The Commissioner of Income-tax, Mysore Travancore-Cochin and Co. vs The Indo Mercantile Bank, Limited

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 259 and 260 of 1958

Decision Date: 23 February 1959

Coram: J.L. Kapur, Natwarlal H. Bhagwati, Bhuvneshwar P. Sinha

The case was titled The Commissioner of Income‑Tax, Mysore‑Travancore‑Cochin and Co. versus The Indo Mercantile Bank, Limited, and it was decided on 23 February 1959 by the Supreme Court of India. The judgment was authored by Justice J L Kapur, with Justices Natwarlal H Bhagwati and Bhuvneshwar P Sinha forming the bench. The petitioner was the Commissioner of Income‑Tax for Mysore‑Travancore‑Cochin, and the respondent was The Indo Mercantile Bank, Limited, with the decision forming part of a connected appeal. The formal citation of the judgment is 1959 AIR 713 and 1959 SCR Supl. (2) 256. Various citator references ensuing from this decision include R 1960 SC 1175 (9), APL 1962 SC 1272 (4), F 1965 SC 1358 (18), F 1967 SC 415 (7, 8), RF 1972 SC 1004 (82), RF 1975 SC 1758 (18), R 1979 SC 117 (8), R 1985 SC 582 (32), RF 1989 SC 1737 (7), and RF 1992 SC 1 (75). The statutes discussed were provisions of the Travancore Income‑Tax Act, 1121 (Travancore XXIII of 1121), specifically sections 4, 9, 13, 18, 32(1) and its first proviso, together with the Indian Income‑Tax Act, 1922 (XI of 1922), namely sections 3, 4, 6, 10, 14, 24(1) and its first proviso.

The headnote of the decision explained that section 32(1) of the Travancore Income‑Tax Act, which corresponds to section 24(1) of the Indian Income‑Tax Act, 1922, provided that an assessee who sustains a loss of profits or gains in any year under any of the heads mentioned in section 9 (section 6 of the Indian Act) shall be entitled to set off that loss against income, profits or gains under any other head in the same year. However, the provision also stated that where the loss would, but for the loss, have accrued or arisen within British India or an Indian State and would, under the provisions of clause (c) of sub‑section (2) of section 18 (corresponding to section 14 of the Indian Act), have been exempted from tax, such loss shall not be set off except against profits or gains accruing or arising within British India or an Indian State and exempt from tax under the said provisions. The assessees in the present case were companies whose head offices were situated in the former State of Cochin, with branches in the former State of Travancore as well as in other locations outside Travancore. These companies earned profits in Travancore State but incurred losses in Cochin State and in other places outside Travancore. For the purpose of their income‑tax assessment they sought to deduct the losses incurred outside Travancore from the profits earned within Travancore. The Income‑Tax Officer, acting under the Travancore Income‑Tax Act, determined the assessable income to consist only of the profits earned in Travancore and, relying on section 32(1) and its first proviso—mirroring the first proviso to section 24(1) of the Indian Act—refused to allow a deduction of the losses incurred elsewhere. The assessees contended that the business they were carrying on was a single, indivisible enterprise for the purpose of determining the assessable income and therefore they should be permitted to set off the losses incurred outside Travancore against the profits made within Travancore.

In this matter, the assessable corporation argued that its total income for tax purposes included the loss incurred outside the State of Travancore and that the loss should be allowed as a deduction against the profit earned within Travancore. The revenue officials raised four principal objections. First, they contended that the first proviso to section 32(1) of the Travancore Income‑tax Act expressly prohibited the set‑off of losses arising outside Travancore against profits generated inside that State. Second, they submitted that although profits and losses belonging to the same head of income could ordinarily be set off, the same proviso added a limitation whereby losses of the business incurred beyond the State could not be deducted from profits of the business that arose inside the State. Third, the officials argued that the proviso applied only to the term “business” in the two territories, noting that the wording referred solely to “loss of profits or gains” and that the word “income” did not appear, thereby limiting its scope. Fourth, they maintained that the word “business” in section 13 of the Travancore Act, which corresponds to section 10 of the Indian Act, must be interpreted as “business in Travancore State” under the Travancore provision and as “business in British India” under the Indian provision, because before 1939 income was taxable only when received or accrued in Travancore or British India, and income from activities outside those territories was exempt from tax in both jurisdictions.

