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Sahu Jain Ltd. v. Commissioner Of Income-Tax
Factual and Procedural Background
The assessee, Sahu Jain Limited, a public limited company and managing agent for several companies, claimed for the previous year ending 31 August 1952 (assessment year 1953-54) that a loss of Rs. 7,72,550 from speculation transactions should be set off against income from its managing agency business. The Income-tax Officer rejected the claim on two grounds: (i) the loss was fictitious and not proved; and (ii) even if genuine, the first proviso to section 24(1) of the Indian Income-tax Act prohibited such a deduction. The Appellate Assistant Commissioner dismissed the assessee's appeal. The Income-tax Appellate Tribunal held that a loss of Rs. 6,52,550 was proved but that the set-off could not be allowed under the first proviso to section 24(1); it directed that the proved loss be carried forward under section 24(2)(i) to be set off against speculation profits in later assessments. Under section 66(1) of the Income-tax Act the Income-tax Appellate Tribunal stated a case raising a question of law for the High Court concerning whether the proved loss must be set off against the profits of the managing agency or other business.
Legal Issues Presented
- Whether, on a proper construction of section 10 and of the first proviso to section 24(1) of the Income-tax Act, the loss of Rs. 6,52,550 sustained by the assessee in speculation transactions must be set off against the profits of the managing agency or other business.
Arguments of the Parties
Assessee's Arguments
- The proviso to section 24(1) operates only when the assessee seeks relief by invoking the set-off mechanism under section 24(1) itself; if the assessee does not claim the right conferred under section 24(1) the restriction in the proviso cannot apply.
- The natural function of a proviso is to carve out an exception to the main section and to operate in the same field; therefore the proviso cannot be interpreted to operate beyond the scope of the main enactment (citing Commissioner of Income-tax v. Indo-Mercantile Bank Ltd.).
Revenue's Position (as reflected in the record)
- The Income-tax Officer maintained that the loss was fictitious and not proved (primary ground of disallowance) and alternatively that the first proviso to section 24(1) barred the deduction of speculative losses against other business income.
- The Appellate Tribunal and the Income-tax Officer took the view that even if the loss were proved, the first proviso to section 24(1) operated as a substantive limitation on computation of business profits so as to prevent such set-off; the Tribunal carried the proved loss forward under section 24(2)(i).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Keshavlal Premchand v. Commissioner of Income-tax [1957] 31 I.T.R. 7 (Bombay High Court) | Interpreting the proviso to section 24(1) as a substantive provision to prevent misuse (buying speculative losses to reduce profits) and to control computation of business profits. | The Court followed Chagla C.J.'s reasoning and accepted that the proviso is substantive in character; the present Court respectfully agreed and relied on that line of reasoning. |
| Commissioner of Income-tax v. Indo-Mercantile Bank Ltd. (Supreme Court) | Principle that a proviso ordinarily carves out an exception to the main enactment and operates in the same field (territory of a proviso). | The Court distinguished this authority: it held the language of the proviso in Indo-Mercantile Bank was markedly different and that its ratio could not be applied to the present proviso because the present proviso uses different language and has a different effect. |
| Corporation of the City of Toronto v. Attorney-General for Canada [1946] A.C. 32, 37 | Support for the general statement about the function and territory of a proviso as carving out exceptions to the main enactment. | Cited as authority for the general principle referred to by the assessee; the Court noted the principle but found the present case an exception to its application. |
| Commissioner of Income-tax v. Ramgopal Kaniyalal (Madhya Pradesh High Court) | Interpretation consistent with construing the proviso to section 24(1) as substantive and restrictive of set-off of speculative losses. | Cited as expressing same view as Bombay High Court; relied upon to support the substantive character of the proviso. |
| Commissioner of Income-tax v. Hukum Chand Dalai [1962] 44 I.T.R. 614 (Punjab High Court) | Support for the interpretation that speculative losses cannot be set off except against speculative profits. | Referenced among decisions expressing the same view and cited to bolster the Court's conclusion. |
| Manohar Lal Munshi Lal v. Commissioner of Income-tax [1962] 44 I.T.R. 618 | Same line of interpretation on treatment of speculative losses. | Cited as part of consistent judicial authority following the restrictive interpretation. |
| Commissioner of Income-tax v. Ram Sarup [1962] 45 I.T.R. 248 | Same line of interpretation regarding speculative losses and set-off. | Cited as further authority aligned with the substantive proviso interpretation. |
| P.S.N.M.K. Ramalingam Chettiar v. Commissioner of Income-tax (Madras High Court) | Followed the Bombay decision on the interpretation of the proviso. | Cited as having followed the Bombay High Court's approach; used as supporting authority. |
