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Commissioner Of Income-Tax v. Hukam Chand Dalal.
Factual and Procedural Background
The reference was made under section 66(1) of the Income-tax Act. The specific question referred was whether, for the purpose of computing the assessee's income under section 10 (profits and gains of business, profession or vocation), losses sustained in jobbing (speculative) transactions could be set off against profits from the assessee's brokerage business by reason of the first proviso (as inserted by the Finance Act, 1953) to sub-section (1) of section 24 of the Act.
Facts: During the assessment year 1953–54 (accounting period ending 23 March 1953) the assessee, Hukam Chand Dalai, carried on two businesses: a brokerage business (which produced a profit) and a jobbing/speculative business (which produced losses).
Procedural history: The Income-tax Officer and the Appellate Assistant Commissioner disallowed the set-off of speculative losses against brokerage profits relying on the proviso to section 24(1). The Appellate Tribunal reversed that view, holding the proviso did not control section 10 and citing a Bombay High Court decision (Commissioner of Income-tax v. Murlidhar Mathurawalla Mahajan Association). A reference was made to this Court under section 66(1) to resolve the question.
Legal Issues Presented
- Whether, on the facts of this case, for the purpose of computing the assessee's income under section 10 of the Income-tax Act, the loss sustained by the assessee in jobbing (speculative) transactions was not adjustable against profits from his brokerage activities by reason of the first proviso to sub-section (1) of section 24 of the Act.
Arguments of the Parties
Appellate Tribunal's Position (and reasoning relied upon)
- The Tribunal held that the proviso to section 24(1) did not in any way control section 10. It relied on the Bombay High Court judgment in Commissioner of Income-tax v. Murlidhar Mathurawalla Mahajan Association to support the view that all businesses fall under one head (profits and gains of business) and that set-offs of profits and losses within that head are governed by section 10 computation rather than by section 24.
Learned Counsel for the Commissioner
- Pointed out that since the Bombay High Court decision relied on by the Tribunal, the wording of the proviso to section 24(1) had been changed.
- Relied on the subsequent Bombay High Court decision in Keshavlal Premchand v. Commissioner of Income-tax which considered the proviso in its present form and addressed whether losses in speculative business could be set off against other business profits under section 10/section 24.
Mr. Palkhivala's Submissions (as recorded)
- Contended that the proviso to section 24(1) should be regarded only as an abridgement of the right of set-off given by section 24(1), and thus should be applied to restrict set-off of losses under one head against profits under another head.
- Sought to paraphrase the proviso to mean that losses arising from speculative transactions in a business could not be set off against other profits (an interpretation the Court characterised as effectively re-writing the proviso).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner of Income-tax v. Murlidhar Mathurawalla Mahajan Association, [1948] 16 I.T.R. 146 (Bom.) | Principle that all businesses, wherever carried on, constitute one head under section 10; losses and profits within the same head may be set off in computing business profits (thus section 24 comes into play only when setting off across heads). | The Appellate Tribunal relied on this decision to hold the proviso did not affect section 10. The Court reviewed it but noted that the proviso's wording had been changed since that decision and therefore its reasoning required re-examination in light of the amended proviso. |
| Keshavlal Premchand v. Commissioner of Income-tax (Bombay High Court) | Consideration of proviso to section 24(1) in its present wording; held (per Chagla C.J.) that the proviso must be regarded as a substantive enactment affecting the mode of computation of profits and gains chargeable under the head 'profits and gains of business, profession or vocation'. | The Court adopted and relied upon Chagla C.J.'s reasoning that the proviso governs the computation of business profits (chapter III computation) and therefore limits the quantum of loss/profit available for set-off under section 24(1). |
| Commissioner of Income-tax v. Ramgopal Kaniyalal (Madhya Pradesh High Court) | The Madhya Pradesh High Court followed the view that the proviso is substantive and affects computation (i.e., adopted Chagla C.J.'s approach). | The opinion records that this decision followed Chagla C.J.'s view and that the present Court considered that following of the view to be correct and persuasive. |
Court's Reasoning and Analysis
The Court undertook a textual and contextual analysis of the statute and of the proviso to section 24(1) in the light of the scheme of the Income-tax Act. Key steps in the Court's reasoning were:
- Statutory framework: The Court summarized the relevant provisions — section 6 (heads of income), section 10(1) (tax payable under head 'profits and gains of business, profession or vocation' and the method of computing such profits), and section 24(1) (set-off of losses).
