# COMMISSIONER OF INCOME TAX, GUJARAT v. M/S. S. C. KOTHARI

- **Citation:** [1972] 1 S.C.R. 950
- **Court:** Supreme Court of India
- **Decided:** 1971-10-05
- **Case number:** Civil Appeals Nos. 1993 of 1968
- **Bench:** K. S. Hegde, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-gujarat-v-m-s-s-c-kothari-5492
- **Pages:** 11

## Headnote

Income-tax Act (ll of 1922), ss. 10(1) and (2) and s. 24(1)-
Scope of.
Forward Contracts (Regulation) Act, 1952 s.
15 ( 4 )-Contract in
violation of-If illegal
Section 15 ( 4) of the Forward Contracts (Regulation) Act, 1952 is
conceived in the larger interest of the public to protect them against the
malpractices indulged in by members of recognised associations in resoect
of transactions in which their duties as agents come into conflict with
theiI personal interest. · Parliament had made a writing, evidencing or
confirming the consent or authority of a non-member, as a condition of
the contract if the member has entered into a contract on his own account.
. So long as there was no such writing thei'e was no enforceable contract.
Under the Act, there is not only an express prohibition but also punishment for contravention of that prohibition.
The assessee, a registered firm, was a member of the Saurashtra Oil
and Oilseeds Association, and was carrying on the business of commission agency and general merchants. It was also doing forward business.
During the assessment year 1958-59 it incurred a loss in certain transactions.
Those transactions were in contravention of the provisions of
s. 15 ( 4) of the Forward Contracts (Regulation) Act. The assessee claimed
that the loss was allowable under s. 10( 1) of the Income-tax Act, 1922,
as a deduction against its other business income even if the losses were
incurred in illegal transactions. The Income-tax Officer rejected the contention of the assessee, and also held that the losses incurred in illegal
business could not be deducted from speculative profits under s. 24 of the
Income-tax Act.
The Appellate Assistant Commissioner confirmed the
order. The Tribunal held that the assessee could not set off the loss
against the other income under s. 10(1) of the Income-tax Act hnt was
entitled to do so under s. 24.
On the questions referred . to the High Court namely : (I) Whether
the loss was in respect of illegal contracts, (2) Whether the loss was a·
resnlt of speculative transactions and therefore could be set off undei' s. 24
of the Im:ome-tax Act, and ( 3) whether even if the loss was as a result
of illegal transactions the asscssee was entitled to set off the loss under
s. 10(1) of the Income-tax Act, the High Court did not answer the first
question but held that the losses could be set off both under s. 10 and
s. 24 of the Income-tax Act.
In appeal to this Court.
HELD : (1) It is well settled that contracts which are prohibited by
statute, the prohibition being either express or implied. would be illegal
A
B
c
D
E
F
G
and unenforceable if they are entered into in contravention of the statute.
Therefore. the contracts in the preient case, were illegal contl'acts and the
JI
loss was in respect of such illegal contracts. (955 C-D)
Sunder Lt;l v. Bharat. Ha11dicrafrs, [1968] 1 S.C.R. 608, followed.
A
C.I.T. v. s. c. KOTHARI {Grover, J.)
951
(2) Under Explanation 2 of s. 24 a speculative transaction means
a transaction in whicu a contract for purchase and sale of anv commodity
is periodically or ultim•tely settled otherwi~ than by actual delivery etc.:
but the contract has to be an enforceable contract and not an unenforceable one by reason of any taint or illegality. In the present case, the contracts were illegal and unenforceable on account of the contravention of
s. 15(4) of the Forward Contracts (Regulation) Act. The High Court
B
was therefore in error in considering that set off could be allowed unders. 24(1) of the Income-tax Act. [959 D-F]
(3) While s. 10(1) of the Income-tax Act imposes a chargs on profits or gains of a business it does not provide how those pi"ofits are to be
computed.
