MAHADEVIA A R Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS reference under section 66(1) of the Indian Income-tax Act, 1922, arises out of the assessee's assessment for the assessment year 1958-59, the relevant accounting year being the financial year ending on the 31st March, 1958. The assessee is a Hindu undivided family. It has income from property, business in shares both ready and forward, dividends and shares of profit from the registered firm of Mahadevia Brothers. For the assessment year 1958-59 the assessee's income from business was assessed in the sum of Rs. 47,987. In the said assessment year the assessee had incurred a loss of Rs. 2,29,597 in its speculative business. The assessee claimed to set off the said loss against its profits from the non-speculative business. The claim was disallowed by the profits from the nonspeculative business The claim was disallowed by the Income-tax Officer relying on the first proviso to section 24(1) read along with the Explanations to the said proviso. It was contended by the assessee that the first proviso to section 24(1) did not apply to a case of computation of the business income under section 10 and consequently the assessee was entitled to have the total income of all the different business carried on by it under a single head of "business" under section 10. The contention, however was negatived by the Income-tax Officer relying on the authority of this court in Keshavlal Premchand v. Commissioner of Income-tax and Appellate Assistant Commissioner in appeal confirmed the said view.

(2.) FOR the purpose of carrying on the speculative business during the assessment year, the assessee had borrowed moneys on which it had paid a total interest of Rs. 16,200. The assessee claimed that this was an expenditure of business deductible under section 10 and must, therefore, be allowed to the assessee as a business expenditure in the computation of the business profits of the assessee as a whole. It was argued on its behalf that the first proviso to section 24(1) did not disentitle the assessee to have this item of expenditure deducted from the profits of the other business because what was not allowed to be set off under the said proviso was only the loss in speculative transactions carried on in the nature of the said business. This contention did not prevail with the Income-tax Officer and the Appellate Assistant Commissioner who took the view that the expenditure, having been admitted incurred in connection with the total loss or profits in the speculative business and would form a part of the profit or loss of the said business either by argumenting the losses in that business if there are losses or by reducing the profits, if there be profits. According to the Income-tax Officer and the Appellate Assistant Commissioner, therefore, this item of Rs. 16,200 also could only be allowed to be added to the speculative loss and the total loss allowed to be carried forward to be adjusted against the speculative profits in the subsequent years.

(3.) AS to the second question, in our opinion, the view taken by the Tribunal is not correct. AS we have held in a resent case in Income-tax Reference No. 37 of 1962, decided on 8th February, 1967, a on a proper interpretation of the first proviso read along with the two Explanations, speculative transactions carried on in the nature of business constitute a distinct and separate business, the income of which is required to be computed under section 10. The loss in speculative transactions carried on in the nature of business referred to in the first proviso to section 24 is the net computed loss under section 10 of the speculative business which is constituted of the speculative transactions carried on in the nature of business. The amount of Rs. 16,200 is admitted interest paid on amounts borrowed for the purpose of carrying on the speculative transactions in the nature of business or, in short, the speculative business. This is an item which will come in for computation of the profit to loss of the speculative business but cannot enter the computation of the profit and loss of the non-speculative business. Since the speculative business has suffered as loss this item which belongs to the speculative business will further argument the loss and will form part of it. The amount of Rs. 16,200, in our opinion, therefore, ask cannot qualify for being allowed against the income from the non-speculative business. Mr. Palkhivala contended that the expression "any loss sustained in speculative transactions which are in the nature of a business" used in the first proviso to section 24(1) can only relate to the loss sustained in the transactions themselves and not the net loss on a computation of the profits and loss under section 10 of the Act. We are not inclined to accept that interpretation because in our view the loss referred to is the net computed loss and not merely the gross loss on the transactions. The proviso which occurs in a provision, which relates to the set-off adjustment of the losses and profits under different heads of income, itself deals with the set-off of profits and losses of different kinds of business under the head of profits and gains of business. The question of set-off arises only when the loss or profit is computed under the Act. In the context of the provision of section 24, we are of the view that the loss spoken of by the first proviso relates to the resultant loss on computation and not merely loss incurred in the transactions.