- Identification of the proviso's language: The Court quoted the first proviso to section 24(1) which excludes, when computing business profits, losses sustained in speculative transactions except to the extent of profits in other speculative businesses.
- Assessment of conflicting authorities: The Appellate Tribunal's reliance on the earlier Bombay High Court decision (Murlidhar) was examined; the Court observed the proviso had been reworded since that decision and thus required reconsideration.
- Reliance on Keshavlal Premchand (Chagla C.J.): The Court found Chagla C.J.'s detailed reasoning persuasive — namely, that although provisos normally limit the section in which they appear, in the statutory context here (Chapters III and IV of the Act and the sequence of computation and deduction), the proviso must be treated as a substantive enactment governing the mode of computation of profits chargeable under section 10 and therefore it affects what is available for set-off under section 24(1).
- Rejection of the paraphrase urged by Mr. Palkhivala: The Court concluded that paraphrasing the proviso to mean the proviso merely abridges the right of set-off under section 24(1) would amount to rewriting the provision; the language and scheme of the Act showed the proviso prescribes how to compute profits and gains under section 10 by disallowing speculative losses except to the extent of speculative profits.
- Conclusion on application: Because the proviso governs computation under section 10, the loss sustained in the assessee's jobbing/speculative transactions could not be taken into account (except as permitted by the proviso) when computing the profits and gains of the brokerage business for the purposes of section 10; consequently such speculative losses were not adjustable against brokerage profits for that purpose.
The Court expressly accepted the reasoning in the cited High Court authorities and considered it the only possible interpretation of the proviso's clear and unambiguous words.
Holding and Implications
Holding: The Court answered the reference by holding that, for the purpose of computing the assessee's income, profits and gains under section 10 of the Income-tax Act, the loss sustained by the assessee in his jobbing (speculative) transactions was not adjustable against his profits from brokerage activities for the same period by reason of the terms of the first proviso to sub-section (1) of section 24 of the Act.
Implications and direct consequences:
- Direct effect on the parties: The assessee is not permitted to set off the speculative losses against brokerage profits when computing business profits under section 10 as limited by the proviso to section 24(1).
- Costs: The assessee was ordered to pay the costs of the Commissioner. Counsel's fee assessed: Rs. 250.
The opinion rests on interpreting and applying existing High Court authorities (as discussed) to the statutory text; it does not purport to create a novel principle beyond endorsing the substantive effect of the proviso as previously expounded.
Falshaw, J.:— The question referred to us in this reference under section 66(1) of the Income-tax Act is whether on the facts and in the circumstances of this case, for the purpose of computing the assessee's income, profits and gains under section 10 of the Indian Income-tax Act the loss sustained by him in jobbing transactions was not adjustable against the profits from the brokerage activities of same period by reason of the terms of the first proviso (as inserted by the Finance Act, 1953) to sub-section (1) of section 24 of the Act.
2. The facts are that during the assessment year 1953–54, for the accounting period ending the 23rd of March, 1953, the assessee, Hukam Chand Dalai, carried on two businesses, one as a broker and the other as a jobber or speculator. During the relevant period his brokerage business showed a profit but losses were sustained in the speculative business.
3. Section 6 of the Act sets out the heads under which taxable income can accrue, namely salaries, interest on securities, income from property, profits and gains of business, profession or vocation, income from other sources and capital gains. Section 10(1) provides that the tax shall be payable by an assessee under the head “profits and gains of business, profession or vocation “in respect of the profits and gains of any business, profession or vocation carried on by him. The remainder of section 10 sets out the various allowances which are to be taken into consideration in computing such profits or gains. Section 24 deals with the set-off of losses in computing aggregate income and sub-section (1) reads:
“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. Then comes the proviso which is under consideration in this reference. It reads:
“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. In the present case the Income-tax Officer and the Appellate Assistant Commissioner have held that this proviso was bar to setting off the losses incurred by the assessee in his speculative business against the profits realised by him from his brokerage business. The Appellate Tribunal, however, held that the proviso to section 24(1) did not in any way control section 10 of the Act. The learned judicial member of the Tribunal cited in this connection a passage from the judgment of the Bombay High Court in Commissioner of Income-tax v. Murlidhar Mathurawalla Mahajan Association [1948] 16 I.T.R 146 Bom.., to the effect that all businesses wherever carried on constitute one head which falls under section 10 and in order to determine what are the profits and gains of a business under section 10, an assessee is entitled to show all his profits and set off against those profits losses incurred by him in the same head and it is only when he proceeds to set off a loss under business against a profit under some other head that section 24 comes into operation and various considerations will arise whether he is entitled to such a set-off or not.
