Commissioner of Income-Tax, U.P. Vs.
Jagannath Mahadeo Prasad,  INSC 171 (2 August 1968)
02/08/1968 GROVER, A.N.
CITATION: 1969 AIR 209 1969 SCR (1) 537
RF 1970 SC1588 (7)
Income-tax Act (11 of 1922), s. 24(1), first
proviso--Scope of--Loss from speculative transactions--Set off against profits
and gains when permissible.
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 v. Kantilal Nathu Chand,  1 S.C.R. 813; 63 I.T.R. 318 (S.C.)
namely: that under the first proviso to s.
24(1) 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 v. Commissioner of Income-tax, Ahmedabad, 31 I.T.R. 7,
Commissioner of Income-tax Nagpur v. Ram Gopal Kanhaiyalal, 38 I.T.R. 193,
Manohar Lal Munshi Lal v. Commissioner of Income-tax, New Delhi, 44 I.T.R. 618,
Commissioner of Income-tax v. Ram Swarup, 45 I.T.R. 248, Jummar Lal Surajkaran
v. Commissioner of Income-tax 47 I.T.R. 80.9, Hanuman Inves'tment Company v. Commissioner
of Income-tax, 48 I.T.R. 915 and Joseph John v. Commissioner of Income-tax, 51
I.T.R. 322, approved.
CIVIL APPELLATE JURISDICTION: Civil 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
538 B. Sen, B.D. Sharing and R.N. Sachthey,
for the appellant (in both the appeals).
G.C. Sharma, V.C. Rishi and P.K. Mukherjee,
for the respondent (in C.A. 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 s. 10 in spite of the first proviso to. s. 24(1) of the
Income Tax Act, 1922.
The facts in C.A. 1761/67 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 i.e., 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,
In the personal business of commission
agency, the assessee returned a net profit of Rs. 2,761. In arriving at this
figure the net share of loss of Rs. 11,075 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. 13,232 and it included a sum of Rs. 8,669 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.
1,415 from the speculative transactions and to carry forward the net loss of
Rs. 7,254 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.
7,254 should be set off against profit from other business. The Tribunal
rejected this contention following the decision in Keshavlal Pramchand v. Commissioner
of Income-tax. Ahmedabad(1). 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's(1) 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) 31 LT.R. 7.
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 s. 10 provides for liability to tax under
the head "profits and gains of business, profession or vocation"
which is the fourth head given in s. 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's(1) 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
Palkhiwala, who argued the case before the
Bombay court, put forward the view that s. 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 s. 24(1) 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, C.J., 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) 31 I.T.R. 7.
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. The. Bombay decision was followed by the Madhya Pradesh
High Court in Commissioner Income Tax, Nagpur v.
Ram Gopal Kanhaiya Lal(1) as also by the
Division Bench of the Punjab High Court in Manohar Lal Munshi Lal v.
Commissioner of Income' Tax, New
Delhi("). The matter ultimately went to a Full Bench of the Punjab High
Court in Commissioner of Income Tax v. Ram Swarup(") in which after
reviewing the entire case law and examining the various aspects relevant to the
questio,n the view exp. ressed by Chagla, C.J. in the Bombay case was accepted
Similarly in Jummar Lal Surajkaran v.
Commissioner of Income Tax(4), Hanuman Investment Company v. Commissioner of
Income Tax(5), and Joseph' John v. Commissioner of Income Tax(6), the
considerations which prevailed in Keshavlal Pramchand's(7) case were accepted
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 v. Kantilal Nathu Chand(8):
"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. been 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
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) 38 I.T.R. 193.
(2) 44 I.T.R. 618.
(3) 45 I.T.R. 248.
(4) 47 I.T.R. 809.
(5) 48 I.T.R. 915.
(6) 51 I.T.R. 322.
(7) 31 I.T.R. 7.
(8)  1 S.C.R. 813; 63 I.T.R. 318, 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 cornuted. 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
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's(1) case by
this Court which cannot be regarded as obiter because 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. s. 24( 1 ) operates as a substantive
provision or only by way of an exception to s. 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)  1 S.C.R 813; 63 I.T.R. 318.
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 business 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.