand. The court noted the reliance but indicated those decisions followed the Keshav Lal line of reasoning, which this court did not accept.
Shree Hanuman Investment Co. Ltd. v. I.T. Commissioner, West Bengal, 1963-48 ITR 915 (Cal) Cited as another case adopting reasoning similar to Keshav Lal Premchand. The court recorded that this authority relied on Keshav Lal’s reasoning and therefore did not persuade this court to adopt the same view.
Joseph John v. I.T. Commissioner, Kerala, 1964-51 ITR 322 (Ker) Cited as a recent decision where the learned Judges largely relied upon the considerations in Keshav Lal Premchand. The court observed this case followed the Keshav Lal approach; the present court declined to follow that line of authorities for the reasons set out in its analysis.

Court's Reasoning and Analysis

The court analyzed the statutory scheme and the sequential steps of assessment under the Income Tax Act. It emphasized the following analytical points, drawn from the text:

  • Statutory structure and stages: Section 3 charges income-tax on total income; “total income” is defined by reference to Section 4(1) and computed in the manner laid down in the Act. Section 6 divides total income into heads (including “Profits and gains of business, profession or vocation”), and Section 10 prescribes how profits and gains under that head are to be computed. Section 24(1) provides for setting off a loss under one head against income under another head as part of determining total income.
  • Different stages have different functions: The court stressed that Section 10 operates at the stage when profits under the business head are computed for the assessable amount under that head, whereas Section 24(1) operates at a later stage when computed amounts under the different heads are aggregated and losses are set off against profits under other heads.
  • Nature and effect of the proviso: The court interpreted the proviso (the one then functioning as the second proviso to Section 24(1) for the assessment year) as a limitation on the operation of Section 24(1). The proviso prescribes that when applying the rule of set-off in Section 24(1) involving the business head, the profits and gains under that head must be computed for the purposes of set-off by ignoring speculative losses except to the extent of profits from other speculative businesses. In short, the proviso curtails the scope of set-off available under Section 24(1).
  • Reasonableness of dual computation: The court accepted that the Legislature could prescribe different modes of computing profits and gains for different purposes — one mode for determining taxable profits under Section 10 and another (as provided by the proviso) for determining the extent of set-off under Section 24(1). Thus, the profits computed under Section 10 need not be identical to the profits considered for the limited purpose of set-off under Section 24(1) where the proviso applies.
  • Rejection of contrary authorities: The court reviewed prior decisions (notably Keshav Lal Premchand and decisions that followed its reasoning) that construed the proviso as a substantive rule operative under Section 10. The court found that those judgments failed to consider the possibility (and permissibility) of different computations for different statutory stages and therefore declined to follow them.
  • Conclusion of analysis: For the purposes of computing profits and gains under Section 10, the court held that the proviso to Section 24(1) has no application; the proviso instead applies at the set-off stage under Section 24(1).

Holding and Implications

Holding: The reference question is answered in the affirmative. The court held that the proviso to Section 24(1) (as it stood for the assessment year in question) does not apply for the purpose of computing profits and gains under Section 10; it is a limitation upon the set-off rule in Section 24(1) and applies at the stage of set-off, not at the stage of computing profits under Section 10.

Direct consequences for the parties:

  • The assessee’s contention that the speculative loss may be set off against profits from other businesses for the purpose of computing profits under Section 10(1) is accepted.
  • The court ordered that a certified copy of the judgment be sent to the Income Tax Appellate Tribunal.
  • The assessee was awarded costs of Rs. 200 and counsel’s fee of Rs. 200 as assessed by the court.

Broader implications: The opinion explains and adopts a particular statutory construction limiting the operation of the proviso to the set-off stage (Section 24(1)) rather than to Section 10 computations. The opinion expressly disagrees with several prior decisions that had held otherwise. The text does not state that it establishes a new binding precedent beyond the decision in this reference; it records disagreement with earlier case law and applies its construction to the matter before the court.

