P L D 1967 Karachi 812 (PLP)

WAHIDUDDIN AHMED, J.‑This is a reference under section 66 (1) of the Income‑tax Act, 1922 by the Income‑tax Appellate Tribunal at the instance of the Commissioner of Income‑tax, South Zone, Karachi. Respondent Haji Ferozud din, the assessee, was a partner owning 1/2 share in a registered firm known as Messrs National Rubber Works, Sialkot. The assessee was also a partner in an unregistered firm working under the name and style of Messrs Munawar & Co. Karachi. In the assessment year 1952‑53 the respondent disclosed profit of Rs. 50,568 in the registered firm and loss amounting to Rs. 60,812 in the unregistered firm. He claimed the adjustment of his loss in the unregistered partnership against his profits in the registered partnership firm. The Income‑tax Officer by order dated 18th March 1957 disallowed the assessee to set off his share of loss on the ground that he was not entitled to do so under the second proviso to section 24 (1) of the Income‑tax Act. The assessee's appeal to the Appellate Assistant Commissioner proved infruc tuous. The assessee then filed further appeal to the Tribunal. The learned Tribunal by order dated 9th February 1961, relying on a decision of the Nagpur High Court in Mohanlal Hiralal v. Commissioner of Income‑tax, C. P. and Berar, Nagpur ((1952) 22 I T R 448) upheld the objection of the assessee and held that on the facts and circumstances of the case the assessee was entitled to set off his loss from the unregistered firm against his income from the registered firm. Thereupon the. Department moved an application under section 66 (1) and the learned Income‑tax Appellate Tribunal by order dated 25th July 1961 has referred the following question of law to this Court for its opinion :‑ "Whether in the facts and circumstances of the instant case the Tribunal was right in allowing the assessee to set off his share of loss computed in the unregistered firm at Rs. 60,812 as a partner in an unregistered firm as against his share income from a registered firm under the head business for the same charge year?" There is no dispute between the parties that the assessee Haji Ferozuddin in the relevant assessment year was a partner in National Rubber Works, Sialkot and was also a partner in Messrs Munawar & Co. at Karachi. The Sialkot firm was registered but the Karachi firm was an unregistered partnership firm. It is also not disputed that the assessee earned profit of Rs. 50,568 in the registered partnership business and suffered a loss amounting to Rs. 60,812 in the unregistered partnership firm. In support of the reference Mr. S. A. Nusrat, the learned counsel for the Department, has contended that under the second proviso of section 24 (1) if the profits of an unregistered firm are not assessed under the provisions of clause (b) of subsection (5) of section 23 in the manner applicable to a registered firm its loss can be set, off only against the income, profits and gains of the firm and not against the income, profits and gains of any of its partners. Thus the main contention of the learned counsel is that the second proviso of the above‑mentioned provision of law being an independent provision would also be taken into consideration in computing the income of an assessee under section 10 of the Income‑tax Act. At this stage it may be mentioned that before the amendment of sections 16 (I) and 24 (1) of the Income‑tax Act in 1939 the Privy Council in Arunachalam Chattiar v. Commissioner of Income‑tax (AIR 1936 P C 133) while interpreting the provision of section 24 (2) of the unamended Act held that Schwabe, C. J. in Commissioner of Income‑tax, Madras v. Arunachalam Chettiar (47 Mad. 660) rightly rejected the contention in that case that an unregistered firm was for income‑tax purposes an entity or that the same person as an individual and partner of a firm is two separate entities merely because the business of the firm is a separate business and the firm is treated as an assessee. In this connection their Lordships observed at page 136 : "From section 24 (2), Income‑tax Act, it would seem that the Indian Legislature thought it necessary to anticipate any possible apprehension that a partnership, by being registered as a registered firm within the meaning of section 26 of the Act might be treated as separate assessee in so absolute a sense as to prevent a partner's share of loss being set off against his individual profits or gains. In their Lordships' opinion whether a firm is registered or unregistered, partnership does not obstruct or defeat the right of a partner to an adjustment on account of his share of loss in the firm, whether the set off be against other profits under the same head of income within the meaning of section 6 of the Act or under a different head, in which case only need recourse be had to section 24 (1). So long as the set‑off is of his share of loss made by the firm in the year of account, the adjustment does net involve the taking of any general or other account between the partners or indeed any examination of the accounts of the individual partners in the books of the firm." This position is not disputed by Mr. S. A. Nusrat. His contention is that after the Legislature amended section 16 (1) and section 24 (1) of the Income‑tax Act there is now a bar on the partners of an unregistered firm to claim set off of loss in that business against their profits in other business carried on by them. In order to appreciate the contention of the learned counsel it would, therefore, be necessary to reproduce the above provisions of law : "16 (1) (b) In computing the total income of an assessee‑ (b) when the assessee is a partner of a firm, then, whether the firm has made a profit or a loss, his share (whether a net profit or a net loss) shall be taken to be any salary, interest, commission