Kapur, J.— These two appeals by special leave raise a common question of law, and that is, whether business losses incurred in the erstwhile State of Cochin could, under the Income Tax Act of Travancore, be set off against the business profits made in the erstwhile State of Travancore. In Appeal No. 260 of 1958 a further question arose whether in the case of that assessee the year ending June 30, 1949, was the previous year for the Assessment Year 1950-51 with the result that it should be assessed under the Indian Income Tax Act of 1922. But this question was not answered by the High Court which confined itself to answering the first question which was common to both the appeals. The appellant before us in both the appeals is the Commissioner of Income Tax and the respondents are the two assessees, in one case a Bank and the other a private limited company. The main argument has been confined to the question of applicability of Section 32(1) and the first proviso to that section of the Travancore Income Tax Act (hereinafter called “the Travancore Act”).
2. In CA No. 259 of 1958 the assessee is a public limited company incorporated in the State of Cochin with branches in that State as well as in what was British India and in Travancore State. It filed its income tax return showing an income of Rs 11,872 for the Assessment Year 1948-49, its accounting year being the previous calendar year. The Income Tax Officer determined its assessable income to be Rs 90,947 representing only the profit it made in Travancore State and under Section 32(1) proviso (i) of the Travancore Act he refused a deduction of Rs 79,275 shown as loss from branches situate outside the State of Travancore, in British India and other Indian States. The assessee's appeal to the Income Tax Commissioner was unsuccessful but the Appellate Tribunal held that the banking business of the assessee being one and indivisible for the purpose of determining the amount assessable to income tax it was entitled to deduct the losses incurred outside Travancore State for the profits accruing and arising in that State. At the instance of the Commissioner of Income Tax the following question was referred to the High Court of Travancore-Cochin:
“Is the aforesaid sum of Rs 79,275 a loss of the assessee arising outside the Travancore State for purpose of the first proviso to Section 32(1) of the Travancore Income Tax Act?”
This question was slightly modified by the High Court which after referring to several decided cases answered the question in favour of the assessee.
3. In CA No. 260 of 1958 the assessee is a private limited company with its registered office in the former Cochin State. It was carrying on business at its head office in Cochin State and it also carried on business in Travancore State. The assessment was made under the Travancore Act and relates to the previous year ending June 30, 1949, the Assessment Year being 1950-51. The assessee made a profit in Travancore State and incurred a loss in the State of Cochin and sought to deduct this loss from the profit of Travancore State thus showing a net profit of Rs 2643. This was not allowed by the Income Tax Officer and on appeal this order was confirmed by the Appellate Assistant Commissioner. The Appellate Tribunal also did not accept the submissions of the assessee and upheld the order of assessment. On an application of the assessee the following question was referred to the High Court of Travancore-Cochin:
“Whether on the facts and in the circumstances of the case the loss of Rs 27,709 arising in Cochin State could be set off against the profit of Rs 38,998 arising in Travancore State?
and was answered in favour of the assessee. The Commissioner has come up in appeal pursuant to special leave against both these judgments.
4. It may be stated that the relevant sections of the Travancore Act which govern the two appeals are identically worded with those of the Indian Income Tax Act of 1922 (to be called “the Indian Act”). The corresponding sections are as follows:
Headings
Sections in Travancore Act
Sections in Indian Act
Application of the Act
4
4
Head of income chargeable to income tax
9
6
Business
13
10
Exemptions of a general nature
18
14
Set off of loss in computing aggregate income
32
24
5. It is only necessary to set out Section 32(1) of the Travancore Act and the proviso which correspond to Section 24(1) and proviso (i) of the Indian Act and which are necessary for the decision of the appeals before us:
“32. (1) Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in Section 9 (Section 6) he shall be entitled to have the amount of loss set off against this income, profits or gains under any other head in that year:
Provided that where the loss sustained is a loss of profits or gains which would but for the loss have accrued or arisen within British India or in an Indian State and would under the provisions of clause (c) of sub-section (2) of Section 18 [Section 14(2)c], have been exempted from tax, such loss shall not be set off except against profits or gains accruing or arising within British India or in an Indian State and exempt from tax under the said provisions.” (Sections in brackets are the corresponding sections of the Indian Act).
