# COMMISSIONER OF ll"COME-TAX, GUJARAT v. KANTIJ,AL NATHUCHAND SAMI

- **Citation:** [1967] 1 S.C.R. 813
- **Court:** Supreme Court of India
- **Decided:** 1966-10-11
- **Case number:** Civil Appeal No. 676 of 1965
- **Bench:** J. C. Shah, V. RAMAsWAMI, V. Bhargava
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-ll-come-tax-gujarat-v-kantij-al-nathuchand-sami-3920
- **Pages:** 8

## Headnote

813
Il)dian Income-tax, 1922, s. 24--Registered firm suffering loss in specu-·
lation business for two years--Such loss whether to be apportioned among·
partners or to be carried forward and set oO against profit in speculation
business in the subsequent year.
The respondent firm had income from property, ready business in
kappas, and also speculation business.
It was registered under s. 26A of
the Indian Income-tax Act, 1922, for the assessment years 1958-59, 195960 and 1960-61.
In the accounting periods relating to the assessment years
1958-59 and 1959-60 the firm suffered loss in the speculation business. Tbe
Income-tax Officer did not set off this loss against the income from property
and ready kappas business but apportioned it between the partners of the
firm.
In 1960-61 there was profit in the speculation business and the Ihm
claimed that the loss in
that business in the preceding two. years should
be set off against the said profit.
According to the firm the Income.tax
Officer was wrong in apportioning the speculation loss between the partners
in 1958-59 and 1959-60. The plea was not accepted by the Income-tax
Officer or the Appellate Ass'.stant Commissioner. But the Tribunal in further appeal, and the High Court in reference under s. 66A accepted it. The
Revenue appealed to this Court.
HELD : (i) The principal clause of s. 24( I) lays down that if there be
a loss of profits or gains in any year under any of the heads in s. 6, that
loss has to be set off against the income profits or gains of the assessee
under any other bead in that year. The first proviso to the clause however
lays down an exception to the above rule, namely, that the 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 \vhich itself consists of speculative transactions.
In the present case 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.
[816 D-H]
(ii) The Income~tax Officer howev-er erred in apportioning the said speculation loss in the years 1958-59 and 1959-60 between the partners and
in Mt carrying it forward and setting it off against the profit in speculation
business in 1960-61.
The second proviso to s. 24( 1) in so far as it deals with registered
firms lays down that any loss \vhich cannot be set off against the income
profits and gains of the registered firm is to be apportioned behveen the
partners of the firm and they alone are entitled to have the amount set otT
under this section. Clearly the word 'any loss' here must refer to the loss
computed for purposes of the principal clause of s. 24( 1) taken with the
first proviso, and will therefore not comprise in it the loss in speculative
business which is not to be taken into account under the first proviso:
If
this T'nrt of the ~econd proviso were interpreted to include within it the ton
in speculative busin-:ss which is not to be taken into account under the fir~t
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SUPREMI! COURT RllPORTS
{1967] I S.C.R.
proviso, the effect of giving a wider meaning to the words 'any loss' in it
A
would be that the same loss in speculative business would, after apportionment, be set off against income profits and gains under other heads in computing the total income of the partners. The result would be that the effect
of the first proviso would be nullified by this part of the second proviso.
[817 E-HJ
Proviso (c} to s. 24(2) envisages the e<istence of !OS> which has not
been apportioned between the partners and this
clearly strengthens the
B
view that the second proviso to s. 24(1) does not cover loss in speculative
business and consequently does not pennit that loss to be appor

## Text

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COMMISSIONER OF ll"COME-TAX, GUJARAT
v.
KANTIJ,AL NATHUCHAND SAMI
October 11, 1966
(J. C. SHAH, V. RAMAsWAMI AND V. BHARGAVA, JJ.j
813
Il)dian Income-tax, 1922, s. 24--Registered firm suffering loss in specu-·
lation business for two years--Such loss whether to be apportioned among·
partners or to be carried forward and set oO against profit in speculation
business in the subsequent year.
The respondent firm had income from property, ready business in
kappas, and also speculation business.
It was registered under s. 26A of
the Indian Income-tax Act, 1922, for the assessment years 1958-59, 195960 and 1960-61.
In the accounting periods relating to the assessment years
1958-59 and 1959-60 the firm suffered loss in the speculation business. Tbe
Income-tax Officer did not set off this loss against the income from property
and ready kappas business but apportioned it between the partners of the
firm.