| Jummarlal Surajkaran v. Commissioner of Income-tax (Andhra Pradesh High Court) | Followed the restrictive interpretation of speculative loss treatment. | Cited as an instance where the Bombay High Court view was followed; relied on to show consistency among High Courts. |
| Cape Brandy Syndicate v. Inland Revenue Commissioners | Principle that subsequent legislation may be used to interpret an ambiguous earlier statute. | Cited to support using the later Income-tax Act, 1961 provisions to shed light on the earlier proviso's meaning where interpretation might be ambiguous. |
| Attorney-General v. Clarkson | Authority referenced in Cape Brandy Syndicate on using subsequent legislation for interpreting earlier ambiguous enactments. | Referred to via Cape Brandy Syndicate to justify looking at later statute (Income-tax Act, 1961) to clarify the earlier proviso. |
Court's Reasoning and Analysis
The Court undertook a textual and contextual analysis of the first proviso to section 24(1) of the Indian Income-tax Act and related statutory scheme. The key points of analysis were:
- Textual focus: The proviso begins with the phrase “in computing the profits and gains chargeable under the head ‘profits and gains of business, profession or vocation’”. The Court treated these words as central, concluding that the proviso deals with the mode of computing business profits rather than being confined to the operation of section 24(1) alone.
- Substantive character of the proviso: The Court observed that, although styled as a proviso, the language (“in computing...”) and the absence of the word “set-off” (the proviso uses “taken into account”) indicate that the legislature intended it to be a substantive provision controlling computation of business profits generally, and thus to travel beyond the confines of section 24(1).
- Statutory scheme: Having regard to the scheme of the Income-tax Act (particularly Chapters III and IV), the Court held that computation of profits under the relevant heads is antecedent to any question of set-off under section 24; therefore a provision affecting computation necessarily affects the availability of set-off.
- Mischief rule and legislative intent: The Court agreed with Chagla C.J.'s reasoning in Keshavlal Premchand that the proviso was enacted to prevent the mischief of buying speculative losses to reduce profits. The Court considered this mischief and legislative purpose as reinforcing the textual conclusion.
- Use of subsequent legislation: The Court noted that the Income-tax Act, 1961 (a consolidating Act) contains section 73, which explicitly restricts set-off of speculation business losses to speculation profits and provides for carrying forward such losses. Applying the principle set out in Cape Brandy Syndicate, the Court regarded the later statute as confirming the proper construction of the earlier proviso where ambiguity might exist.
- Distinguishing contrary authority: The Court considered the decision in Commissioner of Income-tax v. Indo-Mercantile Bank Ltd., where the Supreme Court had emphasized the ordinary territorial operation of a proviso. The Court distinguished that case on the ground that the language of the proviso there differed materially—there were no positive words in that proviso compelling disintegration of the “business” head—whereas the present proviso uses broader and different language which has the necessary effect of controlling computation under section 10.
- Practical and textual congruence with section 24(2)(i): In his concurring opinion, Untwalia J. added that section 24(2)(i), which prescribes that losses from speculative business when carried forward can be set off only against speculative profits, supports reading the proviso as a substantive rule of computation. He illustrated that accepting the assessee's narrower view would render clause (i) of subsection (2) ineffective in many practical cases (for example, when there is business income other than from speculation to set off against), thereby defeating the section's parts.
In sum, the Court combined textual construction, statutory scheme analysis, consideration of legislative purpose (mischief), and reliance on subsequent statutory provisions to conclude that the proviso operates as a substantive rule limiting the use of speculative losses except against speculative profits.
Holding and Implications
Holding: The Court answered the stated question of law in the negative: the loss of Rs. 6,52,550 sustained by the assessee in speculation transactions cannot be set off against the profits of the managing agency or other business of the assessee company.
Implications:
- Direct effect on the parties: The question was answered against the assessee and in favour of the income-tax department. The assessee was ordered to pay the costs of the reference; the hearing fee was fixed at Rs. 250.
- Practical tax effect: The proved loss in speculative transactions may not be used to reduce non-speculation business profits for the assessment year in question; instead, under the statutory scheme (and as the Tribunal directed), such loss must be carried forward and can be set off only against profits of a speculation business in later years in accordance with the statutory provisions (as reflected in section 24(2)(i) of the earlier Act and section 73 of the Income-tax Act, 1961).
