1996 (1) TMI 57 - HC - Income Tax

Horse-racing by HUF held business u/s 2(13), loss allowable as business loss, Revenue estopped

HC held that the assessee-HUF's horse-racing activities constituted 'business' within the meaning of section 2(13) of the Income-tax Act, 1961. The court ... Business in racing - Business Loss - entitlement to deduction of a specific sum from total income for a particular assessment year. - Whether the activities carried on by the respondent/assessee (Hindu undivided family) would constitute a 'business' as defined under section 2(13) of the Income-tax Act, 1961 - HELD THAT:- Admittedly, for all the six or seven earlier assessment years, similar activities of the assessee have been treated by the Department itself only as 'business' and his income or loss was assessed only under 'Profits and gains of business or profession'. The two essential requirements for an activity to be considered as 'business' are : (i) it must be a continuous course of activity ; and (ii) it must be carried on with a profit motive. In the present case, admittedly, the assessee carries on continuous course of activity, not only in the assessment year in question, but also in the earlier assessment years. In respect of the racing activities, the assessee incurred losses during the assessment years in question and claimed deduction of the loss from his income from other sources. This claim was disallowed by the officer on the ground that the assessee was indulging in the racing activity only as a hobby or sport and not as a business proposition. The Tribunal, however, held that the income referable to this activity would be 'income from other sources' and hence the losses might be set-off against the income arising from other sources in each of the years. On a reference, this court held that though the receipts arising from betting and racing would be income falling under the head 'Other sources' they would be of a casual and non-recurring nature exempt from taxation during the relevant years and that since the income was not taxable, the losses arising from such activity could not also be set-off against income from a different source under a different head. So, strictly speaking the present question did not arise there. The net result is the questions referred to us are answered in the affirmative and against the Revenue. Issues involved: Determination of whether the activities of the assessee constitute a 'business' u/s 2(13) of the Income-tax Act, 1961, and entitlement to deduction of a specific sum from total income for a particular assessment year.Issue 1 - Activities as Business:The primary issue is whether the activities of the respondent/assessee, involving acquiring, maintaining, training, and racing horses, qualify as a 'business' as per the definition u/s 2(13) of the Income-tax Act, 1961. The Revenue argued that the income or loss should fall under 'Income from other sources,' while the assessee claimed it should be categorized as 'Profits and gains of business or profession.' The Tribunal found that the assessee's activities constituted a continuous course of business activity, conducted with a profit motive, based on the nature of the activities and financial aspects.Issue 2 - Deduction Claim:The second issue pertains to the deduction claimed by the assessee for losses incurred in the assessment year 1972-73. The assessee sought deductions u/s 36(1)(vi) for unusable horses and general losses related to the racing activities, totaling Rs. 60,779. The Tribunal supported the assessee's claim, emphasizing the business nature of the activities and the profit motive behind them.Legal Analysis:The definition of 'business' under the Act includes any trade, commerce, or manufacture conducted with a profit motive. Previous decisions highlighted the need for a continuous course of activity with a profit motive to classify an endeavor as a business. The Tribunal's findings indicated that the assessee's racing activities fulfilled these criteria, leading to the conclusion that the activities constituted a business. Contrary decisions cited by the Revenue were deemed distinguishable as they did not align with the specific circumstances of the present case.Conclusion:The High Court ruled in favor of the assessee, affirming that the activities in question qualified as a business under the Income-tax Act, 1961. The questions posed were answered in the affirmative, rejecting the Revenue's contentions. The judgment emphasized the continuous nature of the activities and the profit motive behind them, supporting the assessee's claim for deductions.