Disposition: Reference answered in the affirmative; costs and counsel fee awarded to the assessee; copy of judgment to be sent to the Income Tax Appellate Tribunal.

Show full summary ...

    Jagannath Mahadeo Prasad v. Commissioner Of Income Tax

    Pathak, J.:— This is a reference at the instance of the assessee under Section 66(1) of the Indian Income Tax Act.

    2. The assessee, an individual, enjoyed income from property, shares in joint stock companies, commission agency and also as partner in a number of firms. He submitted a return of his income for the assessment year 1953-1954, disclosing a net profit. This profit was computed after setting off a loss from his share in one of the partnership firms, Kamta Prasad Reghunath Prasad, the loss being determined by taking into account a sum of Rs. 8,669/- representing the net loss suffered by him in speculative transactions and paid through that firm. The Income Tax Officer ignored the loss claimed by the assessee from the firm, but the Appellate Assistant Commissioner found that the assessee had suffered a net loss of Rs. 7,254/- upon the speculative dealings, and directed the Income Tax Officer to carry forward that loss for being set off against the profits from speculative dealings in subsequent years. In appeal before the Appellate Tribunal the assessee contended that the loss of Rs. 7,254/- from speculative dealings should be set off against the profits from other businesses for the purpose of computing the profits and gains under Section 10(1) of the Act. This claim was negatived by the Appellate Tribunal, which relied upon the first proviso to S. 24(1).

    3. Accordingly, the following question has been referred:

    “Whether the speculation loss can be set off against the profit from any other business activity under Sec. 10 in spite of the first proviso to S. 24(1)?”

    Section 10(1) provides:

    “10(1). The tax shall be payable by an asses-see under the head ‘Profits and gains of business, profession or vocation’ in respect of the profits or gains of any business, profession or vocation carried on by him.”

    And S. 24(1), at the relevant time, declared:

    “24(1). Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in S. 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:

    Provided that in computing the income, profits and gains chargeable under any head or the loss of profits and gains falling under any head, so much of any loss of profits or gains as would but for the loss have accrued or arisen within the State of Jammu and Kashmir, shall not be taken into account except to the extent of the amount of income, profits and gains, if any, which would be exempt “under the provisions of Cl. (c) of sub-section (2) of S. 14:

    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:

    Provided further………….”.

    4. The first proviso was omitted by the Schedule to the Taxation Laws (Extension to Jammu and Kashmir) Act, 1954, and in the second proviso, which now became the first proviso, the word “further” was in consequence omitted. The question framed by the Appellate Tribunal refers to the first proviso to S. 24(1), but it is apparent that reference was actually intended to the provision which was the second proviso to that sub-section as it stood during the assessment year 1953-1954.

    5. The assessee contends that the aforesaid proviso to S. 24(1) does not govern the computation of the profits and gains for the purpose of S. 10, and that the proviso should be read only when the provisions of S. 24(1) are applied. For the Commissioner, however, it is urged that the proviso cannot be treated as a step in the application of S. 24(1) but should be considered when the profits and gains are computed under S. 10. The point which arises is one of no little difficulty, but having given the matter our careful consideration, in our opinion the contention advanced on behalf of the assessee must prevail.

    6. Section, 3 declares that income-tax shall be charged in respect of the total income of the previous year or every individual, Hindu undivided family, company, etc. “Total income”, by S. 2(15), means “total amount of income, profits and gains referred to in sub-section (1) of S. 4 computed in the manner laid down in this Act”. And S. 4(1) provides that the total income of any previous year of any person includes all income, profits and gains from whatever source derived which are received or are deemed to be received, accrue or arise or are deemed to accrue or arise in the circumstances classified in that sub-section. Then S. 6 divides the total income chargeable to income tax into six heads of income, profits and gains, one of them being “profits and gains of business, profession or vocation”, while the others are salaries”, “interest on securities”, “income from property”, “income from other sources” and “capital gains”. Then follow provisions indicating how the income, profits and gains under these several heads should be computed, and one of these provisions is S. 10. Having provided this, the Act then proceeds to detail the procedure which must be followed for assessing the total income, determining the sum payable on the basis of that assessment and requiring the payment of that sum. The income, profits and gains computed under the several head? are, during the process of assessment, aggregated for the purpose of determining the total income. Now, because income-tax is only one tax and not a number of taxes according to the number of heads, S. 24(1) makes provision for setting off a loss of profits or gains sustained under one head in any year against the income, profits or gains under any other head in that year. This was considered necessary for the purpose of determining the total income of that year, and is an important step in arriving at the true figure of the total income.