In 1960-61 there was profit in the speculation business and the Ihm
claimed that the loss in
that business in the preceding two. years should
be set off against the said profit.
According to the firm the Income.tax
Officer was wrong in apportioning the speculation loss between the partners
in 1958-59 and 1959-60. The plea was not accepted by the Income-tax
Officer or the Appellate Ass'.stant Commissioner. But the Tribunal in further appeal, and the High Court in reference under s. 66A accepted it. The
Revenue appealed to this Court.
HELD : (i) The principal clause of s. 24( I) lays down that if there be
a loss of profits or gains in any year under any of the heads in s. 6, that
loss has to be set off against the income profits or gains of the assessee
under any other bead in that year. The first proviso to the clause however
lays down an exception to the above rule, namely, that the 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 \vhich itself consists of speculative transactions.
In the present case 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.
[816 D-H]
(ii) The Income~tax Officer howev-er erred in apportioning the said speculation loss in the years 1958-59 and 1959-60 between the partners and
in Mt carrying it forward and setting it off against the profit in speculation
business in 1960-61.
The second proviso to s. 24( 1) in so far as it deals with registered
firms lays down that any loss \vhich cannot be set off against the income
profits and gains of the registered firm is to be apportioned behveen the
partners of the firm and they alone are entitled to have the amount set otT
under this section. Clearly the word 'any loss' here must refer to the loss
computed for purposes of the principal clause of s. 24( 1) taken with the
first proviso, and will therefore not comprise in it the loss in speculative
business which is not to be taken into account under the first proviso:
If
this T'nrt of the ~econd proviso were interpreted to include within it the ton
in speculative busin-:ss which is not to be taken into account under the fir~t
81'
SUPREMI! COURT RllPORTS
{1967] I S.C.R.
proviso, the effect of giving a wider meaning to the words 'any loss' in it
A
would be that the same loss in speculative business would, after apportionment, be set off against income profits and gains under other heads in computing the total income of the partners. The result would be that the effect
of the first proviso would be nullified by this part of the second proviso.
[817 E-HJ
Proviso (c} to s. 24(2) envisages the e<istence of !OS> which has not
been apportioned between the partners and this
clearly strengthens the
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view that the second proviso to s. 24(1) does not cover loss in speculative
business and consequently does not pennit that loss to be apportioned between the partners. [820 E-F]
Section 23(5) (a) of the Act also could not help the Revenue. Under
the first proviso to s. 23 (5 )(a) the share of a partner in a loss is r~uired
to be set off against his other income, or carried forward and set off 1n accordance with the provisions of s. 24, This proviso however does not refer
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to the loss incurred by a registered finn in speculative business which is
not to be taken into account when computing the total income of the registered firm under s. 23(1), (3) and (4) of the Act [818 HJ
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 676 of
1965.
Appeal from the judgment and order dated September 13,
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16, 1963 of the Gujarat High Court in
Income-tax Reference
No. 2 of 1963.
B. Sen, T. A. Ramachandran, S. P. Nayyar and R. N. Sachrhey,
for the appellant.
K. R. Chaudhuri, and K. Rajendra Chaudhuri, for the respondent.
Bbargava, J, The respondent is a firm which, for purposes
of assessment under the Income-tax Act (hereinafter referred to
as "the Act"), was registered under section 26A of the Act during
the assessment years 1958-59, 1959-60, and 1960-61. The respondent was earning income from property, ready business in
kappas, and also from speculation business carried on an extensive
scale.
During the assessment year 1958-59, the income from
property was assessed at Rs. 1,369/- and from ready business at
Rs. 28,449/-. There was a loss of Rs. 6,26,606/- in the speculation
business, The Income-tax Officer, in making the assessment for
that year, charged tax on the total of the income from property
and ready busine5s which amounted to Rs. 29,818/-. The loss
of Rs. 6,26,606/- was not set off against this profit in view of the
provisions of the first proviso to s. 24(1) of the Act. This loss
was, however, apportioned between the part!1ers by the Income-tax
Officer, purporting to act under the second proviso to the said subsection. Similarly, in the next assessment year 1959-60, where
there was income from property and Joss in ready business as well
as speculation business, no tax was imposed, as the loss in ready
business exceeded the income from property. The net loss of Rs.
1,239/-, worked out on the basis of loss in ready business reduced
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C.I.T. v. K. N. SAM! (Bhargava, I.)
