TaxTMI 
TaxTMI 
1976 (4) TMI 115
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....ce (being lease rent) Rs. 1,800 .. Rs. 2,382 So much for items, the computation, or assessment of which, are no longer in dispute. 3. Now we enter the area of controversy, a controversy, which illumination by facts alone can resolve. We have culled out from the records such facts as were available and have ascertained during the hearing, to the extent possible further facts, for the necessity of ascertaining facts in a case of this type, is what has been emphasised by each of the three judges Iqbal Ahmed, Bajpai and Braund JJ. Of the Allahabad High Court, who wrote separate judgment in the case of Lala Indira Sen in re(1) : and by their Lordships of the High Court of Madras, a score of years latter, in Fanab A. Syed Fadal Sahib vs. Commissioner of Income Tax(2), two cases on which the learned departmental representative placed considerable reliance, in support of his stand that activity of racing cannot be a "business". 4. We now proceed to set out facts as have been found by us. The assessee while submitting the return had claimed a net loss of Rs. 72,097 from "Racing Business". The Profit and Loss Account relating to this claim is as under: RACIN BUSINESS ....
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.... which figure on the debit side merits mention. The Stake Money has seen been received from the Race Club and so also most of the other items of receipts. The amounts paid to the Race Club are Entry Fees, Forfieits, Jockey Mount Fees, Stable Rent, Classic Entries and Horse Insurance. Other expenses have been mainly incurred directly by the assessee and the major amount is horse feeding expenses of Rs. 15,109. Rent paid of Rs. 5,915 is comprised of Rent for racing office at Madras of Rs. 5,640 and Guest House at Ooty of Rs. 275. Travelling expenses are incurred for travelling of the Karta to the different race centres. The assessee maintains regular accounts which reflect the position according to the statements sent by various Race Clubs as also expenses incurred directly by the assessee. 7. The Balance-sheet as at 31st March 1971 for the Racing Business is as under: Balance Sheet as at 31st March, 1971. LIABILITIES . ASSETS . Sri.K.S.Venkatasubbu . Race Horses Account 1,13,750-00 Reddiar's Money . Sundry Debtors 5,005-00 Lending Account 1,21,051-71 Advances 575-00 Sundry Creditors . Shri K.S. Venkata Subba Reddiar .....
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.... secretary, accountant, a trainer and Jockies on a contract basis. I hire living quarters at various centres during the racing season and make periodical visits to look after this line of business. As is the custom in this line of business, I am also having a partnership with regard to one horse namely, "WE TWO" with Sri. N. Venkataraman, Madras. It is my intention to form partnership with others as and when it is convenient and desirable, to improve the prospects of earning more profits and to share the investments in this business. I have registered my name with all the Race Clubs in South India and also with the Calcutta Turf Club for purposes of running my horses. I have not included my betting, actively which I consider as something quite different and not related to this business. I have been systematically carrying on this business for the last 6 to 7 years. I would like to assert that this is not being carried on by me as a hobby or a pastime, but only as a regular line of business. It is my intention to continue this line of business, so long as I have the hope of making a substantial income out of the same." According to the assessee, thus the betting activity was s....
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....ncome-tax Officer held mere maintenance of accounts would not clothe the activity with the character of "business:. According to him, the expenses were not by an outsider, who should naturally render accounts for getting himself re-ambushed and recording such entries in the assessee's accounts would not be enough. The Income-tax Officer concluded by observing that the observations in the case of Fanab A. Syed Falal Sahib vs. CIT(2) applied to the facts and the racing activities did not constitute a business. The amount of Rs. 1,897 was therefore not allowed as a deduction. 13. As far as the loss of Rs. 70,200 arising on the sale of horses was concerned, according to the Income-tax Officer, the sale was of a "Capital asset" and the loss had to be considered only under the head "Capital gains", and as there was income under that head the loss in effect stood disallowed. 14. The assessee appealed. It was stated before the Appellate Assistant Commissioner that the Income-tax Officer had rejected all the submissions of the assessee in one sentence. It was contended that a number of expenses had been met by the assessee directly and the Income-tax Officer was not correct in stating....
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....o support such a finding. On the other hand, one should not fail to notice that this person is maintaining a string of horses, doing it on a commercially organised basis, it having a regular programme for running them at various races and his declared intention is that it is one of his lines of business. Further, the fact that in respect of some horses he has entered into a partnership with another person is sufficient proof that this activity was really his business". The Income-tax Officer on his part had contended before the Appellate Assistant Commissioner that unless the activity formed a means of livelihood it could not be a business activity. The Appellate Assistant Commissioner considered this untenable because the poor could not risk in racing activities, and the rich who indulged in the same would usually have other business and other sources of income. The Appellate Assistant Commissioner also considered the decision in Falal Saheb's(2) case was not applicable for, that was a case were there was a combined activity of betting and racing. The Appellate Assistant Commissioner eventually considered the amount Rs. 1,898 the quantum of which was not in dispute, as a loss f....
