Case: The Commissioner Of Income-Tax,Mysoretravancore-Cochin And Vs. The Indo Mercantile Bank, Limited(And Connected Appeal)

1. 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 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-lax 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 S. 32(1) and the first proviso to that section of the Travancore Income-tax Act (hereinafter called the Travancore Act).2. In C. A. No. 259/58 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 income-tax return showing an income of Rs. 11,872 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. 90,947 representing only the profit it made in Travancore State and under S. 32(1) proviso (i) of the Travancore Act he returned a deduction of Rs. 79,275 shown as loss from branches situate outside the State of Travancore, in British India and other Indian States. The assessees 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 for 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 ofthe aforesaid sum of Rs. 79,275 a loss of the assessee arising outside the Travancore State for purpose of the first proviso to Section 32(1) of the Travancore Income-taxquestion was slightly modified by the High Court which after referring to several decided cases answered the question in favour of the assessee.3. In C. A, 260/58 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 1050-51, The assessee 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. 2,643. 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 ofon the facts and in the circumstances of the case the lossess of Rs. 27,709 arising in Cochin State could be set off against the profit of Rs. 38,998 arising in Travancorewas answered in favour of the assessee. The Commissioner has come up in appeal pursuant to special leave against both these judgments.

Reasoning: 9. Now we come to S. 24(1). 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 head in any assessment year. There was also a provision in S. 24(2) for carrying over the loss after such set off had been effected. Section 24(1) became the subject matter of controversy in the courts.The Privy Council in Arunachalam Chettiar v. Commr. of Income-tax, 63 Ind App 233 at p. 241: (AIR 1936 PC 133   at p. 136) 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 bead. Sir George Rankin said at p. 241 (of Ind App): (at p. 136 oftheir 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 head of income within the meaning of S. 6 of the Act or under a different head (in which case only need recourse be had to S. 24, sub-s.the Privy Council emphasised that the object of S. 24(1) was to allow a set off of profits against losses arising under different heads and only in such cases could recourse he had to S. 24(1). In cases where profits and losses arose under the same head they had to be adjusted against each other. This Court in Anglo-French Textile Co. Ltd., v. Commr. of Income-tax, Madras, 1953 SCR 448   at p. 453: (AIR 1958 SC 111 at p. 113) again emphasised that distinction in the followinga set off under section 24(1) can only be claimed when the loss arises under one head and the profit 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 24(1)." (Per Boseit 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 Ss. 7 to 12B and not to any other section. But it was contended on behalf of the Revenue that the first proviso to S. 24(1) of the Indian Act not only affected the generality of the main enactment but also introduce 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 S. 10(2) of the Indian Act for 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 per 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.