Secti<.>n 10(2) enumerates various items which are admissible
as deductions but they are not exhaustive. The profits and gains which
are liable to tax under s. 10(1) are what are understood to be such under
c ordinaf} commercial practice. The loss for which the deduction is claimed
mu•t be one

## Text

950
COMMISSIONER OF INCOME TAX, GUJARAT
v.
M/S. S. C. KOTHARI
October 5, 1971
[K. S. HEGDE AND A. N. GROVER, JJ.)
Income-tax Act (ll of 1922), ss. 10(1) and (2) and s. 24(1)-
Scope of.
Forward Contracts (Regulation) Act, 1952 s.
15 ( 4 )-Contract in
violation of-If illegal
Section 15 ( 4) of the Forward Contracts (Regulation) Act, 1952 is
conceived in the larger interest of the public to protect them against the
malpractices indulged in by members of recognised associations in resoect
of transactions in which their duties as agents come into conflict with
theiI personal interest. · Parliament had made a writing, evidencing or
confirming the consent or authority of a non-member, as a condition of
the contract if the member has entered into a contract on his own account.
. So long as there was no such writing thei'e was no enforceable contract.
Under the Act, there is not only an express prohibition but also punishment for contravention of that prohibition.
The assessee, a registered firm, was a member of the Saurashtra Oil
and Oilseeds Association, and was carrying on the business of commission agency and general merchants. It was also doing forward business.
During the assessment year 1958-59 it incurred a loss in certain transactions.
Those transactions were in contravention of the provisions of
s. 15 ( 4) of the Forward Contracts (Regulation) Act. The assessee claimed
that the loss was allowable under s. 10( 1) of the Income-tax Act, 1922,
as a deduction against its other business income even if the losses were
incurred in illegal transactions. The Income-tax Officer rejected the contention of the assessee, and also held that the losses incurred in illegal
business could not be deducted from speculative profits under s. 24 of the
Income-tax Act.
The Appellate Assistant Commissioner confirmed the
order. The Tribunal held that the assessee could not set off the loss
against the other income under s. 10(1) of the Income-tax Act hnt was
entitled to do so under s. 24.
On the questions referred . to the High Court namely : (I) Whether
the loss was in respect of illegal contracts, (2) Whether the loss was a·
resnlt of speculative transactions and therefore could be set off undei' s. 24
of the Im:ome-tax Act, and ( 3) whether even if the loss was as a result
of illegal transactions the asscssee was entitled to set off the loss under
s. 10(1) of the Income-tax Act, the High Court did not answer the first
question but held that the losses could be set off both under s. 10 and
s. 24 of the Income-tax Act.
In appeal to this Court.
HELD : (1) It is well settled that contracts which are prohibited by
statute, the prohibition being either express or implied. would be illegal
A
B
c
D
E
F
G
and unenforceable if they are entered into in contravention of the statute.
Therefore. the contracts in the preient case, were illegal contl'acts and the
JI
loss was in respect of such illegal contracts. (955 C-D)
Sunder Lt;l v. Bharat. Ha11dicrafrs, [1968] 1 S.C.R. 608, followed.
A
C.I.T. v. s. c. KOTHARI {Grover, J.)
951
(2) Under Explanation 2 of s. 24 a speculative transaction means
a transaction in whicu a contract for purchase and sale of anv commodity
is periodically or ultim•tely settled otherwi~ than by actual delivery etc.:
but the contract has to be an enforceable contract and not an unenforceable one by reason of any taint or illegality. In the present case, the contracts were illegal and unenforceable on account of the contravention of
s. 15(4) of the Forward Contracts (Regulation) Act. The High Court
B
was therefore in error in considering that set off could be allowed unders. 24(1) of the Income-tax Act. [959 D-F]
(3) While s. 10(1) of the Income-tax Act imposes a chargs on profits or gains of a business it does not provide how those pi"ofits are to be
computed.
