1981 PTD 129 (PLP)

MUHAMMAD HABIBULLAH, J.‑This is a reference under section. 66(l) of the Income‑tax Act, 1922 by the Income‑tax Appellate Tribunal (Pakistan), Lahore, made at the instance of the applicant Raees Ghazi Muhammad Khan, whereby the following question of law which is said to arise from the Tribunal's consolidated order dated 23‑9‑1969, made in I. T. As. Nos. 1918 and 1919 of 1966‑67, has been referred for opinion of this Court: "Whether on the facts and in the circumstances of the case the Tribu nal was right in upholding the decision of the officers below wherein it was held that share of losses from Messrs Faiz Jillani & Co., Karachi incurred and allocated in the previous years, could not be given set‑off against the share profit of the firm Messrs Shabbir Cotton Factory, Walhar received daring the assessment year?"

2. The facts of this case in brief are that the applicant is a partner of two registered firms, namely Messrs Shabbir Cotton Factory, Wahlar and Messrs Faiz Jillani & Co. Karachi, both of which are engaged in doing cotton ginning business. Both these `concerns suffered losses for a number of years prior to the two assessment years under consideration, namely, 1964‑65 and 1965‑66, during which years they made profits. The assessee claimed that his share of losses determined in the previous years in Messrs Faiz Jillani & Co. be brought forward and set‑off against the share of profits for the assessment year 1964‑65 in question for both the firms a; a whole. The Income‑tax Officer however, allowed the brought‑forward losses of Messrs. Faiz Jillani & Co. to be set‑oil against the profits earned from that concern, but refused to set‑off the same against the share of profits earned from Messrs Shabbir Cotton Factory. In the year 1965‑66 the Income‑tax Officer accorded a similar treatment to the assessee. The assessee's appeals before the Appellate Assistant Commissioner having failed, be brought I. T. As. No. 1918 and 1919 of 1966‑67 before the Tribunal. The decision of this case turns on interpretation of section 24 of the Income‑tax Act, 1922, which deals with set‑off of loss. The Tribunal relying on its earlier decision in a similar case reported as (1969) 12 Taxation 112 dismissed the appeals.

3. The decision of this reference, as already observed, depends entirely on the interpretation of section 24(2) of the Income‑tax Act, which was amended by Finance Act XXV of 1960. The amended section 24 of the Act reads as follows:- "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 bead in that year: Provided that where an assessee is engaged in speculative transactions, which are in the nature of business, such transactions shall, notwith standing 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, as any loss sustained by him in such business shall be set off only against the income, profits and gains of that business: . . . . (2) Where any assessee sustains a loss of profit or gain in any year, being a previous year not earlier than the previous year for the assessment of the year ending on the 31st day of March, 1940, under the head "Profits and against of business, profession or vocation", and the loss cannot by wholly set‑off under subsection (1), so much of the loss as is not so set off, or the whole of the loss where the assessee has no income under any other head, shall be carried forward to the following year; and (i) where the loss was sustained by him in a business consisting of speculative transactions, it shall be set off only against the profits and gains, if any, of the business in speculative transactions carried on by him in that year ; (ii) where the loss was sustained by him in any other business, profession, or vocation, it shall be set off against the profits and gains, if any, of such business, profession or vocation if such business, profession or vocation continued to be carried on by him in that year ; and if the loss, in either case, cannot be wholly so set off, shall be carried forward to the next year and so on but no loss shall be carried forward for more than six years , . . . , . ".

4. The above lays down the principles of set off of loss. Under sub section (1) the loss in one head can be set off against the income, profits or gains in any other head in that year but no such facility has been provided for in subsection (2). Here the loss can be set off from the profits and gains under the same head i.e. No. (iv) of section 6, which is "profits and gains of business, profession or vocation". For the purpose of set off under subsection (2), the business has been split into two, namely, speculative and non‑speculative. Clause (i) of subsection (21 deals with set off in a business in speculative transactions. What those transactions are have been brought out in the First Explanation at the end of subsection (2). The words "any other business . . " occurring in clause (V) should, therefore, mean any business other than that consisting of speculative transactions. Under clause (ii) of subsection (2) if the loss in a non‑speculative business, profes sion or vocation cannot be set off tinder subsection (1) because of the absence or inadequacy of the profits of the same year under that head or any other head, the loss may be carried forward and set off against the profits of such business, profession or vocation of a subsequent year. This right to so carry forward and set off the loss is, however, subject to the following restrictions: (1) the loss must be in a business, profession or vocation, (2) the loss must be set off against the same head i.e. business, profession or vocation, (3) the business, profession or vocation in which the loss was incurred must be continued to be carried on by the assessee in the year in which the carried forward loss is sought to be set off, (4) the loss can be set off only against the profits of the assessee who incurred the loss, and (5) the loss cannot be carried forward beyond six years.

5. The Tribunal's interpretation of the section is that it allows set off of loss sustained in one business against the profits and gains of that business alone and of no other. This view is expressed as follows :‑‑ "The word `such' used in clause (ii) refers only to that business, profession or vocation from which the loss has emanated and which business is continued during the year the set off is claimed. As already pointed out when the Legislature chose to use the word 'such' it clearly did not mean `any' and it could be only by the use of this later word that the learned counsel contends would have been the undeniable position. We are clear in our minds that the word `such' in clause (ii) neither means 'any and every' business nor it means business of like nature. Whenever the word `such' is used to denote a kind only it is followed by the word 'as' and when the phrase is 'such as' it does mean things of like nature. For still better reasons we have already found that the word 'such' refers only to the losing business and not every and any business. On this view of the matter we find all the three appeals are misconceived. The set off was rightly refused when the loss which was sought to be set off was not against the income of the business, profession and vocation from which the loss arose." .