or other remuneration payable to‑ him by the firm in respect of the previous year increased or decreased respectively by his share in the balance of the profit or loss of the firm after the deduction (super‑tax) payable by the firm, if any, and of any interest, salary, commission or other remuneration payable to any partner in respect of the previous year : Provided that if his share so computed is a loss such loss may be set off or carried forward and set off in accordance with the provisions of section 24:‑ 24. (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 entitled to have the amount of the loss set off. against his income, profits or gains under any other head in that year Provided that where an assessee is engaged in speculative transaction, which are in the nature of business, such transac tions shall, notwithstanding anything to the contrary contained in any law for the time being in force, be deemed to constitute a business distinct and separate from any other business carried on by the assessee, and any loss sustained by him in such business shall be set off only against the income, profits and gains of that business Provided further that where the assessee is an unregistered firm which has not been assessed under the provisions of clause (6) of subsection (5) of section 23 in the manner applicable to a registered firm, any such loss 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 ; and where the assessee is a registered firm, any loss which cannot be set off against other income, profits and gains of the firm shall be apportioned between the partners of the firm and they alone shall be entitled to have the amount of the loss set off under this section." It will be noticed that under section 16 (1) (b) it is provided that in computing the total income of an assessee his share of profits in a firm shall be computed in the manner provided in it. The proviso lays down that if his share so computed is a loss such loss may be set off in accordance with the provisions of section 24 (1). It is not disputed by the learned counsel for the Department that section 24 (1) deals with the set‑off of losses under one head of income against the profits and gains of any other head of income in that year. This was rightly conceded by the learned counsel in view of the above decision of the Privy Council and a decision of the Supreme Court of India in Anglo‑French Textile Company Ltd. v. Commissioner of Income‑tax, Madras ((1953) 23 I T R 82). In the last mentioned case it was held that a set‑off under section 24 (1) can only be claimed when the loss arises under one head and the profits against which it is sought to be set off arises under a different head. When the two arise under the same head of course the loss can be deducted but that is done under section 10 and not under section 24 (1). But the learned counsel has very strongly contended that the two provisos which have been added to section 24 (1) are independent provisions of law and have modified the method of computing the income of the assessee under section 10 of the Income‑tax Act. His argument is that section 16 (1) (6) applies both to registered and unregistered firms and lays down the manner in which the losses should be adjusted, namely, under section

24. His contention is that when we come to this provision of law the concession granted to the assessee for set‑off of losses under the Income‑tax Act has been subjected to two embargoes. According to the learned counsel irrespective of the fact whether the case of an assessee is covered by section 24 (1) or not in casts (1) where the assessee is engaged in speculative transactions which are in the nature of business, such transactions, notwithstanding anything to the contrary, shall be deemed to constitute a business distinct and separate from any other business carried on by the assessee, and any loss sustained by him in such business shall be set off only against the income, profits and gains of similar business, and, (2) where an assessee is an unregistered firm having not been assessed under the provisions of clause (b) of subsection (5) of section 23 in the manner applicable to a registered firm, any such loss shall be set off only against the income, profits and gains of the firm and not of any of the partners of the firm. In support of his contention that these two provisos are independent provisions of law and are of an overriding character, the learned counsel has referred us to a decision of the Bombay Court in Keshavlal Premchand v. Commissioner of Income‑tax, Ahmedabad ((1957) 31 I T R 7) in which proviso (1), which is substantially in similar terms, was interpreted to be an independent provision of law. In this connection the learned Judges observed as under:‑ "It is clear, on the language of the proviso itself and on the scheme of the Act, that the Legislature in enacting the so‑called proviso was enacting a substantive provision dealing with the mode of computing the profits and gains chargeable under the head "profits and gains of business, profession or vocation", and what the Legislature has provided is that when you compute these profits and gains, the loss sustained in a speculative transaction must not be taken into account except to the extent of the amount of profits and gains, if any, in any other business consisting of a speculative transaction." Mr. Nusrat has further referred us to another Indian Supreme Court decision in Commissioner of Income‑tax, Bombay City II v. Jadavji Narsidas & Co. ((1963) 48 I T R S C 41) in which the Indian Supreme Court observed "Now under section 24 (1), second proviso, the losses of the unregistered firm of Jamji and these four partners can only be set off against the income, profits and gains of the unregistered firm and not those of its partners."