6. It has, however, been pointed out by the learned counsel for the Commissioner that since this decision of the Bombay High Court the wording of the proviso to section 24(1) has been changed, and the proviso in its present form has again been considered by the Bombay High Court in the case of Keshavlal Premchand v. Commissioner of Income-tax. This is a case similar to the present one in which the assessee sought to set off losses incurred in speculative business against profits realised from his other business. Two questions were referred to the High Court, the first relating to whether the transaction, in which losses had been incurred, was a speculative transaction within the meaning of section 24(1) of the Indian Income-tax Act, but apparently this question was not pressed, and the only question considered was whether the assessee was entitled to a set-off of the loss against his other business income falling under section 10 of the Act.
7. The judgment was delivered by Chagla C.J who pointed out early in the course of his judgment that the wording of the proviso had been changed since the earlier judgment referred to above. It does not seem to me that any useful purpose would be served by citing the whole judgment of the learned Chief Justice and I can only observe that the learned Chief Justice appears to me to have dealt with cogency and clarity with all the arguments advanced by the learned counsel for the assessee. He has expressed agreement with the general principle that a proviso inserted in a particular section of an Act is generally intended only to apply to and limit that particular section, but at the same time he has held, and in my opinion rightly, that in certain circumstances and particularly in the circumstances in which the proviso appears in section 24(1), a proviso must be regarded as a substantive enactment on the part of the Legislature.
8. After pointing out that the matter of computation of taxable income under various heads was dealt with in Chapter III of the Act and that then came Chapter IV which deals with deductions and assessment, he observed2:
“…and then we come to section 24 which deals with set-off of loss in computing aggregate income. 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 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.
9. Therefore, it is impossible to accept Mr. Palkhivala's contention 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 “, the Legislature was referring to the loss to be ascertained for the purposes of a set-off under section 24(1). It was entirely unnecessary to compute the profits and gains of a business, profession or vocation for the purpose of section 24(1) because that had already been done under section 10(2). If it was intended to convey by the proviso that the resultant loss in the business had to be ascertained, then the language used by the Legislature would have been very different from the language actually used. Mr. Palkhivala wants to paraphrase the proviso to mean that in the loss suffered in a business if there is any loss due to a speculative transaction then that loss cannot be set-off against another head. Now, to do this is not to paraphrase the proviso but to re-write it and to substitute an entirely different provision for what the Legislature has done. 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 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 other business consisting of a speculative transaction. It is not as if the proviso has no connection whatever with section 24(1). In one sense it has, because what is available for being set off is the resultant profit or loss under section 24(1) and the proviso sets out the mode of arriving at the resultant profit or loss in the computation of profits and gains of a business, profession or vocation.
10. Mr. Palkhivala says that the proviso to section 24(1) can and should only be looked at as an abridgement of the right of set-off given to the assessee under section 24(1) and that abridgement can only deal with the question of setting off a loss under one head against a profit under another head. 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 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 enactment it cannot be said that the Legislature in placing it after section 24(1) in the shape and form of a proviso has done something for which there is absolutely no justification.” This view has been accepted as correct and followed in the case of Commissioner of Income-tax v. Ramgopal Kaniyalal by Shrivastava and Sharma JJ. of the Madhya Pradesh High Court, and with respect I am of the opinion that it is a correct view and indeed the only possible interpretation of the clear and unambiguous words of the proviso itself. The result is that I would answer the question referred to us by saying that for the purpose of computing the assessee's income, profits and gains under section 10 of the Indian Income-tax Act, the loss sustained by him in his jobbing transactions was not adjustable against his profits from the brokerage activities of same period by reason of the terms of the first proviso to sub-section (1) of section 24 of the Act. The assessee will pay the costs of the Commissioner. Counsel's fee Rs. 250.
Chopra, J.:— I agree.
11. Reference answered accordingly.
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