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....n owner of race horses or a gambler as a business proposition. I think that would be going much too far. I think that it may well be that there are cases in which by the scale on which he conducts his racing or his gambling (whether on horses or in other ways) by the commercial methods adopted, by his declared intention, or by the absence of any other means of livelihood, he may make it clear that this object is to make a "business" of it" Bajpai J. who with Braund J. constituted the majority in Indra Sen's (1) case observed: "The racing establishment consisting of the expenses incurred on money paid to the Secretaries of the race club in the form of entry fee, jockey fee, pay of servants, travelling charges, etc., on the debit side and of the stakes money on the credit side stands on a different footing. This might be indulged as a hobby and a pastime or might be conducted on business lines which involves an element of commercial enterprise. In every case it will be a question of fact, the fact to be determined from surrounding circumstances, the surrounding circumstances being invoked in order to determine the underlying, intention of the person concerned." Iqbal Ahmed J....
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.... exempted under the clause". (Sampath Iyengar on the Three New Taxes 1959 Edition page 385): Note: (Reference to "other clause" is to clause 5(a) of the E.T. Act which exempted from tax expenditure for the purposes of business whether capital or not.) 20. There can be no doubt that racing can, where the evidence warrants, be held to constitute "business". We have, therefore, to decide the issue not with reference to any abstract principles, but necessarily having regard to the facts in the present cases. Before we proceed to draw inferences from the facts in the present case, we would set out briefly such facts as were available in Indra Sen's(1) case and Falal Saheb's (2) case on which it was held (by the majority of Judges in the first case, and by the Bench in the latter) that the activities of betting and racing did not constitute business. 21. In Indra Sen's (1) case, the assessee, who was a money-lender and dealt in precious stones, had purchased in all three horses between 19th October, 1932 and 20th February, 1933. One horse was purchased for Rs. 1,000, the second for Rs. 1,400 and the third for Rs. 1,800. Only the first two of the horses participated in races i....
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....rom horse-racing, the Tribunal came to the conclusion that the income was, therefore, neither casual nor non-recurring and it ought to be taxed." It should be needless to point out that what has been stated in paragraphs 7 and 8 of the statement of the case was not mentioned in the order on appeal. We have also got to point out that there is no reference to the material on record on the basis of which the conclusions set out in paragraphs 7 and 8 were reached, assuming that they had been reached even when the appeals were disposed of." 23. Now what are the facts in the present case. (i) The assessee has considered the racing activity and the betting activity as separate activities right from the inception. Only the racing activity is claimed to be a business activity. (ii) A regular establishment has been maintained, as also regular accounts. The assessee reimburses some of the expenses to the race club, but large amounts of expenses, particularly, on the feeding of horses, etc., are incurred by the assessee directly. (iii) The assessee started with two horses in the accounting period relevant to the assessment year 1966-67. The stable went up to seven horses and the....
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....ing and organisation and the maintenance of requisite staff. The assessee had other business but that alone will not make the racing activity in the present case a non business activity. The assessee has not only bought horses from his own funds but has borrowed heavily from the race club to acquire horses to pursue his activity. May be to foster racing, race clubs have been liberal in giving loans, but the persons who take loans like all borrowers not only hypothecate the property but incur also the personal liability in the form of execution of pronote and subject themselves to other restrictive conditions also. Taking loans, if anything, goes to support the stand of the assessee that the activity is not a hobby but a business activity. In the period of six years, the assessee has at one time or the other been the owner of thirteen horses, and with an average stable of about five horses, with an average stable of about five horses, it is clear that the assessee has been buying as well as selling horses, not infrequently. The figures of stake money over a period of four years showed an average receipt in excess of half a lakh of rupees every year. Subsides in recent years account ....
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....ecome permanently useless within the meaning of the aforesaid section. We agree with the Appellate Assistance Commissioner that the expression "permanently useless" would mean that the animals had become permanently unfit for the business of the assessee i.e., in the present case "racing activity" as oppressed by the assessee. The submission of the learned departmental representative that the expression has to be considered in the abstract in our view is not tenable. The learned departmental representative then went on to submit that merely because a horse was sold to stud it did not mean that the horse had become useless for racing., He stated that he had heard of horses returning to racing after a period in stud. He, however, could not rapidly furnish any exact information in this regard. The learned counsel for the assessee on the other hand submitted that the horses had become unfit for racing and further to his knowledge horses sent to stud have never returned to active to stud have never returned to active racing i.e., the type of racing events which constituted the activity of the assessee. He, therefore, pleaded for the order of the Appellate Asst. Commissioner being upheld....