The Court held that, under section 24(1) of the Indian Income‑tax Act, 1922, and the corresponding section 32(1) of the Travancore Income‑tax Act, a loss may be set off against income only when the loss arises under one head of income and the profit, income, or gain against which it is set off arises under a different head. When profit and loss arise under the same head, they must be adjusted against each other pursuant to the provisions of sections 7 to 12B of the Indian Act, as affirmed in the cases of Arunachalam Chettiar v. Commissioner of Income‑tax (1936) L.R. 63 I.A. 233 and Anglo‑French Textiles Co., Ltd. v. Commissioner of Income‑tax, Madras [1953] S.C.R. 448. The Court further explained that a proviso functions to carve out an exception to the main enactment, excluding from its operation a situation that would otherwise be covered, but it must operate within the same field as the principal provision. If the language of the main enactment is clear, the proviso cannot be employed to reinterpret or to imply a limitation that the main provision does not contain, unless the wording of the proviso necessarily produces that effect. This principle was supported by the decisions in Abdul Jabar Butt v. State of Jammu and Kashmir [1957] S.C.R. 51 and Ram Narain Sons Ltd. v. Assistant Commissioner of Sales [1955] 2 S.C.R. 483. Consequently, the Court concluded that the first proviso to section 32(1) of the Travancore Act barred a set‑off only in the narrow circumstance where a loss incurred in an Indian State under one head was sought to be set off against profits in British India under a different head, and it did not extend to the computation of profits and losses falling within section 10 of the Indian Act, corresponding to section 13 of the Travancore Act.

The Court noted that it relied on the authorities reported in Madras Reports (1944) L.R. 71 I.A. 113 and the decision of the Judicial Committee of the Privy Council in Corporation of the City of Toronto v. Attorney‑General for Canada, [1946] A.C. 32. In applying those precedents, the Court held that section 24(1), first proviso, of the Indian Income‑Tax Act, 1922, and section 32(1), first proviso, of the Travancore Income‑Tax Act, bar the right of set‑off only in the situation where a loss incurred in the Indian States under one head of income is sought to be set off against profits earned in British India under a different head. The provisions do not extend to the computation of profits and losses that fall within section 10 of the Indian Act, which corresponds to section 13 of the Travancore Act. The Court further observed that the absence of the word “income” in the proviso does not justify a construction that the legislature intended to limit the right of set‑off of profits and losses arising in the Indian States solely to business, nor does it permit a modification of the method of computation prescribed in section 10 of the Indian Income‑Tax Act. Moreover, the Court explained that the term “business” appearing in section 10 of the Indian Income‑Tax Act, 1922, is not restricted to business carried on in British India. This interpretation follows from the definitions of “total income” and “total world income” and from the chargeability of total income under section 3, as well as from the provisions of section 4, which state that for a resident, total income includes income, profits and gains accruing both within and without British India.

