Jaganmohan Reddy, J.:— This is a reference by the Income-tax Appellate Tribunal at the instance of the Commissioner of Income-tax, Hyderabad under Section 82(1) of the Hyderabad Income-tax Act, (8 of 1357-F). The assessee is a Hindu undivided family having its place of business in Hyderabad and carrying on various businesses such as Kirana, Cloth, Speculation etc. It also carries on business outside Hyderabad in Bombay. For the assessment year 1358-F. the assessee suffered a loss of Rs. 69,700 in its Bombay business. It was contended before the Tribunal that the net figure of loss was Rs. 51,671/- and not Rs. 69,700/- inasmuch as the Bombay profit of Rs. 18,029/- had been separately included in the local profits of the assessee and further the Bombay gross loss and not the net loss had been added back. The Income-tax Department, however, did not dispute the direction for setting off of Rs. 18,029/- as against Rs. 69,700/- but disputed the Tribunal's decision with respect to the net amount of Rs. 51,671/-. In these circumstances, the question that has been referred to us by the Appellate Tribunal is:
“Whether the net loss of Rs. 51,571/- suffered by the assessee in business at Bombay is liable to be set off against the assessee's income from the business in Hyderabad in the previous year’ relevant to the assessment year 1353-F.?
2. The assessee contended before the Appellate Tribunal in regard to the loss referred to above that it should have been allowed to be set off against the profits in Hyderabad, in view of the decision in —‘Commr. of The Commissioner Of Income-Tax, Bombay City v. Murlidhar Mathurawala Assessee.’, AIR 1945 Bom. 403 (A), or alternatively to reckon this loss for the purpose of fixing the rate at which other income is liable to tax. The department relied upon the case of—‘Misrimal Gulsbchand of Bewar. In re’: AIR 1950 All. 279 (B). The Income-tax Tribunal, however, followed the Bombay decision of—‘AIR 1943 Bom. 403 (A)’, and directed the Income-tax Officer to allow the assessee's claim for set of the Bombay loss against Hyderabad income and in these circumstances, it did not consider it necessary to decide the alternative contention.
3. Even before us, the same contention has been raised, viz., whether the assessee should be allowed to set off the Bombay loss against the income of Hyderabad business. In the case of —‘Commr. of The Commissioner Of Income-Tax, Bombay City v. Murlidhar Mathurawala Assessee.’, (A), Chagla, C.J and Tendolkar, J., held that losses incurred in Indore by the assesses who was a resident in British India and carrying on two distinct and separate businesses, could be set off against profits of the business at Bombay. Chagla, C.J meeting the arguments of the Advocate-General, viz., that inasmuch as the assessee is not liable to pay tax on the income which accrues to him in the Indian State unless he brings it into British India or deemed to have been brought into British India, the Act does not permit an assessee to set off a loss incurred by him in a business carried on by him in an Indian State against the profits earned by him in British India, observed:
“To my mind the scheme of the Act is perfectly clear. When you turn to S. 10 which deals with business it is a self-contained head. Different businesses do not constitute different heads under the Income-tax Act. All businesses where-ever earned on constitute one head which falls under S. 10 of the Act and in order to determine what are the profits and gains of a business under S. 10, an assessee is entitled to show all his profits and set off against those profits losses incurred by him in the same head.”