815
by the income from property, was apportioned. between the partners. Further, the speculation loss of Rs. 5,416/· was also apportioned between the partners on the same basis as was done in the
preceding assessment year 1958-59. In the assessment year 1960:6.1,
there was an income of Rs. 1,014/- from property, and a loss of
Rs. 21,197/- from ready business. In addition, there was a profit
of Rs. 6,19, 784/- in the speculation business. Since this year there
was a profit in speculation business, the first proviso to s. 24(1)
did not apply, and the ne~ income of the respondent was worked
out by taking all the three figures into account. The· respondent
claimed
that
in
the
assessment
of the
respondent's
income in this year, the respondent was entitled to set off the
speculation losses of the two preceding assessment years 1958-59
and 1959..QO against the profits earned from speculation business
in this year, urging that the Income-tax Officer in the two earlier
years was wrong in apportioning the loss between . the partners.
The plea was that under the second proviso to s. 24(1 ), this loss in
speculation business could not be apportioned between the partners, and consequently, under s. 24(2), the respondent was entitled
to carry forward this loss and to have it set off against the profit
from speculation business under clause (i) of s. 24(2). This plea
was rejected by the Income-tax Officer whose order was upheld
by the Appellate Assistant Commissioner. On further appeal, the
Income-tax Appellate Tribunal, however, accepted the plea of
the respondent and held that the speculation josses sustained by
the respondent in the two preceding assessment years must be
adjusted against the profit earned in the account year in question
in speculation business. Thereupon, at the request of the Commiss\oner of Income-tax, the following question of law was referred
by the Tribunal for opinion to the High Court of Gujarat :-
"Whether on the facts and in the circumstances of
the case and 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 Rs. 6, 19, 784/- in its assessment for the assessment year 1960-61."
The High Court upheld the view of the Tribunal and answered
the question in favour of the respondent. This appeal has now
been brought up to this Court by the Commissioner of Income-tax
on certificate granted by the High Court under s. 66A(2) of the
Act.
The answer to the qu~stion referred to the High Court obviously
depends on the inkrpretation of the second proviso to s. 24(1) of
816
SUPREMB COURT REPORTS
[1967] l S.C.R.
the Act. Jn interpreting this provision, the purpose of s. 24{ I)
and (2) has to be kept in view. Under the Act, the Income-tax
Officer has to determine the total income of an assessee under
section 23(1), (3) or (4) of the Act. In determining this total income,
income under all the various heads enumerated in s. 6 has to be
taken into account. Sections 7 to 10 & 12 lay down the principles
on which the income under these various heads is to be computed.
In the case of income from business, profession or vocation, the
income has to be computed under s. I 0( I) of the Act. Section
10(2) of the Act lays down certain deductions which have to be
made in computing the profits and gains from business, profession
or vocation. It is during this computation to be made by the
Income-tax Officer under s. 23 of the income from business, profession or vocation in accordance with s. 10(1) of the Act that
the Income-tax Officer is further required to apply the provisions
of s. 24. Section 24 is, thus, a provision laying down the manner
of computation of total income. The principal clause of s. 24(1)
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 bead in that year. If this provision bad 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 s. 6 would be
adjusted against profits under all other heads, and then the total
income of the assessec would be worked out on that basis. The
first proviso to this sub-section, however, lays down an exception
to this general rule contained in the principal clause. The exception relates to income from business consisting of speculative
transactions, and places the limitation that losses sustained in
speculative transactions arc 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 other heads mentioned
in s. 6 for purposes of computing the total income of the asscssec
in order to determine the tax under s. 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 s. 24( I); 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.
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C.I.T. v. K, N. SAMI (Bhargava, J.)
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Then comes the second proviso, and it is clear from the language of this proviso that it does not deal with the computation of
the income of the assessee for purposes of determining the total
income. This second proviso was incorporated in order to indicate
the personality of the assessee for the purpose of applying the
principal clause of s. 24(1) taken together with the first proviso.