The matter before the Court arose under civil appellate jurisdiction as Civil Appeals Nos. 259 and 260 of 1958. Both appeals were taken by special leave from the judgment and orders dated 5 August 1955 of the former Travancore‑Cochin High Court in Income‑Tax Reference Appeals Nos. 6 of 1953 and 21 of 1954. Counsel for the appellant, the Commissioner of Income‑Tax, were K.N. Rajagopala Sastri, R.H. Dhebar and D. Gupta. Counsel for the respondents were G.B. Pai and Sardar Bahadur in Appeal 259 of 1959, and A.V. Viswanatha Sastri and Naunit Lal in Appeal 260 of 1958. The judgment was delivered on 23 February 1959 by Justice Kapur. The Court identified a common question of law presented by the two appeals: whether business losses incurred in the former State of Cochin could, under the Travancore Income‑Tax Act, be set off against business profits earned in the former State of Travancore. In Appeal 260/58 a further issue arose as to whether the year ending 30 June 1949 should be treated as the preceding year for assessment year 1950‑51, thereby requiring assessment under the Indian Income‑Tax Act of 1922. The High Court had not addressed this subsidiary question, limiting its decision to the primary issue common to both appeals. The appellant in both proceedings was the Commissioner of Income‑Tax, while the respondents were the two assessee – one a bank and the other a private limited company – and the principal arguments were confined to the questions just described.

In the present appeals the Court was asked to consider the operation of section 32 (1) and the first proviso to that section of the Travancore Income‑tax Act, hereinafter referred to as the Travancore Act. The first appeal, recorded as Civil Appeal No. 259 of 1958, involved a public limited company that had been incorporated in the former State of Cochin. The company maintained branches not only in Cochin but also in territories that at the relevant time formed part of British India as well as in the State of Travancore. For the assessment year 1948‑49, the company filed its income‑tax return indicating a total income of Rs 11,872, the accounting year for which corresponded to the preceding calendar year. The Income‑tax Officer, however, computed the assessable income of the company as Rs 90,947, a figure that represented solely the profit generated by the company's operations within Travancore. Pursuant to section 32 (1) proviso (1) of the Travancore Act, the Officer disallowed a deduction of Rs 79,275, which the company had claimed as loss arising from its branches situated outside Travancore, namely in British India and other Indian states. The company appealed this assessment to the Commissioner of Income‑tax, but the Commissioner upheld the Officer’s determination. The matter was then taken before the Appellate Tribunal, which held that the banking business of the assessee was a single and indivisible enterprise for the purpose of ascertaining the amount subject to income‑tax. Accordingly, the Tribunal concluded that the company was entitled to set off the losses incurred outside Travancore against the profits that arose within Travancore. At the instance of the Commissioner, the question was referred to the High Court of Travancore‑Cochin: “Is the sum of Rs 79,275 a loss of the assessee arising outside Travancore for the purpose of the first proviso to section 32 (1) of the Travancore Income‑tax Act?” The High Court slightly reformulated this question, examined several earlier decisions on the same point, and ultimately answered in favour of the assessee, holding that the loss did indeed arise outside Travancore and could therefore be deducted under the proviso.

The second appeal, recorded as Civil Appeal No. 260 of 1958, concerned a private limited company whose registered office was located in the former State of Cochin. The company conducted its principal business from its head office in Cochin and also carried on business in the State of Travancore. The assessment of the company was made under the Travancore Act for the previous year ending 30 June 1949, with the assessment year being 1950‑51. During that period the company earned a profit in Travancore and simultaneously sustained a loss in Cochin. The company sought to offset the Cochin loss against the Travancore profit, thereby arriving at a net profit of Rs 2,643. The Income‑tax Officer rejected this set‑off, a decision that was affirmed on appeal by the Appellate Assistant Commissioner. The Appellate Tribunal also declined to accept the company's submissions and upheld the assessment. The company then applied to the High Court of Travancore‑Cochin, raising the question: “Whether, on the facts and in the circumstances of the case, the loss of Rs 27,709 arising in Cochin State could be set off against the profit of Rs 38,998 arising in Travancore State?” After considering the evidence and relevant legal principles, the High Court answered the question in favour of the assessee, permitting the set‑off of the Cochin loss against the Travancore profit. The Commissioner of Income‑tax subsequently filed appeals against both High Court judgments under the special leave jurisdiction. It may be noted that the sections of the Travancore Act that are applicable to these matters are those dealing with the computation of aggregate income, the set‑off of losses, and the related provisions governing the taxation of business income.