4. Dealing with the arguments that the proviso to S. 24(1) applies to this case, the learned Chief Justice expressed the view that where the assessee proceeds to set off a loss under business against a profit under some other head, it is only then that S. 24 comes into operation. The aforesaid Bombay case was referred to in the case of —‘AIR 1950 All 270 (B)’. In this case the assessee which was resident and ordinarily resident in British India made a profit from its business in British India and suffered a loss from its business in an Indian State in the previous year relevant to the assessment year 1944–1945 and it sought to set off the loss in the Indian State against the profits earned is British India. Malik, C.J and Seth, J. held that the first proviso to S. 24(1) was not applicable to the assessment year 1944–1945, that neither S. 24(1) nor S. 10 helped the assessee and that therefore the loss incurred in the Indian State should be ignored in determining the assessee's income from business. The learned Judges of the Allahabad High Court took a similar view to that of the Bombay High Court in so far as the interpretation of S. 24(1) is concerned in holding that it applies to a case where the assessee tries to set off a loss under one head of income against profits under some other head of income although Malik, C.J considered that as the proviso to Section 24(1) of the Indian Income-tax Act doss not apply to the assessments made in the year 1944–1945, in view of the provisos of Section 6 of the Finance Act, 1944, it was unnecessary to answer the arguments advanced that the first proviso to S. 24(1) enlarges the scope of the said sub-s. (1) or that S. 24 was intended to include the whole law of set oil. The learned Chief Justice observed at p. 273:
“In calculating the profits and gains under the fourth head of S. 6, the Income-tax Officer has to prepare a balance-sheet of the result of the working of such businesses, with which the Income-tax Officer is concerned, and, if he is not concerned with profits of a business carried on in an Indian State, he is obviously not concerned with the losses of that business, so that if the profits of the business cannot be added the losses of the business cannot be deducted either. This result seems to me to be obvious. Sub-section (1) of Section 24 of the Income-tax Act can only apply to the set off of a loss under one head against income under another head.”
5. Dealing with Section 10 of the Income-tax Act, he further observed at p. 273 that:
“Section 10 primarily concerns itself with the income of the assessee in respect of which the income-tax is payable. That Section must be read along with cl. (c) of sub-s. (2) of S. 14 which exempts income, profits or gains arising to the assessee within an Indian State, unless such income, profits or gains are received or deemed to be received in British India, or brought into British India in the previous year by or on behalf of the assessee. If such income becomes taxable by reason of the fact that it received in British India, or brought into British India, in the previous year, to my mind, it would become ‘an Income from other sources’ rather than ‘an income from business’”.
6. He therefore held that inasmuch as neither the first proviso S. 24(1) nor S. 10 of the Act applies, the assessee cannot set off his loss in an Indian State unless he can show some provision of law under which the deduction can be allowed. Seth, J. considering the combined effect of S. 10 and S. 14(2)(c) was of the view that the tax was only payable by an assessee on profits and gains of business carried on by him outside Indian States and it was therefore manifest that in ascertaining the profits and gains, a consideration of looses incurred in business carried on in an Indian State is absolutely irrelevant.
7. It appears to us, with groat respect, that the above observations are not based upon a full appreciation of the scheme of taxation set cut under the Indian Income-tax Act and the distinction created by the said Act between a ‘resident and ordinarily resident’, ‘resident but not ordinarily resident’ and a ‘non-resident’ assessee. In our view, S. 14(2)(c) should be read not with S. 10 as suggested by the Allahabad, decision cited above, but with Section 4(1). Under Section 3 of the Indian Income-tax Act (Section 3 of the Hyderabad Income-tax Act) an assessee is to be charged subject to the provisions of the Act in respect of the total income of the previous year at a rate current for the year of assessment. Section 2(15) defines total income to mean the total amount of income, profits and gains referred to in sub-s. (1) of S. 4 computed in the manner laid down in the Act.
8. Section 4(1) (S. 4(1) of the Hyderabad Act) makes the chargeability of income depend upon the locality of accrual or receipt and divides the assessees whose incomes are to be taxed as (a) resident or ordinarily resident, (b) resident and not ordinarily resident, and (c) non-resident. Residence is defined in S. 4-A and ordinary residence in S. 4-B. It will thus be seen that S. 4 defines the extent of total income with reference to the residence of the assessee. If the assessee is resident, then the question would arise whether he is also ‘not ordinarily resident’ so as to entitle him to the exemption provided in the second proviso to S. 4(1).