So the only difference between the two sections is that in the proviso to Section 24(1) of the Indian Act instead of the words “an Indian State” the words “British India or in an Indian State” have to be substituted. The question for decision is as to how this proviso is to be construed. Ordinarily the effect of an excepting or a qualifying proviso is to carve something out of the preceding enactment or to qualify something enacted therein which but for the proviso would be in it and such a proviso cannot be construed as enlarging the scope of an enactment when it can be fairly and properly construed without attributing to it that effect. Corporation of the City of Toronto v. Attorney-General for Canada (1946) AC 32. But it has been held that a section framed as a proviso to a preceding section may sometimes contain matter which is in substance a fresh enactment adding and not merely qualifying that which goes before. Rhondda Urban Council v. Taff Vale Railway (1909) AC 253.
6. It was argued on behalf of the Revenue that this proviso falls in the second category and takes the present cases out of Section 32(1) of the Travancore Act and imposes a liability to tax on the profits or gains arising in that State, disallowing a deduction of the losses in British India and in States other than Travancore State against profits made in Travancore State: Rhondda Urban Council v. Taff Vale Railway (1909) AC 253 and Harrison v. Ward (1922) 1 Ch 517. It may be mentioned that in the majority of cases decided in India the proviso to Section 24(1) of the Indian Act has been construed in a manner contrary to the submissions made on behalf of the Revenue.
7. In order to determine the true meaning of the words of the proviso it is necessary and convenient to refer to the scheme of the Indian Act which is admitted by the parties to be same as that of the Travancore Act. From 1922 to 1939 in order to be taxable income, profits and gains had to be received or had to accrue in British India. In 1939 the idea of “total world income” was introduced and the definition of “total income” was modified by the Indian Income Tax (Amendment) Act (7 of 1939) which also made consequential changes in other sections of the Indian Act. Under Section 2(15) of the Act “total income” was defined to mean the total amount of income, profits and gains computed in the manner laid down in that Act. The “total world income” was defined as including all income, profits and gains wherever accruing or arising except income to which the Act did not apply. Section 3 provided for the charge of income tax in respect of the total income of the previous year. Under Section 4 the total income of any previous year of any person who was resident included all income, profits and gains from whatever source derived but (i) it must accrue or arise to him during the year in British India or (ii) accrue or arise to him without British India during such year. The third clause is not necessary for this appeal. Section 4(3) provided what income, profits or gains were not to be included in the total income of the person receiving them. Both under the Indian Act and under the Travancore Act there were six heads of income chargeable to income tax. In the Indian Act they were set out in Section 6 as follows:
“6. Save as otherwise provided by this Act the following heads of income, profits and gains shall be chargeable to income tax in the manner hereinafter appearing, namely:
* * *
(iv) Profits and gains of business, profession or vocation.
* * *
Then followed Sections 7 to 12-B laying down the method of computation of the income arising from each head.
8. In 1941 during the war an exemption was given for the purpose of taxability to any income, profits or gains which accrued or arose within what was then called Indian States but which were not received or brought into British India. This was done by Section 8 of the Indian Income Tax (Amendment) Act, 1941 (Act 23 of 1941) by which another clause (c) was added to Section 14(2) which was as follows:
“The tax shall not be payable by an assessee:
* * *
(c) in respect of any income, profits or gains accruing or arising to him within (an Indian State) unless such income, profits or gains are received or deemed to be received in or are brought into the Indian State in the previous year by or on behalf of the assessee or are assessable under Section 12-B or Section 42.”
