Substantive computation rule for speculative losses under income tax law excludes them from business profits except against speculative gains.

The first proviso to section 24(1) of the Income-tax Act, 1922 was held to be a substantive computation rule, not merely a set-off provision confined to section 24. On the statutory scheme and the proviso's wording, loss from speculative transactions had to be excluded when computing business profits under section 10, except to the extent of speculative profits. Accordingly, speculative loss could not be adjusted against non-speculative business income, and the reference was answered against the assessee and in favour of the Revenue.

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Issues: Whether the first proviso to section 24(1) of the Income-tax Act, 1922 governed only set-off under section 24 or also controlled the computation of business profits under section 10, so that loss from speculative transactions could be excluded in computing business income.

Analysis: The statutory scheme separates computation of income under Chapter III from set-off under Chapter IV. Although a proviso is ordinarily confined to the section in which it appears, its language may show that it embodies a substantive rule. Here, the proviso stated in clear terms that, in computing profits and gains chargeable under the head of business, loss in speculative transactions was not to be taken into account except to the extent of speculative profits. The language and structure of the Act indicated that the proviso was intended to regulate the mode of computation of business income itself, and not merely the later process of set-off under section 24. The view taken by the Bombay and Madhya Pradesh High Courts was accepted.

Conclusion: The proviso applied to the computation of business profits under section 10. The speculative loss could not be set off against non-speculative business profits, and the question was answered in the negative, against the assessee and in favour of the Revenue.

Final Conclusion: The reference was answered adversely to the assessee, and the statutory proviso was held to restrict computation of business income by excluding speculative losses except against speculative profits.

Ratio Decidendi: Where the language and scheme of the Act show that a proviso enacts a substantive rule, it governs the computation to which it is directed even if placed in a different section from the provision under which the income is ultimately assessed.

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