2. In reply Mr. Iqbal Naseem, Pasha, the learned counsel for the respondent and Mr. Ali Athar who appeared as amicus curiae in this case contended that the share of a partner in the income of a firm falls under the head profits and gains of the business provided in section 10 of the Income‑tax Act and his total income from this source ought to be computed under the head "business" under section 10 unless a contrary intention appears in any other part of the enactment. They contended that the treatment of losses under section 24 is only for the purposes of setting off losses under different heads and when section 16 (l) (b) refers to section 24 (1) it refers only to those cases where a set‑off is claimed under different heads. They strongly contended that if an assessee claims set off under the same head section 24 has no application to such cases. In support of their contention learned counsel referred to the above Privy Council decision in which their Lordships have clearly observed that section 24 (1), which is still in the same language as before, is to he resorted to when the set‑off is in respect of different heads. They have further referred to the two Indian decisions. One of them is the Nagpur decision referred to above which was relied upon by the learned Tribunal. The second one is a recent decision of the Bombay High Court in Commissioner of Income‑tax, Bombay South v. Jagannath Narsingdas ((1965) 55 I T R 128). In that case identical arguments were advanced as have been put forward on behalf of the Department before us and they were rejected by the Bombay Court on the following observations :‑ "In computing the business income of an assessee under section 10 of the Indian Income‑tax Act, 1922, the assessee is entitled to adjust his share of the loss sustained by an unregistered firm in which he is a partner against the profits made by him in a business carried on by him individually. The principle so laid down by the Privy Council in Arunachalam Chettiar v. Commissioner of Income‑tax (1936) 4 I T R 173 P C continues to apply after the amendments in 1939 of sections 16 (1) (b) and 24." The learned judges further observed : "So long as the adjustment that the assessee seeks is in his income under the same head, namely, business, there is nothing in the proviso to section 16 (1) (b) or the second proviso to section 24 (1) which would preclude him from seeking that adjustment under section 10 of the Act. Section 24 has no application where the set‑off is not of loss under one head of income against profits under another head but is a case of adjustment and set‑off between the profits and losses under the same head. The adjustment of profits and losses under the head of business is to be done not under section 24 but under section 10."

3. The short question, therefore, for consideration is : what is the nature of the second proviso to section 24 (1), whether it is an independent and substantive provision of law or is confined to the cases mentioned under section 24 (1) ? So far as the Pakistan Act is concerned, there seems to be not so much difficulty as in the Indian enactment. Reference to proviso 1 to section 24 (1) of the Income‑tax Act would show that under it the intention of the Legislature was clearly to make it an overriding provision of law ; and, therefore, no doubt can be entertained that it is a substantive and independent provision and is applicable to all the cases arising under the Income‑tax Act, whether governed by section 24 (1) or not. This is quite clear from the language used by the Legislature, namely, the words "notwith standing anything to the contrary contained in any law for the time being in force". Thus whatever is provided in the first proviso to section 24 (1) is of an overriding nature and has a general application and is not limited to the cases arising under section 24 (1) of the Income‑tax Act.