Thus income, profits or gains arising under any of the heads under Section 6 became exempted in circumstances above mentioned but the effect of this exemption was not to exclude such income of an assessee for all purpose as was the case under Section 4(3). Such sums were to be taken into account for the purpose of determining the rate under Section 16 of the Indian Act. A further consequential change was made in Section 24(1) by the addition of the first proviso and a similar addition was made in the Travancore Act to Section 32(1) which has already been quoted and it is this proviso which is the subject-matter of controversy between the parties. A review of the various sections and enactments shows that during 1922-1939 the tax was leviable on income, profits and gains arising or accruing to an assessee in British India. In 1939 the total income became taxable subject to exclusions in sub-section 3 of Section 4 and the chargeability of the “total income” was laid down in Section 3. In 1941 income, profits or gains which a resident made in an Indian State and in the case of Travancore State income, profits or gains which a resident made in British India or other Indian States were exempted from payment of income tax unless received or brought into the respective territories, but this income, profits or gains had to be included for the purpose of calculating the rate.
9. Now we come to Section 24(1). This section was introduced in 1922 before which under the Indian Act of 1918 a loss under one head of income could not be set off against income under another head, the taxability of income arising from each head being separate. By the addition of this section the loss under one head of profits or gains was allowed to be set off against income, profits and gains under any other head in any Assessment Year. There was also a provision in Section 24(2) for carrying over the loss after such set off had been effected. Section 24(1) became the subject-matter of controversy in the courts. The Privy Council in Arunachalam Chettiar v. CIT (1936) LR 63 IA 233 held that this section was meant for a set off of profits arising under different heads and not where profits and losses had to be adjusted if they arose under the same head. Sir George Rankin said at p. 241:
“In Their Lordships' opinion, whether a firm is registered or unregistered, partnership does not obstruct or defeat the right of a partner to an adjustment on account of his share of loss in the firm, whether the set off be against other profits under the same head of income within the meaning of Section 6 of the Act or under a different head (in which case only need recourse be had to Section 24, sub-section 1).”
10. Thus the Privy Council emphasised that the object of Section 24(1) was to allow a set off of profits against losses arising under different heads and only in such cases could recourse be had to Section 24(1). In cases where profits and losses arose under the same head they had to be adjusted against each other. This Court in Anglo-French Textiles Co. Ltd. v. CIT, (1953) SCR 448 again emphasised that distinction in the following words:
“Next, a set off under Section 24(1) can only be claimed when the loss arises under one head and the profit against which it is sought to be set off arises under a different head. When the two arise under the same head, of course the loss can be deducted but that is done under Section 10 and not under Section 24(1).” (Per Bose, J.)
Indeed it is not disputed that when profit and loss arose under the same head in any place which was not an Indian State recourse had to be had to the provisions of Sections 7 to 12-B and not to any other section. But it was contended on behalf of the Revenue that the first proviso to Section 24(1) of the Indian Act not only affected the generality of the main enactment but also introduced an addendum that where the profits of the business arose in what was British India in the case of the Indian Act or what was Travancore State in the case of the Travancore Act and the losses under the head business were sustained in an Indian State or in the latter case in any other Indian State or British India, these losses could not by virtue of the proviso be deducted from profits made in British India or Travancore State as the case may be. They could only be adjusted against profits arising in an Indian State or in the case of Travancore State in British India or another Indian State. Thus the proviso, it was contended, was a modification of the method of computation under Section 10(2) of the Indian Act for determining profits and gains of the business of any resident. We should be averse to lend any countenance to such a mode of construing a proviso unless the language used expressly or by necessary intendment leads to that conclusion. The proper function of a proviso is that it qualifies the generality of the main enactment by providing an exception and taking out as it were, from the main enactment, a portion which, but for the proviso would fall within the main enactment. Ordinarily it is foreign to the proper function of a proviso to read it as providing something by way of an addendum or dealing with a subject which is foreign to the main enactment. “It is a fundamental rule of construction that a proviso must be considered with relation to the principal matter to which it stands as a proviso.” Therefore it is to be construed harmoniously with the main enactment. (Per Das, C.J) in Abdul Jabar Butt v. State of Jammu & Kashmir (1957) SCR 51. Bhagwati, J., in Ram Narain Sons Ltd. v. Assistant Commissioner of Sales Tax (1955) 2 SCR 483 said:
“It is a cardinal rule of interpretation that a proviso to a particular provision of a statute only embraces the field which is covered by the main provision. It carves out an exception to the main provision to which it has been enacted as a proviso and to no other.”