Secti<.>n 10(2) enumerates various items which are admissible
as deductions but they are not exhaustive. The profits and gains which
are liable to tax under s. 10(1) are what are understood to be such under
c ordinaf} commercial practice. The loss for which the deduction is claimed
mu•t be one that springs directly from the carrying on of the business and
is incidental to it, that is, the profit was earned and the loss was sustained
in the same business. If this is established the deduction must be allowed
provided that there is no ptovision against it. If the business is illegal,
neither the ·profits earned nor the losses incurred would be enforceable
in law but that does not take the profits out of the taxing statute. Similarly, the taint of illegality of the business cannot detract from the loss
D
being taken into account for computation of the amount which can be
subjected to tax as profits. Cases whkh deal with payment of a penalty
for mtraction of law or the execution of some illegal activity stand GD
a different footing, because, an expenditure is not deductible. unless it is
a commercial loss in trade and such a penalty cannot be described as
such. [956 G-H. 95.7 A-B, D-E, G-H; 959 H; 960 A-Bl
E
[Since in the present case no finding was given by the High Court that
the two businesses in which profits were made and losses were sustained
were the same, the matter was remanded tci the High Court for decision
on this point.]
Raj Woollen Industries v. C.l.T., Simla, 43 I.T.R. 36, Chandrika
Prasad Ram Swarup v. CJ.T., U.P. &: C.P., 7 I.T.R. 269, Badridas Daga
v. Commissioner of Income-tax, 34 I.T,R. 10, Ht<ji Aziz &: Abdul Shakhor
Bros v. C.l.T., Bombay City, 41 I.T.R. 350 3Dd .Allen v. Farquharson
F
Bros. 17 T.C. 59, referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 1993
of 1968 and 1173 of 1971.
Appeals by certificate/special leave from the judgment and
order dated August 3, 4, 1967 of the Gujarat High Court in
6
Income-tax Reference No. 18 of 1966.
S. T. Desai, R. N. Sachthey and B. D. Sharma, for the appellant (in both the appeals) •
. V. S. Desai, K. L. Hathi and P. C. Kapur, for trnrrespondent
(in both the appeals) .
II
The Judgment of the Court was delivered by
Grover, 1.
This is an appeal from a judgment of the
Gujarat High Court. Originally an appeal ( C.A. 1993 I 68) had
952
SUPREME COURT REPORTS
[1972] 1 s.c.R.
been brought by certificate but that certificate was found to be
A
defective as no reasons were stated therein for granting it.
A
petition for special leave, was, therefore, filed and the same has
been granted. Both !he appeals shall stand disoosed of by this
judgment. The assessee is a registered firm and carried on 'the
bus;ness of commission agency and general 111erchants. It also
does forward l>usiness. It is a member of the Saurashtra Oil and
B
Oilseeds Association Ltd., Rajkot. During the assessmenit year
1958-59 the corresponding accounting period being the samvat
year 2013 the assessee claimed to have incurred a loss of Rs.
3,40,443/- in certain transactions entered into with
different
people for the supply of groundnut oil. The transactions, accord-
. ing to the assessee, were non-transferable ready delivery contracts C
entered into with non-members of the Association.
