Case: Commissioner Of Income Taxgujarat Iii, Ahmedabad &amp; Another Vs. Kurji Jinabhai Kotecha

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 previous 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 following 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) where the loss was sustained by him in any other business, profession or vocation, it shall be set off against the profits and gains, if any, of any business, profession or vocation carried on by him in that year : provided that the business, profession or vocation in which the loss was originally sustained continued to be carried on by him in that year ; and (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 following year and so on but no loss shall be so carried forward for more than eight years... " 5. In the instant case there is no dispute about the following findings of facts: "The assessee sustained losses in the relevant accounting year amounting to Rs. 73, 348. This figure was arrived at on a legitimate computation under section 10(2) of the Act. No further question survives for a recomputation of the income under section 10(2) of the Act in this case. The only question that remains is as to whether the loss of Rs. 31, 745 can be set off against other profits in the previous year. This is the first question in the reference. This question has to be answered in the negative in view of the Kothari decision [1971] 82 ITR 794 (SC). The hedging loss being in respect of a banned contract under section 15(4) of the Forward Contracts (Regulation) Act, 1952, cannot be set off against the profits of other business of the previous yearThe second question is with regard to the assessees claim for entitlement to carry forward the speculation loss of Rs. 41, 603 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 24(2) of the Act. To allow such a claim 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. 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 assessee carrying on a lawful speculative business in the following 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 business 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 24(2)(i) of the Act in this case." 6. 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 distinctly separate even in a taxing statute. There is no express warrant for the submission either under section 24(2) or under any other provision of the Act, far less on general principlesIt is true that by earning income from illegal trading activity the income does not get tainted so far as exigibility 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 activities detected, prosecuted and punished or otherwise penalised, will be taken into account for ascertainment of real profits. There is, therefore, a marked distinction between computation of a particular years 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 interpretation by courts cannot lead to a result where continuation of illegal activity or benefit attached to it is given recognition. 7. The second question, therefore, must be answered in the negative and against the assessee. 8.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]This question has to be answered in the negative in view of the Kothari decision [1971] 82 ITR 794 (SC). The hedging loss being in respect of a banned contract under section 15(4) ofthe Forward Contracts (Regulation) Act,, cannot be set off against the profits of other business of the previous yearThe second question is with regard to the assessees claim for entitlement to carry forward the speculation loss of Rs. 41, 603 to the next year. It is also admitted that the contract for speculation in the commodity in question is banned underthe Forward Contracts (Regulation) Act,. 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 24(2) of the Act.To allow such a claim 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. 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 assessee carrying on a lawful speculative business in the following 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 business 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 24(2)(i) of the Act in this caseIt 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 distinctly separate even in a taxing statute. There is no express warrant for the submission either under section 24(2) or under any other provision of the Act, far less on general principlesIt is true that by earning income from illegal trading activity the income does not get tainted so far as exigibility 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 activities detected, prosecuted and punished or otherwise penalised, will be taken into account for ascertainment of real profits. There is, therefore, a marked distinction between computation of a particular years 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 interpretation by courts cannot lead to a result where continuation of illegal activity or benefit attached to it is given recognitionThe second question, therefore, must be answered in the negative and against the assessee