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Civil Petition for Leave to Appeal No. u4‑K of 1983, decided on 30th January, 1986.

(On appeal from the judgment and order of the High Court of Sind, dated 22‑11‑1982, in I T R No. 117 of 1972).

Constitution of Pakistan (1973)‑‑

‑‑‑Art. 185(3)‑‑Income‑tax Act (XI of 1922), S. 24(1) & (2)‑ Interpretation of‑‑Question arising whether net loss suffered in speculative business, instead of bein6 distributed among partners should be carried forward for being set off against income from same business in subsequent years‑‑Income‑tax Appellate Tribunal and High Court taking view that loss in speculative business sustained by a registered firm could not be apportioned between partners of firm but such firm could carry forward loss for being set off in subsequent years in terms of subsection (2) of S. 24‑‑Supreme Court agreeing with such view found no force in petition for leave to appeal and dismiss it.

Commissioner of Income‑tax, Gujrat v. Kuntilal Oathuchand, Sami

(1967) 63 I T R 318; Commissioner of Income‑tax v. Messrs Haji Ferozuddin P L D 1967 Kar. 812 and Haji Mushtaq Ahmad v . Commissioner of Income‑tax P L D 1978 Kar. 414 ref.

Nasrullah Awan, Advocate Supreme Court with Muzaffar Hassan, Advocate‑on‑Record for the Petitioner.

Nemo for Respondents.

Date of hearing: 30th January, 1986.

ZAFFAR HUSSAIN MIRZA, J.‑‑

This petition for leave to appeal is by the Commissioner of Income‑tax (West), Karachi, against judgment, dated 22nd November, 1982, by a Division Bench of the High Court of Sind, Karachi, whereby a question of law referred by the said Commissioner, under section 66(1) of the Income‑tax Act, 1922, was answered in the affirmative.

2. The question referred to the High Court as originally framed was by consent of parties recast so as to read as under:

"Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the net loss suffered in a speculation business instead of being distributed among partners should be carried forward for being set off against income from the sane business, in subsequent years "

3. The statement of facts on which reference was made briefly is that the respondent, which will be called the assessee hereinafter, was a registered firm dealing in stock shares and bonus vouchers. During the assessment year 1967‑1968, the assessee declared a total loss of Rs.1,50,412 which included the loss of Rs.86,934 on account of speculative business. The Income Tax Officer who carried out the assessment for the year in question, after adjusting the profit of Rs.41,049 distributed the balance of loss among the four partners of the assessee firm. Being aggrieved the assessee filed an appeal against the assessment order before the Appellate Assistant Commissioner slid contended that the loss should not have been allocated among the partners, but instead, should have been carried forward in the firm's account for being set off against future profits from speculative business, if any, under section 24(2) of the Income‑tax Act, 1922, in the subsequent year. The contention of the assessee was accepted by the appellate Assistant Commissioner who reversed the decision of Income Tax Officer, in favour of the appellant, directing that the loss be carried forward and be set off against profits earned by the assessee, from speculative business in a subsequent years.

4. The department did not accept this order and appealed before the Income‑tax Appellate Tribunal. The contention raised by the department was that the losses from speculative business sustained by the assessee were from a business distinct and separate from the ordinary business of the assessee and could be a set off only against losses of the business under section 24(2) of the income‑tax Act, but the Income‑tax Appellate Tribunal agreed with the view taken by the Appellate Assistant Commissioner and dismissed the departmental appeal. Ultimately the department filed a reference under section 66(1) of the Income‑tax Act, as stated above, in which the High Court also agreed that the assessee was entitled to carry forward the loss for being set off against income from the same business in subsequent year. Hence this petition.

5. The contention of the department before the High Court was that second proviso to section 24(1) of the Income‑tax Act controlled the main section as well as the first proviso which was added by way of amendment in the year 1960. The argument was that the first proviso to section 24(la deals only with the disposal of loss suffered by an assessee in a speculative business and the second proviso provides for the manner in which the loss is to be apportioned in respect of a registered or unregistered firm. In this context it was urged that second proviso to section 24(l) is of general, nature while the first proviso deals with a specific subject, namely the disposal of loss suffered by an assessee in a speculative business. The interpretation of the expressions "such loss" and "any loss" used in the second proviso advanced by the department was that these expressions also include a loss suffered in a speculative business which is dealt with under the first proviso to section 24(1) of the Act.