9. The incidence of taxation is highest in the case of a person ‘resident and ordinarily resident’ and not so high in the case of a person who is ‘resident, but not ordinarily resident’ and is low in the case of a person who is not a ‘resident’ at all. We had, during the course of the argument of the learned Advocate for the Department, pointed out that once a person is resident and ordinarily resident the whole of his income wherever accruing becomes taxable subject to the exemption under S. 14(2)(c) regarding income, profits and gains arising in an Indian State; and if this is so, it appears to us clear that in computing the income, profits and gains, the loss wherever accruing will have to be set off and the question of excluding income from business in an Indian State for all purposes in view of S. 14(2)(c) would not arise.
10. The Income-tax Amendment Act, 1939 by basing the liability to income-tax on residence had brought within its ambit all foreign income of residence including residents in what were then called Native States. The Central Government thereafter with a view to avoid loss that would arise due to double income-tax relief if Indian States also adopted the residence basis added clause (c) to sub-Section 2 of Section 14 and sub-Sections (3) and (4) to Section 17 by the Indian Income-tax Amendment Act 22 of 1941. Before the 1941 amendment, however, income-tax was payable by an assessee resident in British India on his total income, profits and gains subject to certain exemptions. The income from business in these circumstances had to be computed in accordance with S. 10 of the said Act, i.e, by setting off losses against profits wherever accruing.
11. Section 14(2)(c) now effects “residents and persons not ordinarily residents” since non-residents are in any case exempted from charge in respect of their foreign income. The income of such persons in an Indian State is only chargeable if it was received in British India or deemed to be received in British India or if it becomes assessable under S. 42. The income exempt under S. 14(2)(c) is, however, included in the total income under S. 16(1)(a) for the purpose of determining the rate of tax. Any exemption granted under S. 14(2)(c) cannot, therefore, be deemed to exclude losses incurred in a Part-B State in computing the income of the assessee. The argument that because the income accruing in an Indian state to an assessee is not taxable unless it is brought into or received in British India, the losses incurred in an Indian State cannot be set off, is in our view untenable. Section 16(1) corresponding to Section 20(1) of the Hyderabad Income-tax Act envisages the computation of total income even where any sum is exempted by the provisions of the Act. The said Section is so far as it is relevant is in the following terms:
“in computing the total income of an assessee — (a) any sums exempted under the second proviso to sub-s. (1) of S. 7, the second and third provisos to S. 8, sub-s. (2) of S. 14 and S. 15 shall be included;
and any sum exempted under S. 15-A shall also be included except for the purpose of determining the rates at which income-tax (but not super-tax) is payable by the assessee to whom the exemption is given.”
12. It will thus be seen that the total income of an assessee has to be computed after making necessary allowances and deductions and setting off losses in accordance with the provisions of the Act, and the tax has to be paid only on the income, profits and gains after allowing for the exemptions and relief provided for in the Act at the rate to be determined in accordance with the total income so computed. Section 10 of the Indian Income-tax Act (corresponding to Section 12 of the Hyderabad Income-tax Act) which deals; with the had ‘income from business’ provides that tax shall be payable by the assessee under the head profits or gains of business, profession or vocation in respect of the profits or gains of any business, profession or vocation carried on by him and proceeds to set out the various allowances which can be deducted in computing such profits or gains. This section is complete in itself as far as business is concerned and there is no warrant for the assumption that it only applies to businesses conducted in what was before the independence British India.
13. Even under the Hyderabad Income-tax Act as has already been observed, the total income of an assessee resident in the Hyderabad State from a business would include the income from the entire business whether in India, Pakistan or anywhere else and in computing the income of that business, the losses will have to be set off. Section 24(1) (corresponding to Section 32(1) of the Hyderabad Income-tax Act) has no application unless the losses suffered in any year under any of the heads mentioned in S. 6 are attempted to be set off against the assessee's income, profits or gains under any other head. Section 6 (corresponding to Section 8 of the Hyderabad Income-tax Act) enumerates the following heads of income, profits or gains which are chargeable to income-tax (1) salaries (2) interest on securities, (3) property. (4) profits and gains on business, profession or vocation, (5) other sources and. (6) capital gains. (In Section 8 of the Hyderabad Income-tax Act agricultural income is added as one of the heads while capital gains has not been added). Generally, if a loss is incurred in respect of any source of income, it must be set off against the profits from the same source before the income from that source is arrived at. This is based upon the ordinary commercial principles of computing profits. To compute profits and losses under any head, it is not necessary to call into play S. 24, but if after computing the profits and losses under any particular head the result is a loss and there is profit under other heads, it is then that S. 24 would apply, to set off the loss from one head against income from any other head; for instance, loss in business may be set off against income from property and loss from property may be set off against income from business. Where the case is only confined to the question as in this case, of setting off losses under the same head, viz., business, S. 24(1) does not apply and if that does not apply, neither proviso (1), nor (2) applies.