In the present matter the two appeals were found to contain language that is identical to that employed in the Indian Income‑tax Act of 1922, which will be referred to as the Indian Act. The corresponding provisions of the Travancore Act and the Indian Act were set out as follows: the application of the Act is contained in section 4 of each statute; the head of income chargeable to tax is provided in section 9 of the Travancore Act and section 6 of the Indian Act; the definition of business appears in section 13 of the Travancore Act and section 10 of the Indian Act; general exemptions are found in section 18 of the Travancore Act and section 14 of the Indian Act; and the rule on set‑off of loss in computing aggregate income is identified as section 32 of the Travancore Act and section 24 of the Indian Act. For the purpose of deciding the appeals it was sufficient to reproduce section 32(1) of the Travancore Act together with its proviso, which correspond respectively to section 24(1) and proviso (i) of the Indian Act. Section 32(1) reads: “Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in Section 9 (Section 6), he shall be entitled to have the amount of loss set off against this income, profits or gains under any other head in that year: Provided that where the loss sustained is a loss of profits or gains which would but for the loss have accrued or arisen within British India or in an Indian State and would under the provisions of clause (e) of sub‑section (2) of Section 18 (Section 14(2)(c)), have been exempted from tax, such loss shall not be set off except against profits or gains accruing or arising within British India or in an Indian State and exempt from tax under the said provisions.” The only variation between the two statutes lies in the wording of the proviso: the Indian Act uses the phrase “an Indian State,” whereas the Travancore Act substitutes “British India or in an Indian State.” The principal question for determination was how this proviso should be construed. Ordinarily, an excepting or qualifying proviso functions to carve out or limit the substantive provision that precedes it and does not expand the statutory scope when it can be interpreted without such expansion, as explained in Corporation of the City of Toronto v. Attorney‑General for Canada. Nevertheless, jurisprudence also recognizes that a proviso may, in substance, constitute a fresh enactment that adds to the earlier provision rather than merely qualifying it, a principle illustrated in Rhondda Urban Council v. Taff Vale Railway. The revenue counsel argued that the present proviso falls within this second category, thereby removing the cases from the operation of section 32(1) of the Travancore Act, imposing tax liability on profits or gains arising in that State, and disallowing the deduction of losses incurred in British India and in other States against profits earned in Travancore State.

The Court observed that the legal position concerning states other than Travancore State with respect to profits earned in Travancore State was discussed in the authorities Rhondda Urban Council v. Taff Vale Railway (1) and Harrison v. Ward (2). It was further noted that, in most Indian decisions, the proviso to section 24(1) of the Indian Act had been interpreted in a way that contradicted the arguments presented on behalf of the Revenue. To ascertain the genuine meaning of the words contained in that proviso, the Court found it necessary and convenient to refer to the overall scheme of the Indian Act, a scheme that the parties agreed was identical to the scheme of the Travancore Act.

According to the Court’s review, between the years 1922 and 1939, income, profits and gains were taxable only if they had either been received in British India or had accrued there. The Indian Income‑tax (Amendment) Act VII of 1939 introduced the concept of “total world income” and consequently altered the definition of “total income”. Under section 2(15) of the Act, “total income” was defined as the aggregate amount of income, profits and gains computed in accordance with the provisions of the Act. The term “total world income” was defined to include all income, profits and gains wherever they arose or accrued, except those to which the Act did not apply. Section 3 imposed income‑tax on the total income of the preceding year. Section 4 provided that the total income of any previous year of a resident person comprised all income, profits and gains from any source, provided that such income either (i) accrued or arose in British India during that year, or (ii) accrued or arose outside British India during that year. The Court stated that the third clause of section 4 was not relevant to the present appeal. Section 4(3) listed the categories of income, profits or gains that were excluded from the total income of the recipient.

