TMI Blog1976 (4) TMI 115X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 BUSIN ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing is only Rs. 1,897. If we hold condition (a) is satisfied the assessee will be entitled to deduction of this loss. 6. A brief narration of the sources from which the assessee has received the amounts on the credit side of the Profit and Loss Account and the nature of disbursement of amounts 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6, and have been running these horses in racing at various centres in South India. It has been my intention to make it a regular line of my business and try to make profit out of this activity. It may be that in some years I may be having a profit and in certain other years, I may be incurring a loss. But this is as much the characteristic of this business as in any other business. I treat the race horses as an income-earning asset and try to make income out of them. I maintain regular accounts for the purchase, maintenance and sale of horses. I employ regular staff like a racing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... racing activity has been accepted by the department to be a "business" activity of the assessee. 11. For the assessment year now under consideration before Income-tax Officer the submission of the assessee was that the racing activities were a "business" and the loss was a business loss. In support of the plea the assessee contended (a) the size of the stable was large the scale of operations was such as to lead to the conclusion that the assessee ran the stable as a means of livlihood (b) an establishment composed of staff, an accountant, and purchasing agency was maintained on a commercially organised basis (c) there was a regular programme adhered to for running horses at various centres and (d) there was the declared intention of the assessee that the activity was a "business". 12. The Income-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 ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s happened in the aforecited case, the claim generally preferred by such race horses owners is that such an activity was their hobby and not business. But, here is a man who admits that it is his business and yet the Income-tax Officer wants to refuse such an assertion without any materials whatsoever. Surely, as against his claim that it was a definite venture with a motive for profit maintained and run on a commercially organised basis, it is no argument from the Income-tax Officer to simply dismiss it by mentioning that mere maintenance of account books will not clothe this activity with the character of business because of the immediate question that will arise will be: What else is it? If it is sought to be labelled as a hobby , surely the Income-tax Officer should specify materials to 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 ano ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct betting data, or if like a book maker he had a scheme to ensure that whatever might be the racing results, he would stand to gain or not to lose, at all events it could well be that it would constitute business of punting (See Gunns Income-tax Law Practice 8th Edition Vol. I. P. 370). Helton vs. Federal Taxation (5) was also relied on to show that, on facts, punting could amount to a business. 18. In the case of Lala Indra Sen in re(1) Braund J. after observing that prima facie where the only facts know were that a well to do man owns and runs three horses and bets on them and other horses, he does so for his pleasure, went on to state: "Though I express this view I do not desire it to be thought that, in my opinion there are no circumstances in which a man can over be said be an 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in Parliament, there was opinion voiced that race horses should be excluded from the scope of the exemption. The Government spokesman (the then Finance Minister Sri. T.T. Krishnamachari) stated in the Lok Sabha Debates of 9th September, 1957: "If a person has got a large number of race horses, he will not claim exemption under this clause and exemption would be given under other clause because he calls it a business. He says that it is his business to have them. But if person has casually a horse or two, they will be exempted under this provision. The total exemption will not arise under this clause because as a business he will get exemption for it under "other clause so far as he is concerned. But it it is not his business and he has casually got a horse or two they will be 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 wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anised manner and continuously and that he treated this activity as important and indulged in it with a view to getting good profit in races. Therefore, they held that the assessee treated the activity as a source of profit. Further, they held on the facts of the case, the assessee did earn profits as a fact from horse-racing." Even so, there was no express finding that the receipts from the racing activities of the assessee amounted to income from any business of his. After referring to s. 4(3) (vii) of the Act the Tribunal stated in paragraph 8 of the statement of the case. "Having regard to these essential ingredients of the sub-section and the facts in the case that the assessee treated this activity as important, as a source of profit, and that he made profits from 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 conclusi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, has claimed the loss as business loss. In the assessment years from 1966-67 to 1970-71 the stand of the assessee has never been questioned by the department. (For figures and further details please see table in paragraph 10). (ix) The gross receipts of stake money and subsides has been: Asst. year Stake Money Subsidies from Club the Race Club 1968-69 50,210 4,000 1969-70 82,750 10,200 1970-71 35,300 9,575 1971-72 50,950 10,632 24. The aforesaid facts of the case show that the assessee has been pressing the racing activity in a systematic manner and considering the number of events and the number of centres at which the horse have participated, the activity necessarily implied considerable planning 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 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s(1) case and Famal Sahib s (2) case in our view gave an entirely different total impression and such the decision in those case do not straight away half the department in canvassing that in the present case the racing activity is not a business. So only the case relied on by learned counsel for the assessee having been decided primarily on the facts cannot be considered as laying down any abstract legal proposition The loss of Rs. 1,898 is an admissible business loss. On the basis of the finding we have arrived at one of the facts of this case. 26. But if we may say so the race is not over The issue regarding the admissibility or otherwise as a deduction under s. 36 (1)(vi) of Rs. 70,020 remains. For this we have to see whether the two horses sold, "Happy Climax" and Only You" had at the time of sale become 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 represent ..... X X X X Extracts X X X X X X X X Extracts X X X X
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