l Appeals Nos 1761 of 1967
Appeal from the judgment and decree dated the 14th April 1964 of the Allahabad High Court in Income tax Reference No 130 of 1960 and Civil Appeal No 1762 of 1967
Appeal from the judgment and decree dated May 5 1964 of the Allahabad High Court in Income tax Reference No 777 of 1961
538 B Sen BD Sharing and RN Sachthey for the appellant in both the appeals
GC Sharma VC Rishi and PK Mukherjee for the respondent in CA No 1761 of 1967
The Judgment of the Court was delivered by Grover J
The common question which arises in these appeals by certificate is whether speculative losses can be set off against profits from any other business activity under section 10 in spite of the first proviso to
section 241 of the Income Tax Act 1922
The facts in CA 176167 in which the question in the above form was referred the language of the question being somewhat different in the other appeal may be stated
The assessee who is an individual derived income from three sources ie property shares in joint stock companies and commission agency business and shares in partnership firms
The accounting year relevant to the assessment year 1953 54 was the period from October 20 1951 to October 8 1952
In the personal business of commission agency the assessee returned a net profit of Rs 2761
In arriving at this figure the net share of loss of Rs 11075 from the firm of Kamta Prasad Raghunath Prasad in which the assessee was a partner was Claimed
The Income Tax Officer did not go into the details but ignored the figure in the absence of information from the Income tax Officer assessing the aforesaid firm
Before the Appellate ASsistant Commissioner it was submitted that the actual share of loss was Rs 13232 and it included a sum of Rs 8669 representing loss suffered in speculative dealings in silver paid through the firm Kamta prasad Raghunath Prosad
The Appellate Assistant Commissioner after examining the details of the loss directed the Income Tax Officer to exclude a profit of Rs 1415 from the speculative transactions and to carry forward the net loss of Rs 7254 for setting it off against the income of the assessee from speculative dealings in subsequent years
Before the Appellate Tribunal there was no dispute about these figures
What was contended was that the loss of Rs 7254 should be set off against profit from other business
The Tribunal rejected this contention following the decision in Keshavlal Pramchand vs Commissioner of Income tax
Ahmedabad1
Thereafter the assessee moved the Tribunal for making a reference to the High Court
The High Court did not accept the view in Keshavlal Pramchand s1 case which has been followed in several other decisions by other High Courts
Now certain provisions of the Act may be noticed before the case law is discussed
Section 6 gives the heads of income 1 539 chargeable to income tax which are six in number
Section 7 deals with the first head salaries Section 8 with the second head interest on securities section 9 with income from property and section 10 provides for liability to tax under the head profits and gains of business profession or vocation which is the fourth head given in section 6
It is unnecessary to go to the 5th and 6th heads
Section 24 provides that 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
In the year with which we are concerned in the present case there was a proviso which was at that time the second proviso but it became the first proviso after the enactment of the Taxation Laws Extension to Jammu  Kashmir Act 1954
This proviso at the material time stood as follows Provided further 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 shah 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 Keshavlal Pramchand s1 case the assessee had suffered a loss in speculative business carried on by him in the year of account
His contention was that he was entitled to take this loss into account in arriving at the profits and gains of his business of non speculative nature
Mr Palkhiwala who argued the case before the Bombay court put forward the view that section 24 1  read with proviso referred only to a case where the assessee was claiming the right to set off the loss which he had suffered under one head against a profit which he had earned in another head
The section therefore had no application when the assessee wanted to adjust or set off a loss against a profit under the same head
It was urged by him that the assessee in claiming to
set off his speculative loss against his business profits under the same head was not claiming the benefit of any right conferred by section 241 and therefore the proviso had no application
The argument was elaborated further by referring to the true nature and function of a proviso which was to except or take out a particular portion from the field dealt with by the section
Chagla CJ who delivered the judgment of the Bombay Bench had no difficulty in coming to the conclusion that on the language of the proviso itself and on the scheme of the Act the Legislature in enacting the so called proviso was enacting a substantive provision dealing with the mode of computing the profits and gains charge 1 540 able under the head profits and gains of business profession or vocation and that the Legislature had provided that when profits and gains
were computed 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 speculative transactions
The learned Chief Justice further referred to the mischief which was aimed at by the Legislature in enacting the proviso
In recent times businessmen were known to buy speculative losses in order to reduce their profits and the Legislature wanted to put an end to that mischief which could only be done by preventing the assessee from reducing his profits by speculative losses
Bombay decision was followed by the Madhya Pradesh High Court in Commissioner Income Tax Nagpur vs Ram Gopal Kanhaiya Lal1 as also by the Division Bench of the Punjab High Court in Manohar Lal Munshi Lal vs Commissioner of Income  Tax New Delhi
The matter ultimately went to a Full Bench of the Punjab High Court in Commissioner of Income Tax vs Ram Swarup in which after reviewing the entire case law and examining the various aspects relevant to the question the view exp
ressed by Chagla CJ in the Bombay case was accepted as correct
