The second proviso to S. 24 (1) of the Income-tax Act, 1922, does not cover loss in speculative business, and consequently, does not permit that loss to be apportioned between the partners of a registered firm.

Judgment

BHARGAVA, J. : The respondent is a firm which, for purposes of assessment under the Income-tax Act (hereinafter referred to as the Act"), was registered under Section 26-A of the Act during the assessment years 1958-59, 1959-60, and 1960-61. The respondent was earning income from property, ready business in kappas, and also from speculation business carried on an extensive scale. During the assessment year 1958-59, the income from property was assessed at Rs. 1,369 and from ready business at Rs. 28,449. There was a loss of Rs. 6,26,606 in the speculation business. The Income-tax Officer. in making the assessment for that year charged tax on the total of the income from property and ready business which amounted to Rs. 29,818. The loss of Rs. 6,26,606 was not set off against this profit in view of the provisions of the first proviso to S. 24 (1) of the Act. This loss was, however, apportioned between the partners by the Income-tax Officer, purporting to act under the second proviso to the said sub-section. Similarly, in the next assessment year 1959-60, where there was income from property and loss in ready business as well as speculation business, no tax was imposed, as the loss in ready business exceeded the income from property. The net loss of Rs. 1,239 worked out on the basis of loss in ready business reduced by the income from property, was apportioned between the partners. Further, the speculation loss of Rs. 5,416 was also apportioned between the partners on the same basis as was done in the preceding assessment year 1958-59. In the assessment year 1960-61, there was an income of Rs. 1,014 from property, and a loss of Rs. 21,197 from ready business. In addition, there was a profit of Rs. 6,19,784 in the speculation business. Since this year there was a profit in speculation business, the first proviso to S. 24 (1) did not apply, and the net income of the respondent was worked out by taking all the three figures into account. The respondent claimed that in the assessment of the respondent s income in this year the respondent was entitled to set off the speculation losses of the two preceding assessment years 1958-59 and 1959-60 against the profits earned from speculation business in this year, urging that the Income-tax Officer in the two earlier years was wrong in apportioning the loss between the partners. The plea was that under the second proviso to S. 24 (1), this loss in speculation business could not be apportioned between the partners, and consequent, under S. 24 (2), the respondent was entitled to carry forward this loss and to have it set off against the profit from speculation business under clause (i) of S. 24 (2). This plea was rejected by the Income-tax Officer whose order was upheld by the Appellate Assistant Commissioner. On further appeal, the Income-.tax Appellate Tribunal, however, accepted the plea of the respondent and held that the speculation losses sustained by the respondent in the two preceding assessment years must be adjusted against the profit earned in the account year in question in speculation business. Thereupon, at the request of the Commissioner of Income-tax, the following question of law was referred by the Tribunal for opinion to the High Court of Gujarat:

"Whether on the facts and in the circumstances of the case and on a true interpretation of the various provisions of the Indian Income-tax Act, 1922, the Tribunal was correct in holding that speculation losses of the Respondent firm (assessee firm) for the assessment years 1958-59 and 1959-60 should be set off against its speculation profit of Rs. 6,19,784 in its assessment for the assessment year 1960-61."

The High Court upheld the view of the Tribunal and answered the question in favour of the respondent. This appeal has now been brought up to this Court by the Commissioner of Income-tax on certificate granted by the High Court under S. 66-A (2) of the Act.

2. The answer to the question referred to the High Court obviously