No difficulty could arise in applying the principal clause and the
first proviso together in the case of individuals, companies, Hindu
undivided families, etc.; but a provision was needed for cases
where the assessee happened to be a firm. This necessity arose
because of the special manner laid down in s. 23 itself for assessing
the income of a firm. That section lays down different rules for
assessment of unregistered firms and registered firms. In the
case of an unregistered firm, the total income computed by the
Income-tax Officer for determining the tax can be assessed by
apportioning that income between the partners, and determining
the tax payable by each partner on the basis of such assessment,
including his .income from other sources, as laid down in s. 23(5)(b)
of the Act. In the alternative, the Income-tax Officer may choose
to assess an unregistered firm as a unit by itself, and in that case,
the tax is determined as payable by the firm as a unit, so that the
provisions of s. 23(5)(b) are not applied. The second proviso to
s. 24(1) lays down that in such a case where an unregistered firm
is not assessed under the provisions of clause (b) of sub-section (5)
of s. 23, "any such .Joss shall be set off only against the income,
profits and gains of the firm and not against the income, profits
and gains of any of the partners of the firm."
Tt is clear that the
expression "any such loss" in this part of the second proviso can
only refer to the loss computed for purposes of applying the principal clause of s. 24(1) taken together with the first proviso. That
will, therefore, be the loss suffered by the unregistered firm in businesses other than speculative business. The loss incurred in the
speculative business by the unregistered firm is, thus, to be ignored.
If this part of the second proviso were to be interpreted as laying
down that the loss mentioned therein includes the loss from speculative business, the effect would be tl~at the provision contained
in the first proviso would be completely nullified. The effect of
the first proviso is that when setting off the loss of profits and
gains under one head against income, profits and gains under any
other head in accordance with the principal clause, the loss suffered
in speculative business is not to be taken into account and is to be
kept apart. If the word "loss" in the' first part of the second proviso were . to be interpreted as including the loss in speculative
business< also, the result woulcj be that the loss excluded under the
first proviso would be included in the assessment of total income
under the second proviso·. In the circumstances, 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
818
SUPREME COURT REPORTS
(1967) l S.C.R.
determined for purposes of the principal clause of s. 24{ I) read
with the first proviso, and, thus, does not comprise within it loss
incurred in speculative business referred to in the first proviso.
Then comes the second part of the second proviso which
prescribes the personality of the assessee to which the provisions
of s. 24 are to be applied in cases where the assessee is a registered
firrn.
Under this part, the loss, which cannot be set off against
other income, profits and gains of the registered firm, is to be
apportioned between the partners of the firrn and they alone are
entitled to have the amount of the loss set off under this section.
Clearly, in this part also, the words "any loss" must refer to the
loss computed for purposes of the principal clause taken together
with the first proviso, and will, therefore, l)Ot comprise in it the
Joss in speculative business which is not to be taken into account
under the first p.roviso. The aspect of this provision, which is of
importance, is that under it, the Income-Tax Officer is required to
.take two steps. The first is that the loss, which cannot be set off
against other income, profits and gains of the registered firm, has
to be apportioned between the partners of the firm, and then he
has to give effect to the right of the partners to have the amounts
of the loss set off under this section. Once again, if this part of
the second proviso were interpreted to include within it the loss in
speculative business which is not to be taken into account under
the first proviso, the effect of giving a wider meaning to
the words "any loss" in it would be that the same loss in speculative
business would, after apportionment, be set off against income,
profits and gains under other heads in computing the total .income
of the partners. The result would be that the effect of the first
proviso would again be nullified by this part of the second proviso.
Consequently, the correct interpretation must be that the words
"any loss" in this part of the second proviso also refer to the loss
computed for the purposes of the principal clause of s. 24(1) taken
together with the first proviso, so that it must also exclude the
loss in speculative business which is not to be taken into account
when computing the total income of the assessce. The language
used in the second proviso, thus, itself leads to the conclusion that
the decision arrived at by the High Court was correct, even though
on a different reasoning.
In this connection, learned counsel appearing for the Commissioner drew our attention 'to the first proviso to s. 23(5)(a) of
the Act, under which the share of a partner in a loss is required to
be set off against his other income, or carried forward and set off
in accordance with the provisions of s. 24. We do not think that
this proviso refers to the loss incurred by a registered firm in speculative business which is not to be taken into account when computing the total income of the registered firrn under s. 23( 1 ), (3) and
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(4) of the Act. Section 23(5Xa) clearly applies only to the totalincome of the finn which has been assessed under sub-s. (I), sub-s.
(3) or sub-s. ( 4) of s. 23, and does not apply to any other income or
loss. If si)eculative business of a firm has resulted in profit, that
profit, as we have indicated earlier, would be taken into account
when determining the total income of that firm.