The Court then compared the Indian Act with the Travancore Act, noting that both statutes contained six heads of income that were subject to income‑tax. The six heads were enumerated in section 6 of the Indian Act, which read:

S. 6 “Save as otherwise provided by this Act the following heads of income, profits and gains shall be chargeable to income‑tax in the manner hereinafter appearing, namely:— (iv) Profits and gains of business, profession or vocation.”

Following section 6, sections 7 through 12B set out the method of computing the income liable to tax for each head. The Court further explained that, in 1941, during the war, an exemption was introduced for tax purposes that applied to any income, profits or gains that accrued or arose within what were then termed Indian States but that were not received or brought into British India. This exemption was effected by section 8 of the Indian Income‑tax (Amendment) Act 1941 (XXIII of 1941), which added a new clause (c) to section 14(2). The added clause read: “The tax.”

The amendment added clause (c) to section 14(2), stating that tax shall not be payable by an assessee in respect of any income, profits or gains accruing or arising to him within an Indian State unless such income, profits or gains are received or deemed to be received in, or are brought into, the Indian State in the preceding year by or on behalf of the assessee, or are assessable under section 12B or section 42. Consequently, income, profits or gains that fell within any of the heads defined in section 6 became exempt from tax under the circumstances described in clause (c). However, this exemption did not remove the income from consideration for all purposes, as was the effect of section 4(3). The sums remained relevant for the calculation of the tax rate under section 16 of the Indian Act. A further consequential amendment was made to section 24(1) by inserting a first proviso, and a similar addition was effected in the Travancore Act to section 32(1). The proviso introduced in these sections is the point of dispute between the parties.

A review of the legislative history shows that between 1922 and 1939 the tax was levied on income, profits and gains arising or accruing to an assessee in British India. In 1939 the concept of “total income” became taxable, subject to the exclusions listed in subsection 3 of section 4, and the chargeability of total income was codified in section 3. In 1941, income, profits or gains earned by a resident in an Indian State, and in the case of Travancore State, income, profits or gains earned by a resident in British India or other Indian States, were exempt from the payment of income tax unless such amounts were received or brought into the respective territories. Nevertheless, those amounts had to be taken into account when determining the applicable tax rate. Section 24(1) was originally introduced in 1922; prior to its introduction, under the Indian Act of 1918, a loss in one head of income could not be set off against income in another head, and each head was taxed separately. The addition of section 24(1) permitted a loss under one head of profits or gains to be set off against income, profits or gains under any other head in the same assessment year, while section 24(2) allowed the remaining loss to be carried forward after such a set‑off. Section 24(1) later became contentious before the courts. The Privy Council, in Arunachalam Chettiar v. Commissioner of Income‑tax, held that the provision was intended to allow set‑off of profits arising under different heads, not to adjust profits and losses that arose under the same head. Sir George Rankin explained at page 241 that “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”.

The Court observed that the Privy Council had held that a partner could set off his share of loss in a firm against other profits either when those profits fell under the same head of income as defined in section 6 of the Act, or when they fell under a different head, in which latter situation the party had to rely on section 24, sub‑section 1. The Privy Council stressed that the purpose of section 24(1) was to permit a set‑off of profits against losses that arose under different heads, and that only in such circumstances could recourse be had to section 24(1). Where profits and losses arose under the same head, the Court explained, they had to be adjusted against each other rather than by using section 24(1).

In the decision of Anglo‑French Textiles Co. Ltd. v. Commissioner of Income‑Tax, Madras, the Court reiterated this distinction. It stated that a set‑off under section 24(1) could be claimed only when the loss originated under one head of income and the profits against which the set‑off was sought arose under a different head. When both loss and profit arose under the same head, the loss could be deducted, but that deduction was effected under section 10, not under section 24(1). The Court further noted that it was not disputed that when profit and loss arose under the same head in a place that was not an Indian State, the appropriate recourse was to the provisions of sections 7 to 12B, rather than to any other section.