14. It has been contended by the learned Advocate for the department that the first proviso has a wider significance going beyond the scope of sub-s. (1) of S. 24 and as such losses incurred either in an Indian State (or under the Hyderabad Income-tax Act in India or Pakistan) shall not be set off except against profits or gains accruing or arising within any native state (or India or Pakistan as the case may be) and exempt from tax under the said provisions. As observed by their Lordships of the Privy Council in — ‘M. and S.M Rly. Co., Ltd. v. Bezwaaa Municipality’, AIR 1944 PC 71 at p. 73 (C):
“that 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.”
15. The view that the provisos to S. 24 have no wider application and are limited by the main section has been taken in — ‘AIR 1948 Bom 403 (A)’, — ‘AIR 1950 All 270 (B)’, — ‘Income-tax Commissioner of M.P Nagpur v. C.P Syndicate Nagpur’, AIR 1953 Nag 77 (D), — ‘Mohanlal Hiralal v. Commr. of Income-tax, C.P and Berar Nagpur’, AIR 1953 Nag 173 (E). Both the last mentioned cases of the Nagpur High Court are also authorities for the proposition that the assessee is entitled to deduct losses suffered by him in an Indian State in computing his total income and the fact that neither under S. 14(2)(c), nor the fact that the income, profits or gains within an Indian State were received in British India in the relevant accounting period affect the result. Maugalmurti, J. in — ‘AIR 1953 Nag 77 (D), dealing with the case of setting off the loss in business arising from two mines in an Indian State against the income in the taxable territory, observed at p. 79 that:
“different businesses do not constitute different heads under the Act. S. 10 which deals with income from business is self-contained. Profits of all businesses after deducting the allowances permissible under the section constitute profits of the assessee from ‘business’. In computing profits the losses have got to be taken into consideration. This has been recognised in — Murlidhar Mathurwalla's case (A), relied on by the appellant.”
16. The same learned Judge in — ‘AIR 1953 Nag 173 (E)’, dealing with the case of an individual who is resident and ordinarily resident in British India and a partner in various firms in British India sought to set off the loss in shares from a firm at Jaipur, in an Indian State where his claim to deduct his share loss of Rs. 7,226/-, had been negatived, held that the losses of profits or gains from business done outside British India have to be deducted from profits or gains in British India to arrive at the income taxable under the head ‘business’. At p. 175 he observed:
“It is next contended that there is no provision in the Act for bringing any loss incurred out of British India into British India as the assessee seeks to do. This contention is fallacious. As already observed, the assessee is not seeking to bring any loss into British India, but the income-tax authorities have to determine his total income having regard to the several provisions of the Act to which reference has been made by us; and in doing so, the Income-tax Officer is bound to take into account the share loss suffered by the assessee out of British India.”
17. Having regard to what has been observed above, we are in agreement with the view taken by the Bombay and the Nagpur High Courts. In the result, the Income-tax Appellate Tribunal was right in allowing the Bombay losses to be set off against the profits of the Hyderabad business. We therefore, answer the question referred to us in the affirmative. The assessee is entitled to set off the less of Rs. 51,671/- suffered in the business at Bombay against his income in Hyderabad in the previous year relevant to the assessment year 1358 Fasli. The Commissioner will pay the costs of the reference. Counsel's fee Rs. 100/-. A copy of this judgment will be sent to the Appellate Tribunal.
A./H.G.P
18. Reference answered.