COMMISSIONER OF INCOME-TAX (EAST), KARACHI Versus MESSRS IQBAL ENGINEERING WORKS
1. NOORUL ARFIN, J. ‑‑During the assessment year 1960‑61, the assessee was partner in an unregistered firm called `Hashmi Rice Mill" and also carried on his own separate business. The income from this separate business of the assessee was computed at Rs. 32,408 as against the assessee's share from the unregistered firm which turned out to be a loss to the extent of Rs. 8,513, The assessee claimed to set off this loss against the income from his individual business, but the Assessing Officer disallowed this claim and his order was upheld by the Appellate Assistant Commissioner. In a second appeal to the Income‑tax Appellate Tribunal, the assessee was allowed to set off the loss from the unregistered firm against the income of his separate business. In coming, to this conclusion, the Tribunal placed reliance on the decision of the Judicial Committee of the Privy Council in Rm. Ar. Ar. Rm. Aruachalarn Chettiar v. The Commissioner of Income‑tax, Madras (1936) 5 I T R173 and on some decisions from the Indian jurisdiction, that is, Anglo French Textile Company Ltd. v. The Commissioner of Income‑tax, Madras (1953) 23 I T R 82, decided by the Indian Supreme Court, and the Commissioner of Income‑tax, Bombay Suath v. Jagannath Narsingdas P L D1958 S C(Pak.)41. In the Privy Council decision it was held that set‑off under section 24(1) of the Income‑tax Act, 1922, can only be claimed when the loss arises under one head and the profits under another head enumerated in section 6 of the Act. In the decisions from the Indian jurisdiction, the view was taken that the adjustment of profits and loss under the head "business" was to be done under section 10 and not under section 24 of the Income‑tax Act. Accordingly, the Tribunal held that, since he income as well as the loss, accrued to the assessee under the head business', the computation of the net income should be made under section 10 of the Act, and accordingly the loss from the firm should be adjusted against the income of the assessee's individual business to arrive at the taxable income of the assessee, Consequent upon this decision, tile Commissioner of income‑tax (East) Karachi applied to the Tribunal for statement to the High Court of the question of law arising from the appellate to order of the Tribunal. Accordingly, the Tribunal has stated the following question to the High Court:
2. "Whether on the facts and in the circumstances of the case the assessee is entitled to set off his share of loss, under section 114 of the Income‑tax Act, from an unregistered firm against profit of this personal business."
2. Mr. S. A. Nusrat, the learned counsel for the income‑tax Department, contended before us that the App; hate Tribunal in taking the view which it did in its appellate order, failed to consider the provisions of sec tion 16 and section 24 of tile Income‑tax Act, 1922, as amended from to time in Pakistan. The relevant part of section 16 before amendments introduced subsequent to the assessment year in question, is clause (b) of subsection (1965) 55 I T R 128 with it proviso which is to the following effect:
3. "16 (1)(b).‑In computing the total income of an assessee‑
(b) when the assessees 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 deduction (super‑tax) payable by the firm, ii any, and of any interest, commission or other remuneration payable to any partner in respect of the precious year:
4. Provided that if leis 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:-
5. Section 24(4), and the two provisos thereto during the relevant period stood as follows:‑
6. "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 shaft be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year:
7. Provided that where an assessee is engaged in speculative transaction, which are in the nature of business, such transaction 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, and any loss sustained by him in such business shall be set off only against the income, profits and gains of that business:
8. Provided further that where the assessee is an unregistered firm which has not been assessed under the provisions of clause (b) of subsec tion (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 he 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."