6. A question, therefore, arises whether the words 'any other business ' read with the words 'such business' occurring twice in clause (ii) are to be given a restricted interpretation to mean that the set off is to be allowed only against the profits and gains of the same very business, profession or location in which the loss had originally occurred and not of any other business, profession or vocation which the assessee has been and is carry ing on. To my mind the words 'any other business . .' undoubtedly mean every business other than speculative and the word 'such' occurring in clause (ii) refers to such non‑speculative business, profession or vocation. The set off, therefore, can be claimed against the income and gains derived from any non‑speculative business, profession or vocation not necessarily being the same business, profession or vocation from which the loss had arisen.

7. Subsection (2) of section 24 of the Indian Income‑tax Act, 1922, had come up for interpretation in Produce Exchange Corporation Ltd. v. Commis sioner of income‑tax (1971) 24 Taxation

1. The subsection there read as follows :.‑ "Section 24.‑(2) Where any assessee sustains a loss of profits or gains in any year, being a previous year not earlier than the previous year for the assessment for the year ending on the 31st day of March, 1940, under the head 'profits and gains of business, profession or vocation', and the loss cannot be wholly set off under subsection (1), the portion not so set off shall be carried forward to the following year and set off against the profits and gains, if any, of the assessee from the same business, profession or vocation for that year; and if it cannot be wholly so set off, the amount of loss not set off shall be carried forward to the following year and soon; . . ." The Supreme Court of India after noting that there was difference of opinion among the High Courts, as to the meaning of the words "the same business", held that "the share business and other businesses carried on by the appellant‑Company constituted the same business within the meaning of section 24(2)". The Supreme Court of India rejected the High Court's view that the decisive test for determining whether the two lines of businesses constitute the same business is the nature of the two businesses, and expressed that the test was a common management of the share and stock business and other lines of business, unity of trading organization, common employees, common administration, common fund and common place of business. The words 'any other business . . .' and 'such business' used in subsection (2), clause (ii) of our law are amenable to a wider interpretation than the words `the same business' occurring in the Indian law as aforesaid.

8. The view taken by the Tribunal had also been examined in Rais Pit' Ahmad Khan's case, and it was held that .the Tribunal was not justified in holding that the share of losses from Messrs Faiz Jillani & Co, incurred and allocated in the previous years, could not be given set off against the share of profits of the firm Messrs Shabbir Cotton Factory, received during the same assessment year, under section 24(2) (ii) of the Income‑tax Act, 1922. Learned Judges interpreted section 24 as follows :‑ "Reading clauses (i) and (fi) of subsection (2) of section 24 in juxtaposi tion with each other, it is evident that the business is divided into two; categories. Clause (i) deals with losses sustained by an assessee in a business consisting of speculative transactions while clause (ii) deals with losses sustained by him in any other business. In the context the term 'such business' occurring twice in clause (ii) of subsection (2) of section 24 has reference to business other than the speculative business which forms the subject-matter of clause (i) 60 above."

9. The contention advanced on behalf of the respondent that' 'any other business' and 'such business' appearing in clause (ii) of subsection (2) of section 24 mean that very businesses in which the loss was sustained, and not any other business, because the word 'loss' is controlled and qualified by these phrases, had also been considered but repelled in Messrs Sainrapt & Et. Brice, Karachi v. The Commissioner of Income‑tax (West),Karachi (P L D 1979 Kar. 591). It was expressed in that case as follows :‑‑ " Mr. Mansoor Ahmad Khan, learned counsel for the Commissioner while interpretation put by the Tribunal on the words such business in clause (ii), submitted that the word such must be read as referring back to the last antecedent, namely, business in which the loss was sustained. He referred to interpretation by the, Supreme Court of the word "such" appearing in section 13(3)(1)(ii)(b) of the West Pakistan Urban Rent Restriction Ordinance, 1959, in Abdul Aziz and another v. Muhammad Ibrahim and Stroud's judicial Dictionary, 4th Edition, Vol. 5, page 2662 as generally referring to the last antecedent. Moreover, he submitted that the words "such business" appearing in clause (ii) when they occur second time refers to the losing business since set off of losses of a losing business is permissible only if the losing business is continued to be carried, on in that year. Therefore, he submitted that if "such business" occurring at the second time in clause (ii) refers to the losing business, the words "such business" when they occur first time, must refer to the losing business as well. This argument prevailed with the Appellate Tribunal. We have considered these submissions but we are not impressed with the same. As observed earlier by us, the words "such business" refer to non‑speculative business. Of course, the words "such business" when they occur second time must refer to the losing business, that is to the losing business as a non‑speculative business. The interpretation put forward by Mr. Mansoor Ahmad Khan, learned counsel for the Commissioner, in our opinion, must give way as they lead to violation of the clear intention of the Legislature in amending the law." In view of the decision in Rais Pir Ahmad Khan s case, we find that on the facts and circumstances of this case, the tribunal was not justified in up holding the decision of the officers below that the share of losses from Messrs Faiz Jillani & Co., Karachi, incurred and allocated ire previous years could not be given set off against share, profits of the firm Messrs Shabbir Cotton Factory, Walhar received during the same assessment year, under section 24(2)(ii) of the Income‑tax Act, 1922. Our answer to the above question is, therefore, returned in the negative. However, in the circumstances of this case there shall be no order as to costs. Question answered in the negative.