It was expected that these contracts would be performed bll!t owing to
certain reasons some of the contracts could not be performed
and differel!!;e.s had to be paid. According to the assessee it had
acted as a Puc.ca Artia. The assessee claimed 'that the aforesaid
loss was allowable nnder s. 10 ( 1) of the Income Tax Act, 1922 D
as a deducti_on against its other business income. The Income tax
Ollicer came to the conclusion that the transactions in question
were hit by the provisions of the Forward Contracts Regulation
Act, 1952, hereinafter called the 'Aot' and the Rules and Regulations of the Saurashtra Oil and Oilseeds Association Ltd. · In particular the transactions were hit by the provisions of sub-ss. (1)
E
and ( 4) of s. 15 of the Act and were not saved by s. 18. The
losses were held to have been incurred in illegal transactions. He
rejected the coniention of the assessee that even on the assumption
that the losses were incurred in illegal transactions they could be
allowed in the computation of the income. The Income tax
Officer further held that the losses incurred in illegal business
.could not be deducted from the speculative profits under s. 24
F
of the Indian Income tax Act, 1922, hereinafter called the "Act
of 1922". The Appellate Assistant Commissioner confirmed the
order of the Income tax Officer. In the appeal before the Tribunal
it was held that the transactions in question were not illegal contracts but w~ contracts ·which had been validly entered into
ynder the Act and the bye-laws etc. The Tribunal thereafter proG
ceeded to examine the question whe!f:her the losses incurred could
be allowed on the assumption that rthe transactions were illegal.
It was of the view that the assessee would be entitled to a set off
under s. 24 even if the losses were incurred in illegal transactions.
The Tribunal remanded the matter for a report from the Appellate
Assistant Commissioner as to the applicability of the proviso to H
s. 24 (1) (read with the Explanation) of the Act of 1922. After
the remand report was received the Tribunal gave the following
two
findings : (1) the contracts under consideration were all
~-
. \
..
l
A
B
c
D
E
F
C.l.T. v. s. c. KOTHARI (Grover, J.)
953
non-transforable specific delivery contracts where
<the
intention
ab initio was either to give or take delivery ( 2) the contracts were
entered in'lo either for the purchase or sale and later on the same
quanti·ty was either sold or purchased back by the assess.~e on behalf of the same constituents at the market rn:·~s prevailing at the
material time i.e. they were squared up by corresponding sales oc
purchases as the case might be.
After referring ·to certain decisions of High Courts the Tribunal held that the loss of
Rs. 3,40,443 had been incur;·~d in speculative transactions. The
Tribunal next proce.~ded to consider whether notwithstanding that
the losses had been incurred in speculative transactions the a>sessee
could set off those against the other income under s. 10(1) of the
Act of 1922.
Purporting to follow the view of •the majority of
the High Courts, the Tribunal held that such a loss could not be
si~t off against the other income.
But according to the Tribunal
th.e assessee was certainly entitled 1o set off the loss agaimt the•
profits in sp_eculative transactions and to that extent the contention
of the assessee was acceP'ted. Both the assessee_ and the Commissioner of Income lax moved the Tribunal for submitting a case
and referring c.~rtain questions of law to the High Court. Thus in
all the following four questions were reforred by the Tribunal
( I ) Whether on the facts and in the circumstances of
the case the contracts in respect of which the
loss of Rs. 3,40,443 was claimed were illegal
ccmtracts and were not validly entered into
under the Forward Contracts
R.~gulation Act
1952?
( 2) Whether even assuming the transactions in which·
th·~ loss of Rs. 3,40,443/ - was incurred, were
illegal transactions, the assessee would be entitled
to the set off of the said loss ?
( 3) Whett'.er on the facts and in the circumstances
of 'the case the transactions resulting in a loss of
Rs. 3,40,443 were sp.~culative transactions for
the purpose of s. 24 of the Indian Income tax
Act 1922 merely on the ground that 1he assessee
q
had not performed. the contracts
by
giving
dehvery and had paid damages in settlement of
the obligations contracted for ?
( 4) Whether on the faC'ts and in the circumstances
of th·~ -case the assessee is entitled to set off the
balance of the loss of Rs. l ,21,3971- against the
H
assessee's other income ?"
-
The High <;mut did not CCilllider that it was necessary to answer
the first question.
The answer to the second question was that
~-l l ,S.,pCl/72
1154
SUPREME COURT REPORTS
(1972) I S;C.R.
even though the disputed contracts were nat validly entered into A
in accordance with the provisions of s. 15 ( 4) of the Act t4e loss
of Rs. 3,40,443/ - was liable to be taken into account in computing
the business income of the assessee under s. 10 of 'the Act of 1922
and the assessee was entitled to set it off against 1the profits from
other specula:ti_ve transactions. The third question was answered
in the aflirmatjve with the result that the transactions resulting in B
the loss of Rs. 3,40,443/ - were held to be speculative for the purpose of s. 24 of the Aot of 1922.