- Precedential scope: The Court applied and endorsed the line of authority treating the proviso as substantive in effect (notably the Bombay High Court decision in Keshavlal Premchand) and distinguished the Supreme Court decision relied upon by the assessee. The opinion confines itself to statutory interpretation and applying established authorities; it answers the reference consistent with prior High Court decisions and the later statutory provision.
Ramaswami, C.J:— In this case the assessee, Sahu Jain Limited, is a public limited company and the managing agent of several other companies. For the previous year ending on the 31st August, 1952, corresponding to the assessment year 1953-54, the assessee company claimed that a loss of Rs. 7,72,550 in speculation transactions should be allowed as set-off against the managing agency business income. The claim was rejected by the Income-tax Officer on the ground, firstly, that the loss was fictitious and not proved, and, secondly, that even if the loss was genuine the first proviso to section 24(1) of the Indian Income-tax Act prohibited such deduction. The assessee took the matter in appeal to the Appellate Assistant Commissioner, but the appeal was dismissed. The assessee again appealed to the Income-tax Appellate Tribunal which held that the loss in speculation transactions was proved to the extent of Rs. 6,52,550, but that the set-off could not be allowed under the first proviso to section 24(1) of the Indian Income-tax Act. The Appellate Tribunal followed the decision of the Bombay High Court in Keshavlal Premchand v. Commissioner of Income-tax [1957] 31 I.T.R 7. and held that the first proviso to section 24(1) of the Indian Income-tax Act was a substantive provision and that the assessee company was not entitled to an adjustment of loss in speculative transactions against the income of any other business. The Appellate Tribunal, however, directed that the proved loss of Rs. 6,52,550 should be carried forward and set off in terms of section 24(2)(i) in the later assessments against the speculation profits.
2. Under section 66(1) of the Indian Income-tax Act the Income-tax Appellate Tribunal has stated a case on the following question of law for the opinion of the High Court:
Whether, on a proper construction of the provisions of section 10 and of the present first proviso to section 24(1) of the Income-tax Act, the loss of Rs. 6,52,550 sustained by the assessee company in speculation transactions has to be set off against the profits of the managing agency or other business.
3. Section 24(1) enacts as follows:
“24. (1) 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.”
4. The first proviso to this section, which was inserted by section 3 of the Finance Act, 1953, is as follows:
“Provided 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.”
5. On behalf of the assessee learned counsel put forward the “argument that the proviso will come into operation only when the relief sought for by the assessee is to set off the loss in speculative transactions under the head” business “against his income arising under other heads, but where the assessee does not claim the right conferred under section 24(1), the restriction contemplated by the proviso cannot be attracted. It was, therefore, submitted by learned counsel that the assessee is entitled in this case to set off the loss in speculative transactions against the managing agency business income. It was argued that the function of a proviso was to carve out an exception to the main section, and the proviso cannot be construed as operating beyond the main section. In support of this argument learned counsel referred to the decision of the Supreme Court in Commissioner of Income-tax v. Indo-Mercantile Bank Ltd., where it was pointed out that 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. At page 7 of the report Kapur J. stated the principle as follows:
“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 enactment 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, 37.].”
6. I am unable to accept the argument of learned counsel for the assessee as correct. In my opinion, the present case falls within the exception to the principle which was pointed out by Kapur J. in the passage underlined* above. It is manifest from the language of the proviso itself and from 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 the intention of the legislature was that in the computation of such profits and gains the loss sustained in a speculation 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 key words which are to be construed in the proviso are “in computing the profits and gains chargeable under the head profits and gains of business, profession or vocation”, and having regard to the scheme of the Act, especially Chapters III and IV, it is manifest 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 Indian Income-tax Act is antecedent to the question of the right of the assessee to claim any set-off under section 24. In other words, the question of set-off 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 profit having been arrived at in the manner laid down in Chapter III. It is also significant that in the proviso to section 24(1) the expression “set-off” is not used; the expression used is “taken into account”. It is, therefore, manifest from the language used in the proviso that the legislature intended to enact a substantive provision, though in the garb of a proviso, and the application of the proviso cannot, therefore, be restricted to the provision of section 24(1).
