ivil Appeals Nos 259 and 260 of 1958
Appeals by special leave from the judgment and orders dated August 5 1955 of the former Travancore Cochin High Court in Income tax Reference Appeals Nos 6 of 1953 and 21 of 1954
KN Rajagopala Sastri R H Dhebar and D Gupta for the appellant
G B Pai and Sardar Bahadur for the respondent in C A No 259 of 1959
A V Viswanatha Sastri and Naunit Lal for the respondents in C A No 260 of 1958
February 23
The Judgment of the Court was delivered by 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 58 a further question arose whether in the case of 259 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 321 and the first proviso to that section of the Travancore Income tax Act hereinafter called the Travancore Act
In C A No 25958 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 incometax return showing an income of Rs 11872 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 90947 representing only the profit it made in Travancore State and under section 321 proviso 1 of the Travancore Act he refused a deduction of Rs 79275 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 from 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 79275 a loss of the assessee arising outside the Travancore State for purpose of the first proviso to section 321 of the Travancore Income tax Act   This question was slightly modified by the High Court 260 which after referring to several decided cases answered the question in favour of the assessee
In C A 26058 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 assesse 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 27709 arising in Cochin State could be set off against the profit of Rs 38998 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
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 Incometax Act of 1922 to be called the Indian Act
The corresponding sections are as follows Headings Sections in Section in Travancore Act
Indian Act
Application of the Act 4 4 Head of income charge able to income tax 9 6 Business 13 10 Exemptions of a gene ral nature 18 14 Set off of loss in com puting aggregate in come 32 24 261 It is only necessary to set out section 321 of the Travancore Act and the proviso which correspond to section 241 and proviso i of the Indian Act and which are necessary for the decision of the appeals before us S321  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 e of sub section 2 of Section 18 Section 142c  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 241 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 vs Attorney General for Canada 1
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 vs Taff Vale Railway 2
It was argued on behalf of the Revenue that this 1  37
2  258
262 proviso falls in the second category and takes the present cases out of section 321 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 vs Taff Vale Railway 1 and Harrison vs Ward 2
It may be mentioned that in the majority of cases decided in India the proviso to section 241 of the Indian Act has been construed in a manner contrary to the submissions made on behalf of the Revenue
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 VII of 1939 which also made consequential changes in other sections of the Indian Act
Under section 215 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 43 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 1  258
2 1922 1 Ch 517
263 there were six heads of income chargeable to income tax
In the Indian Act they were set out in section 6 as follows section 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 12B laying down the method of computation of the income arising from each head
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 XXIII of 1941 by which another clause c was added to section 142 which was as follows  The tax shall not be payable by an assessee cin 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 12B 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 purposes as was the case under section 43
Such sums were to be takeninto account for the purpose of determining the rate under section 16 of the Indian Act
A further consequential change was made in section 241 by 264 the addition of the first proviso and a similar addition was made in the Travancore Act to section 321 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
Now we come to section 241
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 bead in any assessment year
There was also a provision in section 242 for carrying over the loss after such set off had been effected
Section 241 became the subject matter of controversy in the courts
The Privy Council in Arunachalam Chettiar vs Commissioner of Income tax1 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 1 1936 LR 63 IA 233 265 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 
Thus the Privy Council emphasised that the object of section 241 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 241
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 vs Commissioner of Incometax Madras 1 again emphasised that distinction in the following words  Next a set off under section 241 can only be claimed when the loss arises under one head and the profits 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 241 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 12B and not to any other section
But it was contended on behalf of the Revenue that the first proviso to section 241 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 102 of the Indian Act for 11953 SCR 448 453
34 266 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 proviso 
Therefore it is to be construed harmoniously with the main enactment Per Das C J in Abdul Jabar Butt vs State of Jammu  Kashmir 1
Bhagwati J in Ram Narain Sons Ltd vs Assistant Commissioner of Sales Tax 2 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 
Lord Macmillan in Madras  Southern Mahratta Railway Co vs Bezwada Municipality 3 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 1  59 2   493
3 1944 LR 71 IA 113 122
267 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 vs Attorney General for Canada 1