'f\le fourth questjon was answered in the negative and against the assessee.
It is the Commissioner of Income tax alone who has appealed.
So far as the first ques'tion is concerned we are unable to comprehend why the High Court did not decide it.
A lot of debate
took place before us on the question whether the contravention of
s. 15 ( 4) of the Aot would render the contracts illeg~l. According
c
to that provision no member of a recognised Association shall, in
respect of any goods spxified in the notification under sub-s. ( 1),
enter into any contract on his own account wirth any person other D
than a member of the recognised Association unless he has secured
the consent or lluthority of such p.~rson and disclosed in the note
memorandum or ag_reement of sale or purchase that he has bought
or sold the goods as the case may be on his own account.
It is
not necessary to refer to the proviso.
It is common ground and
has been admitted before us that there was a clear corrtravention
E
of the provi~ions of s. 15 ( 4) so far as the transactions in question
were concerned.
According to s. 20 ( e) any person who enters
into any cor;tract in contravention of 'the provisiorn of s. 15 ( 4)
among other sections shall on c.onviction be punishable for the
first offenrn with imprisonment which may extend to one year or
with fine of not less than Rs. 1,000/ - or with both.
It is wholly
F
incomprehensible how such a contrac·t would not fall directly within the ambit of the first part of s. 23 of the Indian Contract Act
which deals wi'th consideration or object of an agreement which
is forbidden by law.
Such consideration or object would be unlawful according to 'the provisions of that section and the agreement would consequently be void. The High Court did not decide
th·~ point whether the contracts which contravened the provisions
of s. 15 ( 4) of the Act wer.~ illegal. It did not consider it ma•erial to decide whether the impugned contracts were illegal.
In its
opinion wha't was material was that the impugned contracts had
been entered into unlawfullv and the question was whether the
loss sustained in the unlawful business could be taken into account
in computing the busine1s income of the assessee.
We consider
that th·~ first auestion which was referred to the High Court stands
concluded by the law laid down by 'this Court in Sunder/al & Son v.
G
H
..;
A
B
c
D
E
F
G
H
C.I.T. v. s. c. KOTHARI (Grover, J.)
955
Bharat Handicrafts (P) Ltd .. (1) It was laid down that the prohibition imposed by s. 15 ( 4) of the Act was not imposed in the
interest of revenue. That provision was conceived in the larger
interest of 1he public to protect them against the malpractices indulged in by members of recognised associations in rnspect of
transactions in which their duties as agents came into conflict with
their personal interest. · Parliament had made a writing, evidencing or confirming the consent or authority of a non-member, as a
condrtion of the contract if the memb·~r has entei;ed into a contract on his own account. So long as there was no writing as was
contemplated by s. 15 ( 4) or its proviso there was no enforceable
contraC't.
It is well settled that contracts which are prohibited by statute
the prohibition being either express or implied would be illegal and
unenforceable if they are entered irrto in contravention of the
statute. Under the provisions of the Act there is not only an express prohibjtion (s. 15 ( 4) ) but punishment is also provided for
contravention of that prohibHion, (s. 20). Such contracts could
not possibly be regarded as having been validly entered into under
the Act. The answer 'to the first question, therefore, should have
been in the affirmative and against 'the assessee.
Coming to the second question, the language thereof is somewhat ambiguous and the question was not framed properly.
It
appears •that there were •two aspects which had come up for consideration before the departmental authorities the Tribunal and
the High Court. The first aspect related to the deduction of
tho~
loss of Rs. 3.40,443/- incurred in the aforesaid illegal transactions
while computing the profits of the assessee's speculative business
under s. 10(1). The other was the set off which can be allowed
within the relevant parts of s. 24 of the Act of 1922.