7. The view that I have expressed is borne out by the decision of the Bombay High Court in Keshavlal Premchand v. Commissioner of Income-tax. Chagla C.J also pointed out in that case that it was a sound rule of interpretation that a statute should be so construed as to prevent the mischief and to advance the remedy according to the true intent of the makers of the statute. Chagla C.J took judicial notice 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. I respectfully agree with the line of reasoning which has been adopted by Chagla C.J in the Bombay case. The same view as to the interpretation of section 24(1) has been expressed by the Madhya Pradesh High Court in Commissioner of Income-tax v. Ramgopal Kaniyalal and by the Punjab High Court in Commissioner of Income-tax v. Hukum Chand Dalai [1962] 44 I.T.R 614., Manohar Lal Munshi Lal v. Commissioner of Income-tax [1962] 44 I.T.R 618. and Commissioner of Income-tax v. Ram Sarup [1962] 45 I.T.R 248.. The decision of the Bombay High Court in Keshavlal Premchand v. Commissioner of Income-tax, has also been followed by the Madras High Court in P.S.N.M.K Ramalingam Chettiar v. Commissioner of Income-tax and by the Andhra Pradesh High Court in Jummarlal Surajkaran v. Commissioner of Income-tax.
8. It is necessary to add that the Income-tax Act of 1961, which is a consolidating Act, contains an independent substantive provision dealing with the matter of losses in speculation business. Section 73 of the new Act states as follows:
“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) Where 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 off 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…”
9. I have already expressed the conclusion that the language of the proviso to section 24(1) of the Indian Income-tax Act of 1922 clearly indicates 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”. In other words, the language of the proviso is clearly such that it has the necessary effect of travelling beyond the main enactment, and controlling the provision of section 10 of the statute. Even assuming for a moment that the interpretation of the proviso to section 24(1) is obscure and ambiguous or is capable of more than one interpretation, light may be thrown on the true view to be taken of it by the aim and provisions of a subsequent statute. This principle is stated by Lord Sterndale in Cape Brandy Syndicate v. Inland Revenue Commissioners as follows:
“I think it is clearly established in Attorney-General v. Clarkson that subsequent legislation on the same subject may be looked to in order to see what is the proper construction to be put upon an earlier Act where that earlier Act is ambiguous. I quite agree that subsequent legislation, if it proceeded upon an erroneous construction of previous legislation, cannot alter that previous legislation; but if there be any ambiguity in the earlier legislation then the subsequent legislation may fix the proper interpretation which is to be put upon the earlier. As I have said, taking the Act of 1915, the words which are relied upon really, not entirely, but most strongly, as showing that what I may call post-war businesses were not included in the Act, are the words ‘where there has not been one pre-war trade year.’ I do not find it possible to say that those words are not capable of two constructions. I have mentioned the two constructions. One would exclude post-war businesses; one would not do so. I will not say it would include them because if they are not excluded they are included by section 39. I think those arc-two possible constructions. It is perfectly obvious that the Act of 1916 and the Act of 1920 both assume that the Act of 1915 was so framed as to include post-war businesses, and therefore it seems to me to assume and really to direct that the second construction, which does not exclude post-war businesses, is the right construction of Part II of the Fourth Schedule to the Act of 1915.”
10. Applying the principle to the present case, it is manifest that the proviso to section 24(1) of the Indian Income-tax Act is really a substantive provision dealing with the computation of profits and gains under section 10 of the Act. This is an additional reason for supporting the view of Chagla C.J as to the interpretation of section 24(1) of the Act in Keshavlal Premchand v. Commissioner of Income-tax.
11. Learned counsel on behalf of the assessee also based his argument upon the reasoning adopted by the Supreme Court in Commissioner of Income-tax v. Indo-Mercantile Bank Ltd. and contended that the principle of that case must govern the decision of the present case also. I see no warrant for accepting this argument. In the Supreme Court case the question at issue was the interpretation of section 32(1) of the Travancore Income-tax Act, which was almost similar to another proviso to section 24(1) of the Indian Income-tax Act and was to the following effect:
“Provided that—
(a) where the loss sustained is a loss of profits and gains of a business or vocation to which the first proviso to sub-section (1) is applicable, and the profits and gains of that business, profession or vocation are, under the provisions of clause (c), sub-section (2), section 14, exempt from tax, such loss shall not be set off except against profits and gains accruing or arising (in an Indian State) from the same business, profession or vocation and exempt from tax under the said provisions.”