    7. Both S. 10 and S. 24(1) play their part in the assessment of total income, but they operate at different stages in the process of assessment. Section, 10 is applied when the profits and gains of a business, profession or vocation are qpmputed for determining the assessable amount under that head. When under similar provisions, the income, profits and gains under other heads have also been computed, then the stage is reached when the loss, if any, under one head must be set off against the profits under another. This is abundantly clear from the provisions of S. 24(1) itself. It refers to the heads mentioned in S. 6 and provides for setting-off the loss sustained under one head against the profits enjoyed under any other head. That is stage which comes in the process of assessment distinctly after the loss or profits, as the case maybe, have already been computed under the several heads in accordance with the earlier provisions of the Act. But while providing for the setting-off of loss under one head against profits under another, the Legislature has inserted a number of provisos, among them being the proviso under consideration. The effect of these provisos is, in our judgment, to limit the field upon which S. 24(1) operates.

    8. By virtue of the proviso under consideration, the Legislature enjoins that if one of the heads to be considered is “Profits and gains of business, profession and vocation” when you apply the provisions relating to set-off under Section 24(1), you must compute the profits and gains under that head in the manner laid down in the proviso, and it is the profits and gains so computed that can be set off. The proviso requires that in the computation, the loss sustained on speculative transactions must not be taken into account except to the extent of the amount of profits or gains in any other business consisting of speculative transactions. In other words, when applying the rule of set-off incorporated in S. 24(1), the profits and gains under the aforesaid head which will be set off is not that computed under Section, 10 but that determined after ignoring the loss on speculative transactions which is in excess of the profits in any other business of the same nature. On this construction, the proviso appears to be a provision enacted for the purpose of limiting or curtailing the set off available under S. 24(1). The contention that the proviso does not relate at all to S. 24(1) cannot be accepted. The construction which we are inclined to place upon the proviso appears to us to be reasonable. If the proviso can be reasonably related to the provisions of S. 24(1), there is no reason why it should not be considered in its true character to be a proviso to S. 24(1).

    9. It might be said that one central idea rims through the entire body of S. 24(1), namely, the formulation of the rule that in determining the aggregate income of an assessee the loss of profits or gains under one head shall be set off against the income, profits or gains under another head, and what are the limitations within which such set off may he effected. It is not disputed that the first and third provisos are in their true nature provisos to Section 24(1). It will be noticed that S. 24(1) contains two expressions, “income, profits or gains” and “loss of profits or gains”. The loss of profits or gains under one head are to be set off against the income, profits or gains under another head. The first proviso operates when you are computing either the income, profits and gains chargeable under any head or the loss of profits and gains falling under any head. Both these expressions refer to Section 24(1), and it seems clearly to imply that the first proviso is related to S. 24(1). For the same reason it can be said that the third proviso is also related to S. 24(1). If that is so, then there can be little room for the contention that the second proviso is not really a proviso to S. 24(1). Its nature should be the same as that of the provisos going before and after. Indeed, the use of the word “further” in this proviso and in the one which follows seems to indicate this.

    10. If the first proviso is in its true character a proviso to S. 24(1), there is good reason why the proviso under consideration which follows it should also be so considered, for it opens with the words.

    “Provided further ……….” And, if the third proviso is also really a proviso to S. 24(1) since its opening words include the word “further”, that appears to be an Indication that the provisos which precede it are also provisos to S. 24(1). After the omission in 1954 of the first proviso and, consequently, of the word “further” in the proviso under consideration, the retention of the word “further” in the last proviso points to the conclusion that these two provisos remaining in 1954 must be read as provisos to S. 24(1).