The High
Court referred to various English decisions as also •to Wheatcroft's
Law of Income tax and Simon's Income tax for supporting the
view that even where a trade is illegal it would still be a trade within tho~ meaning .of income tax law and if any profits are derived
from such trade they would be assessable to tax.
The High Court
did not accept the cont~ntion urged on behalf of the Revenue that
although the profits from an illegal trade or business would be
exigible to tax the losses from such business could not be taken
into account whiJ.~ computing the profits.
This is what the High
Court observed :-.
"There is in principle no dis'tinction between profits
and. losses of a business and if the profrts of an illegal
business are assessable to tax, equally the losses arising
I) [1968] I S.C.R. 608. ...--
956
SUPREME COURT REPORTS
[1972] l S.C.R.
from illegal busi11>~ss must be held to be liable to be
taken into account in computing the income of the
~ssessee'.
A
The High Court was not inclined to accede •to the submission on
behalf of the Revenue that the same principle would be applicable
as has been applied in certain cases in which the question which
B
came up for de~mnination was whether an expenditure incurred
on an illegal activity would b~ deduc1ible under s. 10 ( 2) (xv J of
the Act of 1922.
One of such cases is a decision of the Punja:b
High Court·in Raj Woollen Industries v. Commissioner of Income
tax, Simla(!). In that case the real question was whether a certain amount which was paid to achieve what was proh "bited by c
law, viz., the export of wool without having the requisite export
licence was an amount which tb~ assessee was entitled to deduct
under s. 10(2) (xv) of the Act of 1922. It was held that
according to principle and authority such a deduction could not
be claimed. It was also observed that such a d.~duction would
not be pefI!lissible even under s. 10(1). Following ob: et vations
D
may be referred to :
"Profits had 1o be ascertained according to the
accepted principles of commercial accountancy and if
s. 10(2)(xv) did not permit
o~duction of an item of
expenditure which was laid out or expended for carrying
on the business in contravention of the law, then such
E
an onteoing though otherwise properly admi-<ihle, "~
set off against the gross receiots on the principles of
commITcial accountancv could not be taken into consideration in computing the profits".
On <the other hand according to the decision of a full bench of the
Allahabad High Court in Chandrika Prasad Ram Swarup v. ComF
mi~sioner of Income tax, U.P. & C.P. (2 ) income assessable to tax
is the actual income of an individual or a firm irrespective of the
manner in which the income was derived.
Legality or illegality
of the transaction culminating in profits or losses, was, therefore,
foreign •to the scope of an inquiry into the income of an individual
or a firm for the purpose of income tax.
G
Now while s. 10(1) of the Act of 1922 impo~es a charge on
the profits or gains of a business it does not provide how these
profits are to be computed.
Section 10(2) enumerates various
items which are admissible as deductions. They are, however, not
exhaustive of all allowances which can be made in ascertaining the
profits of a busines~ 1axable under s. 10(1 ). It is undoubtedly
H
true that profits and gains which are liable to be taxed under
(I) 43 l.T~R. 36.
(2) 7 l.T.R. 269.
A
Jl
D
E
F
G
H
C.I.T. v. s. c. KOTHARI (Grover, J.)
957
s. 10(1) are what are understood <to be such under ordinary commercial principles.
The loss for which the deduction is claimed
must be one that springs directly from the carrymg on of the business and is incidental to it. If this is establbhed the cfoduction
must be allowed piovided that 1there is no provision against rt,
express or impiied in the Act :
(See Badridas Daga v. Commissioner of Income tax (1).
In that case Joss
sustained by
the
business by reason of embezzlemznt by an employee was held to
be an admissible deduction under s. 10 (I) although it did nat fall
within s. 10(2) (xi) of 'lhe Act of 1922. Indeed profits
cannot
be computed without deducting the loss and permissible expenses
incurred for the purpose of the business.