The Revenue, however, contended that the first proviso to section 24(1) of the Indian Act did more than qualify the general provision; it introduced an additional rule. According to that contention, if the profits of a business arose in British India under the Indian Act, or in Travancore State under the Travancore Act, and the losses under the head “business” were incurred in an Indian State—or, in the Travancore case, in any other Indian State or British India—then, by virtue of the proviso, those losses could not be deducted from profits made in British India or Travancore State. The Revenue argued that such losses could only be adjusted against profits arising in an Indian State, or, in the Travancore context, against profits arising in British India or another Indian State. Accordingly, the Revenue claimed that the proviso modified the method of computation prescribed by section 10(2) of the Indian Act for determining the profits and gains of a resident’s business, as indicated in the 1953 Supreme Court Reports at pages 448 and 453.

The Court rejected that expansive construction, stating that a proviso must be given effect only if the language expressly or necessarily leads to such a conclusion. It explained that the proper function of a proviso is to qualify the generality of the principal enactment by providing an exception that removes from the main provision a portion that would otherwise be covered. Ordinarily, a proviso does not operate as an addendum or address a subject foreign to the main enactment; rather, it must be read harmoniously with the principal provision.

The Court explained that the proper function of a proviso was to qualify the general wording of the main enactment by providing an exception that removed from the main provision a portion which would otherwise be included. It stated that a proviso should not be read as an addendum dealing with a subject foreign to the main statute, but rather it must be read in relation to the principal matter to which it refers. Accordingly, the Court held that a proviso had to be construed harmoniously with the main enactment, quoting Das, C. J. in Abdul Jabar Butt v. State of Jammu & Kashmir (1). The Court further cited Bhagwati, J. in Ram Narain Sons Ltd. v. Assistant Commissioner of Sales Tax (2), observing that a cardinal rule of interpretation required a proviso to embrace only the field covered by the main provision, carving out an exception to that provision and nothing more. The Court then referred to Lord Macmillan’s declaration in Madras & Southern Mahratta Railway Co. v. Bezwada Municipality (3), which described the sphere of a proviso as an exception that deals with a case that would otherwise fall within the general language of the main enactment, and noted that when the language of the principal provision is clear and unambiguous, a proviso could not alter its meaning or exclude from it by implication anything that the express terms expressly contain. The Court therefore concluded that the territory of a proviso is to carve out an exception to the main enactment and to exclude something that would otherwise be within the section, operating only in the same field and having no effect on the interpretation of the principal provision unless the wording of the proviso itself necessarily produced that effect. The Court also referred to the decision in Corporation of the City of Toronto v. Attorney‑General for Canada (1) to reinforce this principle. Turning to the specific proviso under dispute, the Court observed that there were no positive words in that proviso which supported a reading that would split the head “business” and force the proviso to apply to the same head, especially when the object of the main section, s. 24(1), was to allow set‑off of loss of profits or gains under one head against income, profits or gains under any other head. The Court noted that the proviso used the expression “where the loss sustained is a loss of profits or gains”, and therefore it necessarily applied to the head “business” in the two territories concerned. However, the Court pointed out that the main enactment itself, s. 24(1) of the Indian Act, employed the words “a loss of profits or gains”. The Court stressed that the mere absence of the word “income” did not justify a construction that would limit the proviso to business alone or indicate a legislative intention to restrict set‑off of profits and losses arising in Indian States only to business, nor to modify the computation method under s. 10 of the Indian Act.