12. After closely examining the language of this proviso, the Supreme Court held that the case fell within the normal principle that the territory of a proviso was to carve out an exception to the main enactment and to operate in the same field. It was further pointed out by the Supreme Court in that case that in the proviso in question there were no positive words which would support an interpretation in favour of the disintegration of the head “business” and compel the application of the proviso to the same head, It is manifest that the language of the proviso which was the subject-matter of interpretation in the Supreme Court case is markedly different from the language of the proviso which is the subject-matter of interpretation in the present case. I am, therefore, of opinion that the ratio decidendi of the Supreme Court decision cannot apply to the present case and the same conclusion cannot be reached with regard to the interpretation of the proviso with which we are concerned in the present case.
13. For the reasons I have expressed I hold that on a proper construction of the provisions of section 10 and of the first proviso to section 24(1) of the Indian Income-tax Act, the loss of Rs. 6,52,550 sustained by the asses-see company in speculation transactions cannot be set off against the profits of the managing agency or other business of the assessee company. I would accordingly answer the question of law referred by the Income-tax Appellate Tribunal against the assessee and in favour of the income-tax department.
14. The assessee must pay the costs of this reference. Hearing fee Rs. 250
Untwalia, J.:— For the reasons given by my Lord the Chief Justice, I agree that the question of law should be answered against the assessee and in favour of the income-tax department. I would, however, like to add one more reason in support of the view expressed by him.
15. The construction and meaning aforesaid of the proviso in question find further support from the provisions of sub-section (2) of section 24, which deals with carrying forward of the loss of profits or gains sustained by an assessee in any year in any business, profession or vocation to the following year. Sub-section (2) of section 24 with clause (i), which is the relevant clause in support of the construction put upon the proviso, reads thus:
“Where any assessee sustains a loss of profits or gains in any year, being a previous year not earlier than the previous year for the assessment for the year ending on the 31st day of March, 1940, in any business, profession or vocation, and the loss cannot be wholly set off under subsection (1), so much of the loss as is not so set off or the whole loss where the assessee had no other head of income shall be carried forward to the following year, and
(i) where the loss was sustained by him 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.”
16. The main enactment in sub-section (2) provides that, even if the loss in any business, profession or vocation cannot be wholly set off under subsection (1) against the assessee's income, profits or gains under any other head in any assessment year, or it cannot be set off at all, there being no such income from any other head, so much of the loss as cannot be set off under sub-section (1) or the whole loss, as the case may be, shall be carried forward to the following year. But in clause (i) of sub-section (2), it is provided that, where the loss was sustained by the 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 the assessee in the following year. That is to say, such loss sustained by the assessee in any previous year “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”, “in computing the profits and gains chargeable under the head ‘profits and gains of business, profession or vocationr’,” in the assessment year relating to the previous year. If the general and the restricted meaning and interpretation of the proviso as suggested on behalf of the assessee were to be accepted, it will not be possible to give full effect to all the parts of the section, namely, to clause (i) of sub-section (2) of section 24. The glaring example of this is the case in hand. The Income-tax Officer, for the assessment year 1953-54, assessed the income of the assessee to be Rs. 10,87,685 as income from only one head, namely, business, profession or vocation other than the business consisting of the speculative transactions. After some modification by the Appellate Assistant Commissioner and the Income-tax Tribunal, the figure of that income was maintained in the neighbourhood of rupees 10 lakhs. The claim of the assessee for a set-off of the loss of Rs. 7,72,550 in speculative transactions against the said income was rejected by the Income-tax Officer and the Appellate Assistant Commissioner chiefly on the ground that the loss itself was fictitious and not proved. The Tribunal, however, rejected the assessee's claim to the extent of Rs. 1,20,000 and held that the claim for the loss in speculative business to the extent of Rs. 6,52,515 was proved. In this case there was no question of set-off under sub-section (1) and, if the proviso to that sub-section were not to be given the exceptional and the wider meaning, the whole of the loss could be set off against the income of about rupees 10 lakhs from the business other than the one of speculative transactions. In that event, although the loss of rupees 6 lakhs and odd was sustained by the assessee in the previous year relating to the assessment year 1953-54 in a business consisting of speculative transactions, it will not be possible to give effect to clause (i) of sub-section (2) and to say that the loss in the speculation business is to be set off by carrying forward to the following year, only against the profits and gains, if any, of any business in speculative transactions carried on by the assessee in that year.
17. Question answered in the negative.
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