The approach of the High Court, in •the present case, has been
that in order to arrive at the figuP2 of pwfits even of an illegal
business th<e loss must be deducted if it has actually been i_ncurred -
in the carrying on of that business. It is 1he net pro!it after
deducting the outgoings that can be brought to tax. It certainly
seems •to have been held and that view has no•t be>~n shown to .be
incorrect that so far as the admissible deductions under s. 10(2)
are concerned they cannot be claimed by the asses&~e if such expenses have been incurred in either payment of a penalty for infraction of Jaw or the execution of some illegal activity.
This,
however, is based on the principle •that an expenditure is not deductible unless it is a commercial loss in trad·~ and a penalty imposed for breach of the law during th.~ course of the trade cannot
be described as such.
PenaHies which are incurred for infraction
of the law is not a normal incident of business and they fall on the
assessee in some charncter other than that of a trader; (See
Haji Aziz & Abdul Shakoor Bros v. Commissioner of Income tax,
Bombay City('). In that case this Court s1id quite clearly that a
disbursement is deductible only if it falls w'thin s. 10(2)(xv) of
the Act of 1922 and a penaty cannot be regarded as an expendi ure
wholly and exclusively laid for the purpose of th~ business. Moreover disbursement or expense of a •trader is something "which
comes out of his pocket.
A loss is something different.
That is
not a thing which he expends or disburses.
That is a •thing which
comes upon him abextra" (Finlay J., in Allen v. Farquharson
Brothers & Co.) (
3 ). If the business is ill~gal neither the profits
earned nor the losses incurred would be enforceabl·~ in law.
But
that does not take the profits out of the taxing s' atute.
Similarly
the taint o.f illegality of the business cannot detract from the losses
being taken into account for computation of the amount which
can be subj·~cted to-tax as "profits" under s. 10(1) of the Act of
(!) 34 l.T.R. 10.
(2) 411.T.R. 350.
(3) 17 T.C. 59.
958
SUPREME COURT REPORTS
[ 1972) 1 S.C.R.
1922.
The tax collector cannot be heard to say 1that he will bring
the gross receipts to tax.
He can only tax profits of a trade or
business.
That cannot be done without deducting 1the losses and
the legitimate expenses of the business.
We concur in the view
of the High Court that for the purpose of s. 10(1) the losses which
have actually been incurred in carrying on a particular illegal business must be deducted before the true figure relating to profits
. which have to b~ brought to tax can be compu•ted or determined.
This will, however, not conclude the answer to question No. 2 because it seems to have been framed with the other aspect relating
to "set off" under s. 24 of the Act.
A
B
The High Court found tha:t the transactions were of a specula- c
tive nature. Ii was thus held that the loss of Rs. 3,40,443/- sustained in the impugned contracts was liable to be set off against
the profit of Rs. 2,19,046/- which was admittedly a profit from
speculative transactions.
The concluding portion of the judgment
of the High Court may be reproduced because to our mind rt
creates a certain amount of difficulty.
"The Joss of Rs. 3,40,443/- sustained in the impugned
coll'tracts was, therefore, liable to be set off only against
. the profrt of Rs. 2,19,046/- which was admittedly profit from speculative transactions and the balance of
Rs. 1,21,397/- after such set off was not liable to be set
off against the other income of the assessee in view of
the first proviso to s.
24(1 ).
We may make it clear
that in taking this view we have proceeded upon the
basis 1that the impugr.·~d contracts which resuhep in the
loss of Rs. 3,40,443 constituted a separate business distinct from the business of forward contracts resulting in
the profit of Rs. 2,19,046/-.
The result would, however, be the same even if the impugned contrac's ·which
resulted in tb~ loss of Rs. 3,40,443/- did not constitute
a separate business but w~re part of the same business
of forward contrac'is which resulted in the profit of
Rs. 2,19,046/- for in that event the loss of Rs. 3,40,443
would be liable to be taken into accourrt in d.~tennining
the profits from such business under section IO".