    11. In support of his contention, learned counsel for the Commissioner relied principally upon a decision of the Bombay High Court in Keshav Lal Premchand v. Commissioner of Income Tax, Bombay, (1957) 31 ITR 7 : (AIR 1957 Bom 20) where it was held that this proviso must be construed as a substantive provision which comes into operation when profits and gains are computed under S. 10. Chagla, C.J who delivered the judgment of the, Court, appears to have been influenced primarily by the words “…in computing the profits and gains chargeable under the head ‘Profits and gains I of, business, profession or vocation’.” He reasoned: ‘that the computation of profits and gains chargeable under that head was a matter falling for consideration under S. 10 and, therefore, the proper time when this proviso could be said to operate was when the computation was made under S. 10. He, pointed out that when one came to the stage; of applying S. 24(1), the computation of the profits and gains chargeable under the head “profits and gains of business, profession or vocation” had already been completed under S. 10. He observed:

    “It was entirely unnecessary to compute the profits and gains of business, profession or vocation for the purpose of S. 24(1) because that had already been done under S. 10(2).”

    12. In view of the construction which, we think, can fairly be placed upon the proviso, we find our selves, with respect, unable to agree with the view expressed by the Bombay High Court. The learned Judges of the Bombay High Court did not consider that the profits and gains falling under the head “profits and gains of business, profession or vocation” could be required to be computed for two distinct; purposes, one for the purpose of determining the taxable profits and gains under S. 10 and the other for the purpose of applying the rule of set off incorporated in S. 24(1). It was open to the Legislature to provide different modes of computing the profits and gains for the two separate purposes. The mode of computing the profits and gains contained in the proviso under consideration is specially intended for the purpose of determining the limitations within which the rule of set off should be applied. This aspect of the proviso did not receive the consideration of the learned Judges of the Bombay High Court. Learned counsel also relied upon Commissioner of Income Tax, Nagpur and Bhandara v. Ram Gopal Kaniyalal, 1960-1938 ITR 193 : (AIR 1960 Madh Pra 106) but that decision proceeded almost entirely on the reasoning underlying Keshav Lal Premcliand's case, 1957-31 ITR 7 : (AIR 1957 Bom 20) (supra). We were then referred to Commissioner of Income Tax v. Ram Saran 1962-45 ITR 248 : (AIR 1962 Punj. 318 (FB) where a Full Bench of the Punjab High Court took the same view. The considerations which prevailed with the learned Judges appear, to out mind to be identical with those upon which the ??? Keshav Lal Premchand's case. 1957-31 ITR 7 : (AIR 1957 Bom 20) (supra) rested. There are also the decisions in Jummarlal Surjkaran v. Commissioner of Income Tax, 1963-47 ITR. 809 (Andh Pra); Shree H-anuman Investment Co. Ltd. v. I.T Commr. West Bengal, Calcutta 1963-48 ITR. 915 (Cal) and recently in Joseph John v. I.T Commissioner Kerala, 1964-51 ITR. 322 (Ker) In all these cases the learned Judges largely relied upon the considerations which prevailed in Keshav Lal Premchand's case, 1957-31 ITR 7 : (AIR 1957 Bom 20) (Supra).

    13. In our judgment, for the purpose of computing the profits and gains from business under S. 10, the proviso to S. 24(1) under consideration can have no application.

    14. Accordingly, the question referred must be answered in the affirmative.

    15. We direct that a copy of this judgment under the seal of the Court and the signature of the Registrar shall be sent to the Income Tax Appellate Tribunal. The assessee shall be entitled to his costs which we assess at Rs. 200/-. Counsel's fee is also assessed at Rs. 200/-.

    IH/V.B.B

    16. Reference answered.

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    Jagannath Mahadeo Prasad v. Commissioner Of Income Tax
    (Apr 14, 1964)