The Court observed that the phrase “losses of profits or gains” appears in the provision, but the mere absence of the word “income” does not permit an interpretation that the legislature intended to limit the set‑off of profits and losses arising in Indian States to the head “business”. It also does not permit a modification of the method of computation prescribed in section 10 of the Indian Act. The Court pointed out that the language of the proviso to subsection (2) of section 24 demonstrates that the legislature did not intend to confine the proviso to business alone. The relevant wording of section 24(2) reads: “provided that (a) where the loss sustained is a loss of profits and gains of a business or vocation to which the first proviso to sub‑section (1) is applicable, and the profits and gains of that business, profession or vocation are, under the provisions of clause (c) of sub‑section (2) of section 14, exempt from tax, such loss shall not be set off except against profits and gains accruing or arising in an Indian State from the same business, profession or vocation and exempt from tax under the said provisions.” The provision states that, provided that the loss sustained is a loss of profits and gains of a business or vocation to which first proviso to sub‑section (1) applies, the loss shall not be set off. Instead, the loss may be set off only against profits and gains that accrue or arise in an Indian State from the same business, profession or vocation. Such profits and gains must also be exempt from tax under the referenced provisions, as noted in (1) [1946] A.C. 32, 37. The Court explained that this wording makes it clear that when the legislature wished to restrict the set‑off to business alone it expressed that restriction expressly. The Court also noted that in sections 2(13) and 2(5) of the Indian Act of 1918, which correspond to sections 2(15) and 6 of the Indian Act of 1922, the term used was “income”. In the later Act that term was expanded to “income, profits and gains”. The Privy Council, in Commissioner of Income‑tax v. Shaw Wallace and Co., held that the object of the Indian Act is to tax “income”, a term that the statute does not define. The Council observed that although “income” is undoubtedly broadened to include “profits and gains”, such an expansion is essentially a matter of terminology rather than a substantive change in meaning. Similar observations were made in Commissioner of Income‑tax, Bengal v. Mercantile Bank of India Ltd., and in London County Council v. Attorney‑General. Consequently, the Court concluded that the mere presence of the phrase “loss of profits or gains” and its reference to set‑off against profits and gains does not, by itself, limit the application of the proviso. In particular, the proviso was not restricted to losses and gains arising under the head “business” in the two territories of British India and the Indian States. On behalf of the revenue, an alternative argument was advanced relying on two decisions of the Allahabad High Court in In Re: Mishrimal Gulabchand and Raghunath Parshad v. Commissioner of Income‑tax. Those decisions held that section 10 of the Indian Act must be read together with section 14(2)(e), and that if profits could not be added for the purpose of computing total income, then losses sustained could not be deducted. Counsel for the revenue did not pursue the position that because certain profits were exempt, the corresponding losses could not be deducted; instead, his argument was

The argument advanced was that because before 1939 income was not chargeable unless it was received or accrued in British India, the term “business” in section 10 could be limited to business carried on in British India. However, this argument, which is supported by citations (1)(1932) L. R. 59 I. A. 206, 212. (3)[1901] A.C. 26. (2)(1936) L.R. 63 I.A. 457. (4)[1950] 18 I.T.R. 75. (5) [1955] 28 I.T.R. 45., fails to consider the definition of “total income” as “total world income” and the provisions governing chargeability of total income under section 3, as well as the rules in section 4 that, for a resident, total income comprises income, profits and gains accruing both within and without British India. Consequently, to interpret the expression “business” in section 10 as meaning only business in British India, or to say that the profits or gains of such business are taxable only in British India, would disregard the definitions contained in sections 3, 4 and 6. Section 10 of the Indian Act does not draw a distinction between business conducted in British India and business carried on in an Indian State, nor does it divide business on that basis. Nevertheless, it was later contended that because the profits or gains of business undertaken in an Indian State were exempt from tax in British India, the phrase “business” in section 10 must therefore refer to business in British India. Such a construction would stretch the language of section 10 and would require inserting words that are not present in the statutory text. During the arguments, several decisions of various High Courts were cited and subjected to criticism. The Court found it unnecessary to revisit those judgments because it had already explained the proper scope of the proviso and the meaning of proviso (i) to section 24(1). In the Court’s view, the question referred to the High Court, which was common to both appeals, had been correctly decided in favour of the assessee. Concerning the second question raised in Civil Appeal No. 260 of 1958, the Court chose not to express any view, leaving it open for the assessee to take the appropriate steps as advised. Accordingly, the appeals were dismissed with costs.