9. In particular, Mr. S. Nusrat laid emphasis on that part of the second pro vision to section 24(1) of the Act which reads, any such loss shall be set off 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". It will be noted that the second proviso to section 24(1) of the Act contemplates two situations (1) where loss has accrued to an unregistered firm, and (2) where loss has accrued to a registered firm. In regard to the unregistered firm, the proviso specifi cally states that loss accruing to such a firm shall be set off only against the income, profits and gains of the firm anal not against the income, profits and gains of any of the partners of the firm. In regard to a registered firm, the proviso prescribes that any loss which cannot be set off against other income, profits and gains of such 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. According to Mr. S. A. Nusrat, though the main sub‑ section (1) of section 24, makes provision for set off loss under one bead against income, profits and gains under any other head enumerated in sec tion 6 of the Act the second proviso, as well as the first proviso, to this subsection operate as independent proviso, to this subsection operate as independent provision and the language employed in these two provisos, particularly in the second proviso is such that it cannot be said that the second proviso is controlled by the main subsection. Mr. S. A. Nusrat contended that section 16(l), (b) is applicable both to registered and unregistered firms and lays down the manner in which the losses should be adjusted, namely, under section 24, but, according to him, subsection (1) of section 24 operates subject to the conditions laid down in the first arid second provisos there to, that is, (1) under the first proviso the speculative business of an assessee is to be treated as a distinct and separate business and therefore, by necessary implication, it should he deemed that, though such business is an independent head of income, the loss which accrues from such business cannot be set off against the income, profits, gains which accrue under any other head, and (2) if the assessee is an unregistered firm, then any loss accruing to such assessee can be set oft' only against the income, profits and gains of this assessee, and not against the income, profits and gains of any of the partners of the firm. Mr. S. A. Nusrat contended that the func tions of a `proviso' may be to restrict, limit or qualify the enacting part of the section to which it is attached. 1n this connection, Mr. S. A. Nusrat referred us to The East and West Steamship Company v. Pakistan P L D 1958 S C (Pak) 41, in which Cornelius, J., made the following observations:‑
10. "One of the plainest rules of Statutory interpretation is that a proviso is to be regarded as something which excepts a particular case from a general Principle. The effect of a proviso is to except something out of the preceding portion of the enactment or to qualify something enacted therein which but for the proviso would be within it."
11. The learned counsel also referred as to the Privy Council decision in Dayal Singh v. Kenyan Insurance Ltd. P L D I955 P C 4, in which the following observation was made with regard to the nature of the proviso:
12. "A proviso may limit and severely limit the application of an enactment to which it is a proviso but it could only be held in the most excep tional circumstances that the proviso nullifies the enactment."
13. He further referred us to the opinion of M. R. Khan, J., in Mian Rafi‑ud‑Din v. The Chief Settlement and Rehabilitation Commissioner P L D 1971 S C 258, in which reference has been made to the preceding two decisions with regard to the function of the proviso. According to Mr. S. A. Nusrat, the function of the first and second, provisos subsection (1) of section 24 of the Income‑tax Act is, therefore, to except the loss accrues from a speculative business or which accrues to an unregistered firm out of the provisions contained in subsection (1), or to nullify provisions of subsection (I) of section 24, as also the provisions of section 16(1)(b) so far as losses accruing from or to a speculative business or an unregistered firm, 'as the case may be, are concerned On a plain reading of the first and second provisos, we were inclined to take the view that There eras force in the argument of Mr. S. A. Nusrat. However, Mr. 1qbal Naseem Pasha, the learned Advocate for the assessee, brought to our notice a Division Bench judgment of the Karachi Bench of the former High Court of West Pakistan, The Commissioner of Income‑tax v. Messrs Haji Ferozuddin P L D 1967 Kar. 812. In that case, the circumstances were somewhat identical with the facts of the case before us. In that case also, the assessee was a partner in a registered firm known as "National Rubber Works", and also a partner in an unregistered firm known as "Munawar & Co." For the assessment year 1952‑53, the assessee claimed to set off his income of Rs. 50,568, from the registered firm against the loss of Rs. 60,812 which came to his share in the unregistered firm. The Division Bench held that the first proviso to subsection (1) of section 24 of the Income‑tax Act operated as a substantive and independent provision, but that the language employed in the second proviso did not justify the conclusion that this proviso should operate likewise, that is, as an indepen dent proviso. Their Lordships, in that case, referred to the observation of the Privy Council with regard to the function of the proviso made in The Madras arid Southern Mahratta Railway v. Bezwada Municipality (1945) 47 B L R 587, to the effect that‑
14. "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."
15. From this observation, their Lordships concluded that it could not be said that the Legislature contemplated that, even though the case of an assessee did not come under subsection (l) of section 24, he could still be dealt with for purposes of adjustment of loss, under the second proviso. Accord, to their Lordships, the language of both section 16(1)(b) and section 24(1), was of a directory nature, and that the second proviso was applicable to case arising under subsection (1) of section 24 of the Act. On this reasoning it was held 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 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 that," 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." In effect, this judgment held that the second proviso did not apply to cases if adjustment of loss, against, income, profits and gains was claimed under one and the same head, such as "business" because such adjustment is allowable in the case of "business" under section 10, and not under section 24 of the Income‑tax Act. Thus, the contest before us appeared to have been settled by this judgment. Mr. S. A. Nusrat, however, stated that this judgment was under appeal in the Supreme Court. Ordinarily, we may have waited for the decision of their Lordships of the Supreme Court, but as the sum involved in the case before us is not large, we did not consider it advisable to postpone the decision in the present case. Consequently, in accordance with the judgments in The Commissioner of Income‑tax v. Messrs Haji Ferozuddin we answer the question stated by the Tribunal to the High Court in the affirmative.
16. Question answered in affirmative.