1. SABBDUZZAMAN SIDDIQUI, J.-The following question has been referred to us by the Commissioner of Income-tax under section 66(1) of the Income Tax Act, 1922 for decision "Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the not loss, instead of being distributed among, partners, should be carried forward for being set off against income from the some business, in subsequent years?"
2. However, at the hearing of the reference be learned counsel for the parties agreed that the question needs modification and accordingly we notified the question as suggested by the counsel jointly as follows :- "Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the not loss suffered in a speculation business instead of being distributed among partners should be carried forward for being set off against income from the same business, in subsequent years?"
3. We have heard Mr. Nasrullah Awan and Mr. A.I Athar, the learned counsel for the department and the assessee respectively.
4. The main contention of, the learned counsel for the department is that proviso 2 to section 24 (1) of the Income-tax Act controls the main section as well as the first proviso which was added by Ordinance XXV of 1960 on 1-7-1960. It is contended by the learned counsel for the department that whereas the first proviso to section 24 (1) deals only with the disposal of a loss suffered by an assessee in a speculation business, the 2nd proviso provides that how much loss is to be apportioned in respect of a registered and unregistered firm. It is contend by the learned counsel that the second proviso to section 24 (1) is of a general nature while the first proviso deals strictly with a particular subject namely the disposal of loss suffered by an assessee in a speculative business. The contention of the learned counsel in substance is that the expressions "such loss" and "any loss" used in the second proviso also include a loss suffered in a speculative business which is dealt with under the 1st proviso to section 24(1) of the Act. The expression "such loss" and "any loss" in the 2nd proviso to section 24(l) of the Act came up for consideration before the Supreme Court of India in the case of Commissioner of Income-tax, Gujrat v. Kanti Lal Nathuchand, Sami ((1967) 63 I T R 318). It will be advantageous to reproduce here the relevant discussion in the above case appearing at page 321 of the report which is as follows :-- "Then comes the second proviso, and it is clear from the language of this proviso that it does not deal, with the computation of the income of the assessee for purposes of determining the total income. This second proviso was incorporated in order to indicate the personality of the assessee for the purpose of applying the principal clause of section 24(1) taken together with the first proviso. No difficulty could arise in applying the principal clause and the first proviso together in the case of individuals, companies, Hindu undivided families, etc. But a provision was needed for cases where the assessee happened to be a firm. This necessity arose because of the special manner laid down in section 23 itself for assessing the income of a firm. That section lays down different rules for assessm ent of unregistered firms and registered firms. In the case of an unregistered firm, the total income computed by the Income-tax Officer for deter--mining the tax can be assessed by apportioning that income between the partners, and determining the tax payable by each partner on the basis of such assessm ent, including his income from other sources, as laid down in section 23 (5) (h) of the Act. In the alternative, the Income-tax Officer may choose the assess an unregistered firm as a unit by itself, and, in that case, the tax is determined as payable by the firm as a unit, so that the provisions of section 23 (5) (6) are not applied. The second proviso to section 24 (1) lays down that in such a case where an unregistered firm is not assessed under the provisions of clause (b) of subsection (5) of section 23 "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". It is clear that the expression "any such loss" in this part of the second proviso can only refer to the loss computed for purpose of applying to principal clause of section 24 (1) taken together with the first proviso. That will, therefore, be the loss suffered by the unregistered firm in business other than speculative business. The loss incurred in the speculative business by the unregistered firm is, thus, to be ignored. If this part of the second proviso were to be interpreted as laying down that the loss mentioned therein includes the loss from speculative business, the effect would be that the provision contained in the first proviso would be comp--letely nullified, The effect of the first proviso is that when setting off the loss of profits and gains under one head against income, profits and gains under any other head in accordance with the principal clause, the loss suffered in speculative business is not to be taken into account and is to be kept apart. If the word "loss" in the first part of the second proviso were to be interpreted as including the loss in speculative business also, the result would be that the loss excluded under the first proviso would be included in the assessm ent of total income under the second proviso. In the circumstances, the only interpretation that can be placed on the words ---any such loss" in this part of the second proviso is that this expression refers to the loss as determined for purpose of the principal clause of section 24(1) read with the first proviso, and, thus, does not comprise with in it loss incurred in speculative business referred to in the first proviso.
5. Then comes the second part of the second proviso which prescribes the personality of the assessee to which the provisions of section 24 are to be applied in case where the assessee is a registered firm. Under this part the loss, which cannot be set off against other income, profits and gains of the registered firm, is to be apportioned between the partners of the firm and they alone are entitled to have the amount of the loss set off under this section. Clearly, in this part also, the words "any loss" must refer to the loss computed for purposes of the principal clause taken together with the first proviso, and will, therefore not comprise in it the loss in speculative business which is not to be taken into account under the first proviso. The aspect of this provision, which is of importance, is that under it, the Income-tax Officer is required to take two steps. The first is that to loss, which cannot be set off against other income, profits and gains of the registered firm, has to be apportioned between the partners of the firm, and then he has to give effect to the right of the partners to have the amounts of the loss set off under this section. Once again, if this part of the second proviso were interpreted to in-)e within it the loss in speculative business which is not to be taken into account under the first proviso, the effect of giving a wider meaning to the words "any loss" in it would be that the same loss in speculative business would, after apportionment, be set off against income, profits and gains under other heads in computing the total income of the partners.
6. The results would be that the effect of the first proviso would again be nullified by this part of the second proviso. Consequently the correct interpretation must be that the words "any loss" in this part of the second proviso also refer to the loss computed for the purposes of the principal clause of section 24 (1) taken together with the first proviso, so that it must also exclude the loss in speculative business which is not to be taken into account when computing the total income of the assessee. The language used in the second proviso, thus, itself leads to the conclusion that the decision arrived at by the High Court was correct even though on a different reasoning."
7. The scope of 2nd proviso to section 24(1) of the Income-tax Act also came up for consideration before the Karachi Bench of the erstwhile High Court of West Pakistan in the case of Commissioner of Income-tax v. Haji Ferozuddin (PLD 1967 Kar. 812) and the learned Judges of the Division Bench while deal' with a similar-argument as is raised before us, held as follows "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 I 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 211 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 "notwithstanding anything to the contrary contained in any law for the time being in force". Thus whether 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 is 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 the year. It seems to us that the Department's contention that it has a general application and not confined to the cases mentioned in section 24(1) cannot be accepted as good argument.
8. In the first place, the well-established rule of interpretation of a statute is that 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 that proviso takes out or craves out from that a particular situation and therefore to that extent modifies the main provision of the section."
9. The above case decided by the Karachi Bench of the then High Court of West Pakistan was quoted with approval by a Bench of this Court in the case of Haji Mushtaq Ahmad v. Commissioner of Income-tax (PLD 1978 Kar. 414). In the above-referred decisions the Court took the view that the first proviso to section 24(1) is in the nature of an independent provision of law and is not controlled by the second proviso to section 24(1) which is its application restricted only to losses computed under the main section 24(1) of the Act. We are in respectful agreement with the views expressed in the above decision and the learned counsel for tire Department was unable to advance any argument to persuade us to take a contrary view. We accordingly answer the reference in the affirmative but there will be no order as to costs.