4. The same however cannot be said about the second proviso. No such overriding phraseology has been used in it. It is no doubt true that it is in general terms but can it be said that it is applicable to other cases also which are not covered by section 24 (1), namely, where the adjustment of loss is claimed by an assessee against his income, profits or gains under the same head in that year. If seems to us that the Department' contention that it has a general application and not confined to the cases mentioned in section 24 (1) cannot be accepted as good argument. In the first place, the well established rule o interpretation of a statute is that a proviso can only operate to deal with a case which but for its existence would have fallen within the ambit of the main section to which the proviso is attached. The principle underlying this is that the main section covers a particular field and the proviso takes out or carves out from that a particular situation and therefore to that extent modifies the main provision of the section. This is what was held by the Privy Council in the Madras and Southern Mahratta Railway v. Bezwada Municipality ((1945) 47 Bom. L R 587). Lord 'Macmillan at page 589 of the report in this connection observed : "The proper function of a proviso is to accept and deal with a case which would otherwise fall within the general language of the main enactment, and its effect is confined to that case. Where the language of the main enactment is clear and unambiguous, a proviso can have no repercussion on the interpretation of the main enactment so as to exclude from it by implication what clearly falls within its express terms." It is in this light that we have to consider whether the second proviso is an independent provision of law or modifies only the field covered by section 24 (1). The argument of Mr. Nusrat that under' the proviso to section 16 (1) (b) in computing the total income of an assessee, who is a partner of a firm, his losses should be set‑off in accordance with the provision of section 24 and in no other manner has not impressed us. It seems to us that in referring to section 24 in the proviso to the above provision of law the Legislature was only contemplating a case where a set‑off of the nature provided in section 24 (1) is likely to arise. On the language of this proviso it cannot be held that though the case of the assessee does not fall under it that is the only manner in which such a loss would be adjusted or set‑off against his profits as a partner. The language used in it is of a directory nature. Therefore, whenever a set‑off is claimed under section 24 (1) it shall have to be considered whether it is of the nature mentioned in it, that is, in respect of other heads mentioned in section 6 of the Income‑tax Act. The use of the word `may' in the proviso to section 16 (1) (b) is very significant: Secondly, the language used in the second proviso clearly indicates that it is applicable only to the cases arising under section 24 (1) and to no other situation. Otherwise nothing prevented the Legislature to use the same words as in proviso 1 to section 24 (1). It is, therefore, perfectly clear to us that wherever the partner of an unregistered firm claims a set‑off of his losses under one head against profits of another head he will be governed by section 24 and consequently subject to the second proviso attached to it ; and if the assessment has not been made against unregistered firm under section 23 (5) (b) of the Income‑tax Act his losses of that business cannot be adjusted against his income under any other head. But if the adjustment is claimed in respect of his income under the same head, as in the present case, from other sources under the head "business" there is nothing in the second proviso to section 24 (1) read with the proviso to section 16 (1) (b) of the Act which should prevent him from claiming it as a set‑off under section 10 of the Income‑tax Act. The cases cited by the learned counsel for the Department have no bearing on the facts of the present case. In the Bombay case only proviso 1 to section 24 (1) was under consideration, and on its phraseology it was held to be a substantive provision of law, but as discussed earlier this cannot be said about the second proviso to section 24 (1). It is in a different language and applies only to the cases arising under section 24 (1) and deals with no other situation. The Indian Supreme Court decision is also distinguish able because the point there was in respect of the adjustment claimed by a firm consisting of four partners who were also partners in another firm in which a stranger was also a partner. That case therefore dealt with a different situation altogether and the principle of law enunciated therein has no bearing on the facts of the present case. In these circumstances we are of the view that the principle of law enunciated in 1936 P C 133 at page 136 that whether a firm is registered or unregistered partnership does not obstruct or defeat the right of a partner to an adjustment on account of his share of loss in the firm, when the set‑off be against other profits under the same head of income within the meaning of section 6 of the Act still holds the field.

5. We would, therefore, answer the question referred to this Court in the affirmative. In the special circumstances of the case, we would however direct the parties to bear their own costs. S. Q. Reference answered in the affirmative.