11. Lord Macmillan in Madras & Southern Maharatta Railway Co. v. Bezwada Municipality (1944) LR 71 IA 113 laid down the sphere of a proviso as follows:
“The proper function of a proviso is to except and deal with a case which would otherwise fall within the general language of the main enactment, and its effect is confined to that case. Where, as in the present case, the language of the main enactment is clear and unambiguous, a proviso can have no repercussion on the interpretation of the main enactment, so as to exclude from it by implication what clearly falls within its express terms.”
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 City of Toronto v. Attorney-General for Canada (1946) AC 32.)
12. In the proviso in dispute there are 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, specially keeping in view the object of the main section i.e Section 24(1) which was to set off loss or profits or gains under one head against income, profits or gains under any other head.
13. It was then submitted that in the proviso the words used were “where the loss sustained is a loss of profits or gains” and therefore it necessarily applied to the head “business” in the two respective territories. But in the main enactment itself, i.e Section 24(1) of the Indian Act the words used are “a loss of profits or gains”. The mere fact that the word “income” is not used does not justify the construction that the intention of the legislature was to restrict the set off of profits and losses arising in Indian States only to business or to modify the mode of computation under Section 10 of the Indian Act. That the use of these words does not circumscribe the proviso to business alone is shown by the difference in the language of the proviso to sub-section (2) of Section 24 of the Indian Act:
“24. (2) * * *
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) of sub-section (2) of 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.”
That proviso shows that where the legislature wanted to restrict the losses and profits or gains to business alone they specifically said so. It is significant that in Sections 2(13) and (5)# of the Indian Act of 1918 corresponding to Sections 2(15) and 6 of the Indian Act of 1922 the word used was “income” which in the latter Act was expanded into “income, profits and gains”. The Privy Council said in CIT v. Shaw Wallace and Co. (1932) LR 59 IA 206 that “the object of the Indian Act is to tax ‘income' a term which it does not define. It is expanded no doubt into ‘income, profits and gains' but the expansion is more a matter of words than of substance”. It was also so said in CIT v. Mercantile Bank of India Ltd. (1936) LR 63 IA 457. See also London County Council v. Attorney-General (1901) AC 26. Thus the mere use of the words loss of profits or gains to be set off against profits and gains would not be sufficient to restrict the scope of the proviso to the profits and losses arising under the head business in the two territories i.e British India and the Indian States.
14. On behalf of the Revenue an alternate argument was raised for which support was sought from two decisions of the Allahabad High Court in In Re: Mishrimal Gulabchand (1950) 18 ITR 75 and Raghunath Parshad v. CIT (1955) 28 ITR 45. There it was held that Section 10 of the Indian Act had to be read with Section 14(2)(c) and if profits could not be added for the purposes of “total income” losses sustained also could not be deducted. Counsel for the Revenue did not go to this extent that because profits were exempted losses could not be deducted; his argument was that because before 1939 income was not chargeable unless it was received or accrued in British India therefore business in Section 10 could only mean business in British India. But this argument does not take note of the definition of “total income”, “total world income” and chargeability of total income under Section 3 or the provisions of Section 4 where in the case of a resident “total income” includes income, profits and gains accruing within or without British India. Therefore to say that business in Section 10 means business in British India or business the profits or gains of which are taxable in British India is to ignore the definitions and Sections 3, 4 and 6. Section 10 of the Indian Act does not distinguish between business in British India and business in an Indian State or so divide business. But then it was said that as the profits or gains of business in an Indian State were exempted from payment of tax in British India business in Section 10 must mean business in British India. That would be straining the language of Section 10 and would necessitate addition of words in Section 10 which are not there in the section.
15. In the course of argument a number of cases of the various High Courts were cited and criticised. We find it unnecessary to refer to them because we have indicated above what is the correct sphere of a proviso and what proviso (i) to Section 24(1) means.
16. In our view the question referred to the High Court which is common to the two appeals was rightly answered in favour of the assessee. As to the second question in Civil Appeal No. 260 of 1958 we do not propose to say anything. It will be open to the assessee in that appeal to take such steps in regard to that question as it may be advised.
17. In the result the appeals fail and are dismissed with costs.