Similarly in Jummar Lal Surajkaran vs Commissioner of Income Tax4 Hanuman Investment Company vs Commissioner of Income Tax5 and Joseph  John vs Commissioner of Income Tax6 the considerations which prevailed in Keshavlal Pramchand s7 case were accepted as correct
It would appear that so far as this Court is concerned the matter now stands concluded by the following observations in Commissioner 07 Income  Tax Gujarat vs Kantilal Nathu Chand8 Section 24 is thus a provision laying clown the manner of computation of total income
The principal clause of section 24 1  lays down that if there
ben loss of profits or gains in any year under any of the heads mentioned in section 6 that loss has to be set off against the income profits or gains of the assessee under any other head in that year
If this provision had stood by itself without any provisos the result would
have been that all losses incurred by an assessee under any of the heads mentioned in section 6 would be adjusted against profits under all other heads and then the total income
of the assessee would be worked out on that basis
The first  proviso
to this
sub section 1 2 3 4 5 6 7 8   321
541 however lays down an exception to this general rule contained in the principal clause
The exception relates to income from business sustained in speculative transactions and places the limitation that losses sustained in speculative transactions are not to be taken into account in computing the profits and gains chargeable under the head Profits and gains of business profession or vocation except to the extent that they will be set off against profits and gains in any other business which itself consists of speculative transactions
The effect of the proviso is that if there are profits in speculative business those profits are added to income under the other heads mentioned in section 6 for purposes of computing the total income of the assessee in order to determine the tax under section 23 of
the Act
On the other hand losses in speculative business are not to be taken into account when computing the total income except to the extent to which they can be set off against profits from other speculative business
The first proviso thus clearly limits the applicability of the principal clause of section 24  1  and when applied it governs
the manner in which the total income of the assessee is to be corn 
puted
In the case before us the Income Tax Officer was clearly right in the assessment years 1958 59 and 1959 60 in not setting off the losses in the speculative business against the income earned in those years either from property or from ready business in kappas
The learned counsel for the assessee sought to press the reasons which prevailed with the learned Judges of the High Court and has sought to characterise the above observation as obiter
It is neither necessary to
deal with the reasoning of the High Court nor can that reasoning stand in view of what has been laid down in Kantilal Nathu Chand s1 case by this Court which cannot be regarded as obiter becau se it has been clearly stated that the question of the applicability of the proviso with which we are concerned arose directly in that case in respect of the assessment years 1958 59 and 1959 60
The concluding portion of the passage extracted leaves
no room or doubt in this matter
Moreover we are of the opinion that where the language is quite clear and no other view is possible it is futile to go into the question whether the proviso to
section 24 1  operates as a substantive provision or only by way of an exception to section 24 1 
The proviso says in unmistakable and unequivocal terms that any losses sustained in speculative transactions which are in the nature of a business shall not be taken into account except to the extent 1  542 of the amount of profits or gains in any other business consisting of speculative transactions
This has to be read with Explanation 1 according to which where the speculative transactions carried on are of such a nature as to constitute a business the business shall be deemed to be distinct and separate from any other busi In the above view of the matter the answer to the questions referred in both the appeals will be in the negative namely against the assessee and in favour of the Department
The appeals are accordingly allowed with costs
There will be one hearing fee
VPS Appeals allowed


Summary:
The assessee an individual derived income from various
sources including commission agency business and shares in partnership firms
In arriving at the net profit for the assessment year 1953 54 he claimed his share of the loss from one of the firms in which he was a partner as a set off against profits from other business
The loss was the result of speculative transactions
The Department and Tribunal held against him
On a reference the High Court held in favour of the assessee on the basis
that the observations of this Court in Commissioner of Income tax Gujarat vs Kantilal Nathu Chand  namely that under the first proviso to section 241 of the Incometax Act 1922 losses in speculative business are not to be taken into account when computing the total income except to the extent to which they can be set off against profits from other speculative business are obiter
In appeal to this Court HELD The observations in Kantilal Nathu Chand s case cannot be regarded as obiter because the question of the applicability of the proviso directly arose in the ease
The proviso says in unequivocal terms that any losses 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 or gains in any other business consisting of speculative transactions
If this is read with Explanation I according to which where the speculative transactions carried on are of such a nature as to constitute a business the business shall be deemed to be distinct and separate from any other business no other view is possible
541 G H 542 A B Keshavlal Pramchand vs Commissioner of Income tax Ahmedabad  Commissioner of Income tax Nagpur vs Ram Gopal Kanhaiyalal  Manohar Lal Munshi Lal vs Commissioner of Income tax New Delhi  Commissioner of Income tax vs Ram Swarup  Jummar Lal Surajkaran vs Commissioner of Income tax  Hanuman Inves tment Company vs Commissioner of Income tax and Joseph John vs Commissioner of Income tax  approved