Appeal No 580 of 1972
From the Judgment and Order dated 8 9 1970 of the Gujarat High Court in Income tax Reference No 968
BB Ahuja and RN Sachthey for the Appellants
KL Hathi and PC Kapoor for the respondent
The Judgment of the Court was delivered by GOSWAMI J
This appeal by certificate is from the judgment of the Gujarat High Court in an Income tax Refer ence under section 661 of the Indian Income tax Act 1922 briefly the Act
The two questions which were earlier referred by the Tribunal to the High Court at the instance of the Commis sioner of Income tax Gujarat III
are as follows  2 Whether on the facts and in the circumstances of the case the assessee was entitled to set off hedging
loss of Rs 31745 against other profits of the previous year  2 Whether on the facts and in the circum stances of the case the assessee was entitled to carry forward the speculation loss of Rs 41603 to the next year  The following facts appear from the statement of case and the order of the Tribunal The assessment year in question is 1957 58 and the corresponding previous year is the Samvat year 2012
The assessee is carrying on business by running an oil mill and also doing business in sales and purchase of groundnuts groundnut seeds and oil speculation business in groundnuts groundnut oil and groundnut seeds and speculation business in cotton errands etc
His total income for the year in question was determined by the Income tax Officer as Rs 171632 
This was after allowing set off of loss brought forward from the year 1955 56 amounting to Rs 211431 
In arriving at the figure of the total income the Income tax Officer disallowed loss amounting to 28 Rs 73348 in forward contracts in groundnut oil ground nuts and groundnut seeds
He disallowed this loss on the ground that it arose out of illegal contracts on account of the same being banned Under section 154 of the Forward Contracts Regulation Act 1952
It will appear that the break up of losses in the busi ness of illegal forward contracts is as follows   1  Groundnut oil Account Rs 49664 2 Groundnut Account Rs 22522 3 Singdana Groundnut seeds Account at Veraval Rs 1162 Total Rs 73348 The above third item of loss is arrived at by the Income tax Officer after adjusting the profit of the forward business in groundnut seeds at Rajkot
On appeal by the assessee the Appellate Assistant Com missioner affirmed the order of the Income tax Officer
The Appellate Assistant Commissioner
however bifurcated the loss into two categories as follows  1  Loss incurred in hedging transactions in the banned items Rs331745 2 Loss incurred in speculative tran sactions other than hedging transac tions in the banned items
Rs 41603 Total Rs 73348 The Appellate Assistant Commissioner held that the assessee was not entitled to the set off of the loss against the assessee s other business under section 241  of the Act and also that such loss could not be carried forward to the following year under section 242 of the Act On a second appeal by the assessee before the Appellate Tribunal the Tribunal held that notwithstanding the ille gality of the transactions the loss could be set off and carried forward in accordance with the provisions of section 241 and 242 respectively of the Act
The Tribunal accordingly directed that the loss in hedging transactions of forward business in the banned contracts amounting to Rs 31745 be set off against the other profits of the asses see for the relevant accounting year under section 241 and that the balance loss of Rs 41603 relating to the specu lative transactions in the banned contracts be carried forward to the following year under section 242 of the Act to be set off against profits of the following year from speculative business
As stated earlier at the instance of the Commissioner of Incometax the two questions set out above Were referred to the High Court under section 661 of the Act
The High Court relying upon its 29 earlier judgment in the Commissioner of Income tax vs SC Kothari1 answered both the questions in the affirma tive in favour of the assessee
That decision was however partly reversed by this Court in the Commissioner of Income tax Gujarat vs SC Kothari2 hereinafter to be referred to as Kothari decision
This Court held in the Kothari decision as follows  
the taint of illegality of the business cannot detract from the tosses being taken into account for computation of the amount which can be subjected to tax as profits  under section 10 1  of the Act of 1922
The tax collector cannot be heard to say that he will bring the gross receipts to tax
He can only tax profits of a trade or business
That cannot be done without deducting the losses and the legitimate expenses of the business
This Court however held that the High Court was in error in considering that any set off could be allowed in that case under the first proviso to section 241
This Court ob served The contract contemplated by Explanation 2 to the first proviso to section 24 1  of the Income tax Act 1922 has to be an en forceable contract and not an unenforceable one by reason of any taint of illegality resulting in its invalidity
Set off cannot be allowed under the first proviso to section 241 read with Explanation 2 thereto of losses in contracts which are illegal and unenforceable on account of contravention of Section 154 of the Forward Contracts Regu lation Act 1952
This Court held the contracts in that case in respect of which the loss was incurred by the assessee as illeged contracts
It also held that the assessee was not entitled to a set off under the first proviso to
section 24 1  of the Act of the loss against its profit in speculative trans actions
It however held that if the business in which the loss was sustained in that case was the same as the business in which the profit was derived then the loss had to be taken into account while computing the profits of the business under section 102 of the Act