6. The learned Judges of the High Court rejected these arguments and held that the first proviso to section 24(1) is in the nature of independent provision of law and is not controlled by the second proviso to section 24(1) which in its application is restricted only to losses computed under the main section 24(1) of the Act. This conclusion was arrived at by the learned Judges relying on Commissioner of Income Tax, Gujrat v. Kuntilal Oathuchand, Sami, (1967) 63 I T R 318, Commissioner of Income Tax v. Messers Haji Ferozuddin P L D 1967 Kar. 812 and Haji Mushtaq Ahmad v. Commissioner uC, Income Tax PLD 1978 Kar. 414. In Kantilal's case which is from the Indian jurisdiction, it was held, that the expressions "any such, loss" in the first part and "any loss" in the second part of the second proviso to section 24(1) of the Indian Income‑tax Act 1922, refer to the loss computed for the purpose of the main part of section 24(1) taken together with the first proviso thereto and do not comprise within their connotation the loss in speculative business which is not to be taken into account under the first proviso. In this case also the apportionment of loss from speculative business between the partners in the earlier year was challenged and it was claimed that the assessee which was a re6istered firm, was entitled to set off the profits from such business against the loss sustained by the firm in earlier years. This argument was accepted by the Indian Supreme Court by construing the crucial expressions mentioned above in the manner stated. In the Karachi case the learned Judges construed the first proviso to section 24(1) to be an overriding provision of law applicable to all cases arising under the Income‑tax Act, whether governed by section 24(1) or not. This view was taken having regard to the non obstante clause used in the said proviso, whereas the second proviso was held to be restricted to cases covered by section 24(1), namely, where the adjustment of loss was claimed by an assessee against his income profits or gains under some other head in the year. The department's contention that the second proviso is of general application and is not confined to the cases mentioned in section 24(1) was rejected. The third case of Haji Mushtaq Ahmad followed the view taken in the earlier Karachi case.

7. Learned counsel appearing in support of the petition has reiterated the argument advanced on behalf of the department before the High Court. We have perused the cases relied upon by the High Court and agree with the view taken therein. Learned counsel was unable to advance any argument justifying any different view on the interpretation of section 24(1) and the provisos contained therein. We are satisfied that the second proviso to section 24(1), while using the expression "any loss" refers to losses under any of the heads which can be set off against income, profits or gains under any other head in that year excluding losses in speculative transactions. Since the second proviso is intended to deal with the subject matter of the main enacting part of section 24(1) along with the first proviso, expression "any loss which cannot be set off against other income profits and gains of the firm" refers to such loss which an assessee firm is unable to set off against its other income profits and gains, under the main provision of section 24(1) along with the exception provides by the first proviso, namely, that the loss sustained by the firm in speculative business would be excluded. In other words the combined effect of section 24(1) and the first proviso is that an assessee can set off his loss under one head of income, profits or gains as against another such head except the loss sustained by him in speculative business. The second part of the second proviso deals with the situation where a registered firm is unable to set off its loss under one head as against other heads of income, profits and gains, excluding speculative business, then such loss is to be apportioned between the partners of the firm, who can then take advantage of the main provision of section 24(1) that is, they can set off the loss apportioned to each one of them against their income, profits and gains under other heads in their individual capacity as assessee. The result is that the loss in speculative business sustained by a registered firm cannot be apportioned between the partners of the firm, but such firm can carry forward the loss for being set off in subsequent years in terms of subsection (2) of section 24 of the Income‑tax Act, 1922. We are, therefore, unable to agree with the contention that the second proviso also covers loss sustained in speculative business. In this view of the matter we are in agreement with the following observations of the Appellate Tribunal in its order dated 10th May, 1971:‑

"Losses having occurred in speculative business, the provisions of section 24(1) of the Income‑tax Act would not be attracted; consequently, therefore, there was no question of this loss being apportioned amongst the partners under the second proviso to section 24(1) of the Act. The appropriate provision in this case was contained in section 24 clause (2), which provided for carrying forward such, a lose for being set off against profits earned by the firm, from the speculative business in a subsequent year. "

8. For the foregoing reasons, we find no force in this petition which is accordingly dismissed.

M.I. Petition dismissed.

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