But if there be
a net loss in all speculative businesses taken t"gether, that loss is
not to be taken into account when computing the total income,
and consequently, that loss would be outside the scope of s. 23(5)(a)
also. The first proviso to s. 23(5)(a) cannot be; therefore, held
to be applicable to loss in speculative business kept apart under the
first proviso to s. 24(1).
Coming to sub-section (2) of s. 24 on which reliance was placed
by learned counsel for the Commissioner, we find that, instead of
supporting the interpretation. sought to be put on behalf of the
Commissioner on the second proviso to s. 24(1 ), it supports the
view which we have arrived at on interpretation of the language of
s. 24(1) and its provisos. Clause (1) of s. 24(2) lays down that where
the loss was sustained by an assessee in a business consisting of
speculative transactions, it ·shall be set off only against the profits
and gains, if any, of any business in speculative transactions carried
on by him in that year. This is a general provision which is applicable to loss in speculative· business suffered by any assessee,
including a firm, and the limitation that it places is that speculative
E ,loss, kept apart under s. 24(1) and not set off against the income,
profits and gains of that earlier year, is only to be set off in a subsequent year, if there are profits in speculative transactions of the same
business. This provision is also, however,
governed by some
provisos, including proviso (c) which lays down- that : "nothing
herein contained shall entitle any assessee, being a registered
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firm, to have carried forward and set off any loss which has been
apportioned between the partners, under the proviso to sub-s. (I),
or entitle any assessee, being a partner in an unregistered firm
which has not been assessed under the provisions of clause (b)
of sub-s. (5) of s. 23 to have carried forward and set off against
his own income any loss sustained by ti)e firm." This proviso
is again divisible into two parts. One par{ relates to the case of
an unregistered firm and lays down an absolute prohibition against
setting off of Joss carried forward in the assessment of a partner.
of. an unregistered firm, which has been assessed as a separate
unit, by omitting to apply the provisions of cl. (b) of sub-s. (5) of
s. 23. This part, thus, does not envisage that, in the case of such
an unregistered firm, there would be any loss which could be_ apportioned between the partners. In the case of. a,_registered firm,
however, the provision made is in different language. It lays down
that "nothing herein contained shall entitle any assessee, being a
registered firm, to have carried forward and set off any loss which
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SUPREME COURT REPORTS
(1967] l s.c.R.
has been apportioned between the partners, under the proviso
to sub-section ( 1 ). "
Thus, it prohibits a claim being made by a
registered firm as such to set off loss in the future year against
profits in that year, which loss has been apportioned between the
partners under the proviso to s. 24(1 ). That loss would be the
loss taken into account in computing the total income under s.
23 in view of the principal clause of s. 24(1) read with the first proviso to it and will, thus, exclude the speculative loss which is not
taken into account. The language of this part of the proviso
clearly envisages that there could be loss which has not been
apportioned between the partners of a registered firm, so that the
registered firm can claim to have it carried forward and set off in
future years. Clearly, that can only be the loss in speculative business of the registered firm which is not taken into account, when
computing the total income of the firm under s. 23, in view of s. 24
(1). No question could have arisen of the Legislature recognising
the possibility of a firm claiming set off of any loss incurred in an
earlier year if, as contended on behalf of the Commissioner, even
the loss in speculative business were to be apportioned between
the partners under the second proviso to s. 24(1) On the interpretation sought to be placed on behalf of the Commissioner, loss,
other than loss in speculative business, has to be set off against the
income, profits and gains under any head of the assessee in view
of s. 24(1) read with its first proviso, while loss in speculative business would also have to be apportioned under the second proviso
leaving no loss unapportioned between the partners. The fact
that proviso (c) to s. 24(2) envisages the existence of loss which
has not been apportioned between the partners cleally strengthens
our view that the second proviso to s. 24(1) does not cover loss
in speculative business, and consequently, does not permit that
loss to be apportioned between the partners. Thus, s. 24(2) also
leads to the same conclusion which we have arrived at above on
the interpretation of the language of s. 24(1).
Jn view of the reasons given by us above, we are unable to
agree with the reasoning adopted by the Bombay High Court in
Commissioner of Income-tax, Bombay City I, v. Chimanlal J. Dalal
and Co.(1), and cannot accept the view of that Court that the decision given in the present case by the Gujarat High Court was
incorrect.
The appeal, therefore, fails and is dismissed with costs.
G.C.
Appeal dismissed.
(I) 57 l.T.R. 285.
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