In the view it took this Court remitted the matter to the High Court to
decide the point which was not clear on the findings wheth er the profits and losses were incurred in the same busi ness even though that business involved the entering into of contracts some of which were illegal
In the present case there is no dispute that the losses were incurred in connection with forward contracts which were banned under section 154 of the Forward Contracts Regulation Act
It is also clear that the Income tax Officer adjusted the profit against the loss with regard to the illegal business in groundnut seeds which was carried on in two places Veraval and Rajkot
This set off is permis sible under section 102 of the Act because it is only by 1 2 30 setting off of the loss of the particular business in groundnut seeds that true profit with regard to that par ticular business can be computed under section 102
There is therefore no reason to remit this case as thecourse earnestly suggested by Mr Hathi for the respondent
In Kothari decision supra it was observed by this Court while remitting the case that enough attention was not devoted to the business which the assessee was doing and in which the profit of Rs 219046 was made and the loss of Rs 340443 was sustained
Such an uncertainty however is not present in the instant case
The submission of Mr Hathi therefore cannot be accepted
The present case rests upon section 24 of the Act
That section so far as material for our purpose reads as follows  241 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 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 2 Where any assessee sustains a loss of profits or gains in any year being a previ ous year not earlier than the previous year for the assessment for the year ending on the 31st day of March 1940 in any business profession or vocation and the loss cannot be wholly set off under sub section 1 so
much of the loss as is not so set off or the whole loss where the assessee had no other head of income shall be carried forward to the fol lowing year and i where the loss was sustained by him in a business consisting of speculative transactions it shall be set off only against the profits and gains if any of any business in speculative transactions carried on by him in that year ii whether loss was sustained by him in any other business profession or vocation it shall be set off against the profits and gains if any or any business profession or vocation carried on by him in that year provided that the business profession of vocation in which the
loss was originally sustained continued to be carried On by him in that year and 31 iii if the loss in either case cannot be wholly so set off the amount of loss not so set off shall be carried forward to the fol lowing year and so on but no loss shall be so carried forward for more than eight years
X X X X X In the instant case there is no dispute about the fol lowing findings of facts The assessee sustained losses in the relevant accounting year amounting to Rs 73348 
This figure was arrived at on a legitimate computation under section 102 of the Act
No further question survives for a recomputation of the income under Section 102 of the Act in this case
The only question remains is as to whether the loss of Rs 31745 can be set off against other profits in the previ ous year
This is the first question in the reference
This question has to be answered in the
negative in view of Kothari decision supra
The hedging loss being in respect of a banned contract under section 154 of the Forward Contracts Regulation Act 1952 cannot be set off against the profits of other business of the previous year
The second question is with regard to the assessee s claim for entitlement to carry forward the speculation loss of Rs 41603 to the next year
It is also admitted that the contract for speculation in the commodity in question is banned under the Forward Contracts Regulation Act 1952
It also appears that the said loss could not be set off in the previous year against profit in the same business in that year
The assessee contends that this loss should be allowed to be carried forward under section 242 of the Act
To allow such a claim is to permit a benefit of ad justment of loss from an illegal business to spill over and continue in the following year even in a lawful speculative business
A speculative business which is carried on in the following year must be a business of lawful speculation pertaining to lawful and enforceable contracts
The asses see carrying on a lawful speculative business in the follow ing year cannot derive benefit by carrying forward and setting off a loss from an illegal speculative business of the earlier year
Law will assume an illegal business to die out of existence with all its losses to the assessee in the year of loss itself
The assessee can derive no benefit on account of the unlawful business in the following year
The matter will be different if a lawful speculative busi ness after incurring loss is discontinued and loss therefrom is carried forward for set off against any other lawful speculative business in the following year
This is the true legal effect of section 242i of the Act in this case
It iS inconceivable that law can permit an illegal activity to be carried on from which a benefit could be obtained
The concept of carry forward is not the same thing as the setting off of loss in a particular illegal business against profit of that illegal business in a particular year
The two concepts have to be kept distinct ly separate 32 even in a taxing statute
There is no express warrant for the submission either under section 202 or under any other provision of the Act far less on general principles