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 ie section 241 which was to set off loss of profits or gains under one head against income profits or gains under any other head
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 241 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_s
2 of section 24 of the Indian Act section 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 11946 AC 32 37
268 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 213 and 5 of the Indian Act of 1918 corresponding to sections 215 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 the Commissioner of Income tax vs Shaw Wallace and Co 1 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 Commissioner of Income tax Bengal vs Mercantile Bank of India Ltd 2
See also London County Council vs Attorney General 3
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
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 4 and Raghunath Parshad vs Commissioner of Income tax 5
There it was held that section 10 of the Indian Act had to be read with section 142 e 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 11932 L R 59 I A 206 212
31901 AC 26
21936 LR 63 IA 457
41950 5 269 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 I 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
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 241 means
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
In the result the appeals fail and are dismissed with costs
Appeals dismissed


Summary:
Section 321 of the Travancore Income tax Act which corresponds to section 241 of the Indian Income tax Act 1922 provided   Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in Section 9 section 6 of the Indian Act 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 corresponding to section 14 Of the Indian Act 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 
The assessees were companies having their head offices in the erstwhile State of Cochin with branches in the erstwhile State of Travancore and in other places outside the latter State
They made profits in Travancore State but incurred losses in Cochin State and other places and for the purposes of assessment to income tax they sought to deduct this loss from the profits made in Travancore State
The Income tax Officer acting under the provisions of the Travancore Income tax Act determined the assessable income representing only the profits made in Travancore State and under section 321 first proviso of the Travancore Income tax Act which corresponds to the first proviso to section 241 of the Indian Income tax Act 1922 refused to allow a deduction of the losses incurred
The assessees claimed that the business 257 which they were carrying on was one and indivisible for the purpose of determining the amount assessable to income tax and that they were entitled to a deduction of the losses incurred outside Travancore State
The contention on behalf of the income tax authorities was i that under the first proviso to section 321 of the Travancore Income tax Act losses incurred in places out I side the State of Travancore cannot be set off against profits made in that State 2 that though profits and losses in the State arising under the same head could be set off the proviso aforesaid affected not only the generality of the main enactment but also introduced an addendum that where the profits of the business arose in the State and the losses under the head business were sustained outside that State those losses could not by virtue of the proviso be deducted from profits made in the State3 that the proviso applied only to the bead  business in the two respective territories as the words used therein are where the loss sustained is a loss of profits or gains  andthe word  income  is not mentioned therein and 4 that the word  business  in section 13 of the Travancore Act corresponding to section 10 of the Indian Act must mean business in Travancore State under section 13 Of that Act and  business in British India  under the Indian Act because before 1939 income was not chargeable under the two Acts unless it was received or accrued in Travancore State or British India as the case may be and profits and gains of business in territories outside Travancore or in an Indian State were exempted from payment of income tax in Travancore State or in British India as the case may be
Heldi Under section 241 of the Indian Income tax Act 1922 Is
321 of the Travancore Income tax Act a set off can be claimed only when the loss arises under one head and the income profits and gains against which it is sought to be set off arises under a different head
In cases where profits and losses arise under the same head they have to be adjusted against each other under the provisions Of sections 7 to 12B of the Indian Act
Arunachalam Chettiar vs Commissioner of Income tax 1936 LR 63 I A 233 and Anglo French Textiles Co Ltd vs Commissioner of Income tax Madras  relied on
2The territory of a proviso 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
Abdul jabar Butt vs State of Jammu and Kashmir   Ram Narain Sons Ltd vs Assistant Commissioner of Sales    Madras  1944 LR 71 IA 113 33 258 and Corporation of the City of Toronto vs Attorney General for Of Canada  relied on
Consequently section 241 first proviso of the Indian Income tax Act 1922 Is
321 first proviso of the Travancore Act bars the right of set off only where a loss in the Indian States under one head is sought to be set off against profits in British India under any other head and does not apply to profits and losses and computation thereof which fall under section 10 of the Indian Act corresponding to section 13 of the Travancore Act
3The mere fact that the word  income  is not used in the proviso does not justify the construction that the intention of the Legislature was to restrict the right to a 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 Income tax Act
4The word  business in section 10 of the Indian Income tax Act 1922 is not confined to business in British India in view of the definition of  total income  and  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