Section 24, to the extent it is material for our purposes, is set out
below :
"Set off of loss in computing aggregate income :-
( 1) 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 errtitled to have the amount of the
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C.I.T. v. s. c. KOTHARI (Grover, J.)
loss set off against his income, profits or gains under any
other head in that year :
Provided that in computing the
profits and gains
chargeable under the head "profits and gains of business, profession or vocation", any Joss sustained in s~e:u
·lative transactions which are in the nature of a busmess
shall not be 'taken into accoull't except to the extent of
the amount of profits and gains, if any, in any other bmines consisting of speculative transactions;
Explanation 1.
Wher-~ the speculative transactions
carried ou are of such a na:ture as to collS'titute a business, the business shall be deemed to be distinct and
separate from any other business.
Explanation 2. A speculative transaction mea.ns a
transaction in which a contract for purchase and sale of
any commodity including stocks and shares is periodically or ul<timately settled otherwise than by actual delivery or transfer of tb~ commodity or scripts;"
959
In order to claim the set off the meaning of the speculative transaction has to be first looked at.
Under Explanation 2 such a
transaction means a transaction in which a contract for 'the purchase and sale of any commodity is periodically or ultimately
settled otherwise than by actual delivery etc.
Now the contract
has to be an enforceable contract and not an unenforceable on·~
by reason of any taint of illegality resulting in its invalidity.
It
has already been found by us that the contracts in question were
illegal and up.enforceable on account of contravention of s. 15 ( 4)
of th.e Act.
The High Court was in '~rror in considering that any
set off could be allowed in the present case under •the first proviso
to s. 24( I) which must be read with Explanation 2.
There would have 1'.~en no difficulty in disposing of the matter
finally aHer the above discussion.
But enough attention was pot
devoted to the business which the assessee was doing and in which
the profit of Rs. 2,19,046 was made and the loss of Rs. 3.40,443
was sustained. It has b.'!en found 'to be of a speculative na'ure but
the High Court has not clearly found thirt it was the same busin•:!Ss
in which the amount of the profit and the loss mentioned above
was earned and sus'tained in which case alone a deduction will be
possible of the loss under s. 10 (I). The High Court proceeded
on the basis that if the business in which the profit was made and
the business in which the loss was incurred were separate a set off
could ~e cla[med by the assessee under s. 24 ( 1). If, however,
the busmess was the same then the loss would be liable •to be taken
960
SUPREME COURT REPORTS
[1972] l 5.C R.
A
inio account while computing •the profits under s.10 (1).
As we
have come to the conclusion that no set ofI could be allowed under
s. 24( 1) of the Act of 1922 it will have to be determined whether
the profrts and losses were incurred in the same business even
ihough that business involved the ent·~ting into contracts some of
which were, in the eye of the law, illegal. If the 'trade or the
business, for instance, the business of commission agency or forward business was the same in which the profits were made and the
loss was incurred then in order to arrive at the figure which can
be subjected to 'lax the loss will have 1to be deducted f• om the
profit.
For this purpose w~ shall have to remit the matter to the
High Court to decide this point and if necessary, after calling for
a supplementary statement of the case.
In the result our answer to the first question is that
the
contracts were illegal. on the third and the fourth quest:ons there
is no dispute nor has any appeal been preferred by rthe assessee
relating to tJi.~m that the answers returned by the High Court in
B
c
the affirmative and in the negative respectively w.~re not correctly
answered.
As regards question No. 2 the High Court will have
D
to answer the same in the light of our judgment.
The appeal by
special leave (i.e. C.A. 1173/71) shall stand disposed of accordingly and the other appeal by certificate (i.e. C.A. 1993/68) is
hereby dismissed.
Ther>~ will be no order as to costs.
V.P.S.
Appeal partly a/lowed.