1966 (10) TMI 31 - SC - Income Tax

Whether on a true interpretation of the various provisions of the Indian Income-tax Act 1922 the Tribunal was correct in holding that speculation losses of the respondent-firm (assessee-firm) for the assessment years 1958-59 and 1959-60 should be set off against its speculation profit of 6, 19, 784 in its assessment for the assessment year 1960-61? Held that - 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 computed. 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 only interpretation that can be placed on the words any such loss in this part of the second proviso is that this expression refers to the loss as determined for purposes of the principal clause of section 24(1) read with the first proviso and thus does not comprise within it loss incurred in speculative business referred to in the first proviso. The fact that proviso (c) to section 24(2) envisages the existence of loss which has not been apportioned between the partners clearly strengthens our view that the second proviso to section 24(1) does not cover loss in speculative business and consequently does not permit that loss to be apportioned between the partners. Thus section 24(2) also leads to the same conclusion which we have arrived at above on the interpretation of the language of section 24(1).Appeal dismissed.

Issues Involved:
1. Interpretation of the second proviso to Section 24(1) of the Indian Income-tax Act, 1922.
2. Applicability of the first proviso to Section 23(5)(a) of the Act.
3. Application of Section 24(2) of the Act.

Issue-wise Detailed Analysis:

1. Interpretation of the second proviso to Section 24(1) of the Indian Income-tax Act, 1922:
The primary issue in this case revolves around the interpretation of the second proviso to Section 24(1) of the Act. The respondent firm, registered under Section 26A of the Act, claimed that the speculation losses from the assessment years 1958-59 and 1959-60 should be set off against the speculation profits of the assessment year 1960-61. The Income-tax Officer had apportioned the speculative losses between the partners in the earlier years, which the firm argued was incorrect. The Tribunal and the High Court upheld the firm's plea, leading to the present appeal.

The court clarified that Section 24(1) and its provisos are integral to computing the total income of an assessee. The first proviso to Section 24(1) specifies that losses from speculative transactions are not to be considered in computing the total income except to the extent they can be set off against profits from other speculative transactions. The second proviso, however, does not deal with the computation of total income but rather with the personality of the assessee for applying the principal clause of Section 24(1) together with the first proviso. It was emphasized that the second proviso should not nullify the first proviso's effect, meaning speculative losses should not be included in the total income computation.

2. Applicability of the first proviso to Section 23(5)(a) of the Act:
The court also addressed the argument regarding the first proviso to Section 23(5)(a) of the Act, which requires the share of a partner in a loss to be set off against his other income or carried forward and set off in accordance with Section 24. The court held that this proviso does not apply to losses incurred by a registered firm in speculative business, which are not considered when computing the total income under Section 23(1), (3), and (4). The speculative losses are outside the scope of Section 23(5)(a) and thus cannot be set off against the partner's other income.

3. Application of Section 24(2) of the Act:
The court examined Section 24(2) of the Act, which allows for the carry forward and set off of losses, including those from speculative transactions, in subsequent years. It was noted that Clause (i) of Section 24(2) restricts the set-off of speculative losses to profits from speculative transactions in subsequent years. Proviso (c) to Section 24(2) further clarifies that a registered firm cannot carry forward and set off any loss apportioned between the partners under the proviso to Section 24(1). This supports the interpretation that speculative losses should not be apportioned between the partners but instead carried forward by the firm to be set off against future speculative profits.

Conclusion:
The court concluded that the second proviso to Section 24(1) does not cover speculative losses, and such losses should not be apportioned between the partners. The speculative losses from the assessment years 1958-59 and 1959-60 should be carried forward and set off against the speculative profits of the assessment year 1960-61. The appeal was dismissed, and the judgment of the High Court was upheld. The court disagreed with the reasoning of the Bombay High Court in a similar case and affirmed the decision of the Gujarat High Court. The appeal was dismissed with costs.

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