# COMMISSIONER OF INCOME-TAX, U.P v. JAGANNATH MAHADEO PRASAD, ETC

- **Citation:** [1969] 1 S.C.R. 537
- **Court:** Supreme Court of India
- **Decided:** 1968-08-02
- **Case number:** Civil Appeals Nos. 1761 of 1967
- **Bench:** J. C. Shah, V. Ramaswami, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-u-p-v-jagannath-mahadeo-prasad-etc-4438
- **Pages:** 6

## Headnote

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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 fr:ms.
1!1
arriving at the net profit for the assessment year 1953-54, he churned his
share of the loss tfrom one oi the firms in which he was a partner, as a
set off against profits from other business.
The. loss was the !esult. of
speculative transactions. The Department and Tribunal held agamst him.
On a reference, ihe 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,
[1967] 1 S.C.R. 813; 63 I.T.R. 318
(S.C.) namely: that under the first proviso to s. 24(1) of the Income.
tax 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. tfrom 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 case.
The p'roviso 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-BJ
Keshavlal Pramchand v. Commissioner of Income-tax, Ahmedabad,
31 l.T.R. 7,
Commissioner
of Income-tax
Nagpur
v. Ram
Gopal
Kanhaiya/al, 38 I.T.R. 193, Manohar Lal Munshi Lal v. Commissioner of
Income-tax, New Delhi, 44 l.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. 809, Hanuman Investment Company v. Conzmis-
.sioner of Income-tax, 48 I.T.R. 915 and Joseph John v. Commissioner of
Income-tax, 51 I.T.R. 322, approved.

## Text

-
537
A
COMMISSIONER OF INCOME-TAX, U.P.
v.
JAGANNATH MAHADEO PRASAD, ETC.
August 2, 1968
B
[J. C. SHAH, V. RAMASWAMI AND A. N. GROVER, JJ.]
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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 fr:ms.
1!1
arriving at the net profit for the assessment year 1953-54, he churned his
share of the loss tfrom one oi the firms in which he was a partner, as a
set off against profits from other business.
The. loss was the !esult. of
speculative transactions. The Department and Tribunal held agamst him.
On a reference, ihe 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,
[1967] 1 S.C.R. 813; 63 I.T.R. 318
(S.C.) namely: that under the first proviso to s. 24(1) of the Income.
tax 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. tfrom 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 case.
The p'roviso 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-BJ
Keshavlal Pramchand v. Commissioner of Income-tax, Ahmedabad,
31 l.T.R. 7,
Commissioner
of Income-tax
Nagpur
v. Ram
Gopal
Kanhaiya/al, 38 I.T.R. 193, Manohar Lal Munshi Lal v. Commissioner of
Income-tax, New Delhi, 44 l.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. 809, Hanuman Investment Company v. Conzmis-
.sioner 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 1961.
538
SUPREME COURT REPORTS
(1969] I S.CR.
B. Sen, B. D. Sharma and R. N. Sachthey, for the appellant
A
(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
Gro.-er, 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. JO 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, 1952.
In the personal business of commission agency, the assessee returned a net profit of Rs. 2,76 I. In
arriving at this figure the net share of loss of R_s. 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 Prasad.
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 sctting 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 K esilal'/a/ Pramchand v. Commissioner of Income-tax. Ahmedabad('). Thereafter
the assessce moved the Trihunal for making a reference to the
High Court. The High Court did not accept the view in Keshavla/ 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
(!) 3t t.T.R. 7.
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c.r.T. v. JAGANNATH (Grover, J.)
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 ill the nature of a
business shall 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 Keshav/nl 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 nature).
Mr. 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 functi?n of a _proviso which was to except or take out a particular porUon from the field dealt with by the section.
Chagla,
C.J., who delivered the judgment of the Bombay Bench, had no
clifficulty 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-
(!) 31 l.T.R. 7.
540
SUPREME COURT REPORTS
(1969] I S.C.R.
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 rnken into account except to the extent
-0[ the amount of profits and gains, if any, in any other busmcss
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 Commis .• ;011er
of Income Tax, Xai;rmr v. Ram Gopa/ Kanlwiya /,al(')
as also
by the Division Bench of the Punjab High Court in Marwhar Lal
Muns/ri /,a/ 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: iaw and examining the various
aspects relevant to the question the view expressed by Chagla. C.J.
in the Bombay case was accepted as correct. Similarly in Jun•mar
Lal Surajkaran
v.
Commissioner of Income Tax('), Hanuml!n
Investment Companv
v.
Commisi"ioner of Income Tax('). and
Joseph John v. Con1min·ioner of fllcome Tax( 6 ), the considerations which prevailed in Keshavlal Pramchand's(')
case
w.~rc
accepted as correct.
It would appear that so far as this Court is concerned the
matter now stands concluded bv the following observations in
Commissioner of Income Ta . .;,
Gujarat v. ~ Kantilul Nat/111
Clrand ( ') :
(t)
(3)
(5)
(7)
"Section 24 i;, thus. a provision laying down the
manner of computation of total income. The principal
clause of section 24 (I) lays down that. if there be a
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 result would
have been that all losses incurred by an assessee under
any of the heads mentioned in section
6
would
be
ad.iusted 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,
38 1.T.R. 193.
(2) 44 l.T.R.
45 l.T.R. 148.
(4)
47 I.T.R.
48 I.T.R. 915.
(6)
SI J.T.R.
31 I.TR. 7.
(8)
[1967) t S.CR. 813;
6) l.T.R. 318.
618.
809,
322.
321.
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,,
C.J.T. v. JAGANNATH (Grover, J.)
however, lays down an exception to this ge:ieral rule
contained in the principal clause. The excepuon rel!J.teS
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 othe~ heads
mentioned in section 6 for purposes of computmg 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 p10iits
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 inanner
in which the total income of the assessee is to be com·
puled.
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 ellher
from property or from ready business in kappas".
541
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 reasonin_g stand in view of what has been laid down in
Kantilal Nathu Chand's(') 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 respeg_t of the assessment
years 1958-59 and 1959-60. The concluding portion cf the
passage extracted leaves no room or doubt in this matter.
Moreover we are of the opinion that where the language 1s
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 terr.is that any
losses sustained in speculative transactions which are in tl;e nature
of a business shall not be taken into account except to the extent
(I) [1967] I S.C.R 813; 63 I.T.R. 318.
542
SUPREME COt:RT REPORTS
[1969] ] S.C.R.
of the amount of profits or gains in any other business c0nsisting
of speculative transactions. This has to be read with FxplanatioP
(I) according to which where the speculative transactions carried
on arc 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 asscsscc and in favour of the Department.
The appeals arc
accordingly allowed with costs. There will be one hearing fee.
V.P.S.
Appeal.< a/lowed.
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