It is true that by earning income from illegal trading activity the income does not get tainted so far as exigibil ity to tax is concerned
While computing income from illegal activity in a particular year all losses incurred in earning that particular income are also taken into account for computation of real profits even in the illegal business
That does not mean that fines imposed on the illegal activi ties detected prosecuted and punished or otherwise pena lised will be taken into account for ascertainment of real profits
There is therefore a marked distinction between computation of a particular year s profit from illegal trading activity and carry forward of a loss to set it off against income in subsequent years even assuming that such illegal activity is continued against the provisions of law
No illegal activity can be perpetuated under any provisions of law nor benefit out of it
Law will miss its paramount object if it is not consistent with morality and any inter pretation by courts cannot read to a result where continua tion of illegal activity or benefit attached to it is given recognition
The second question therefore must be answered in the negative and against the assessee
In the result the judgment of the High Court is set aside and the two questions set out above are answered in the negative and in favour of the Department
The appeal is allowed with costs
PHP Appeal allowed


Summary:
The assessee carries on business of running Oil Mill and dealing in groundnuts groundnut seeds and oil speculative business in groundnuts groundnut oil and groundnut seeds and speculation business in cotton errands etc
The ITO disallowed loss in forward contracts and groundnut oil groundnuts and groundnut seeds on the ground that it arose out of illegal contracts on account of the same being banned under section 154 of the Forward Contracts Regulation Act 1952
The Appellate Assistant Commissioner on appeal confirmed the decision of the l
TO but bifurcated the loss into two headings namely loss incurred in hedging transac tions m the banned items and loss incurred in speculative transactions
On second appeal the Tribunal held that notwithstanding the illegality of the transactions the loss could be set off and carried forward in accordance with the provisions of section 241 and 242 of the Income Tax Act 1922
The Tribunal accordingly directed that the loss in hedging transactions of forward business in the banned contracts be set off against the other profits of the asses see for the relevant accounting year under section 241 and that balance of loss relating to the speculative transac tions in the banned contracts be carried forward to the following year under section 242 of the Act to be set off against profit of the following year from speculative busi ness
On reference to the High Court the High Court an swered both the questions in favour of the assessee and upheld the judgment of the Tribunal
The High Court relied on its earlier judgment in the case of CIT vs SC Ko thari
Allowing the appeal by certificate HELD 1 The loss incurred in the hedging transactions cannot be set off against other profits in the previous year in view of the decision of this Court partly reversing the judgment of the High Court in the case of SC Kothari
31C D Commissioner of Income tax vs SC Kothari  ap plied
2 It is admitted that the contract for speculation in the commodity in question is banned under the Forward Con tracts Regulation Act 1952
To allow such a loss to be carried forward is to permit a benefit of adjustment of loss from an illegal business to spill over and continue in the following year even in a lawful speculative business
The speculative business which is carried on in the following year must be a business of lawful speculation pertaining to the lawful and enforceable contracts
An assessee carrying on a lawful speculative business in the following year cannot derive benefit by carrying forward and setting off a loss from illegal speculative business of the earlier year
Law will assume an illegal business to die out of existence with all its losses to the assessee in the year of loss itself
The assessee can derive no benefit on account of the unlawful business in the following year
The matter will be different if a lawful speculative business after incurring loss is 27 discontinued and loss thereupon is carried forward for set off against any other lawful speculative business in the following year
It is inconceivable that law can permit an illegal activity to be carried on from which a benefit could be obtained
The concept of carry forward is not the same thing as the setting off of loss in a particular illegal business against profit of that illegal business in a par ticular year
The two concepts have to be kept distinctly separate even in a taxing statute
It is true that by earning income from illegal trading activity the business does not get tainted so far as exigibility to tax is con cerned
While computing income from illegal activity in a particular year all losses incurred in earning that particu lar income are also taken into account for computation of real profits even in the illegal business
There is a marked distinction between the computation of a particular year s profit from illegal trading activity and carry for ward of a loss to set it off against income in the subse quent years even assuming that such illegal activity is continued against the provisions of law
No illegal activi ty can be perpetuated under any provisions of law nor bene fit out of it
Law will miss its paramount object if it is not consistent with morality and any interpretation by courts cannot lead to a result where continuation of illegal activity or benefit attached to it is given recognition
31D H 32A D