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TMI Blog1976 (4) TMI 115X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Profit and loss account for the year ended 31st March, 1971 . Rs. . Rs. To Entr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 . Madras Race Club 88,769-79 . Drawings during the year : 18,500-00 . Tyrell :100-00 88,869-79 Add : Net Loss during the year:72,097-50 90,597-50 2,09,927-50 . 2,09,927-50 The main sundry creditor is the Madras Race Club and the build up of the balance of Rs. 88,769 in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venient 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 separate and different and what was being claimed as "business" was only what was related to the activity of racing. 9. We give below in a tabulated form further details assessment year wise:-- (1). Asst. yr. (2) Number of horses owned (3) Number of centres in which horses ran (4) Number of races in which participated 1966-67 2 3 4 1967-68 4 3 17 1968-69 5 3 23 1969-70 7 5 57 1970-71 5 3 52 1971-7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed 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 that the expenditure of the assessee was always me by an outsider. The decision in Falal Saheb's (2) case, it was urged, was not applicable on the facts in the present case. 15. The Appellate Assistant Commissioner observed: "There is no doubt in this case that the appellant is an owner of five or six race horses since quite some years has been entering them in various races run by the different race clubs in South India with a decided intention of running these as get another line of his business. In the earlier assessment the ITO has himself recognised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 from "business". 16. Regarding the balance of claim of Rs. 70,200 the Appellate Assistant Commissioner stated "Happy Climax" had broken a tendon in his front leg and "Only You" had developed an ulcer and had become unfit for the racing and had to be sold to stud. According to the Appellate Asstt. Commissioner, the two horses had become permanently useless for the purpose of the business of the assessee, i.e., racing and the requirements of s. 36(1)(vi) were satisfied. In coming to this conclusion reference was made to the decision in Union Drug Co. Ltd, vs. CIT, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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., who delivered the dissenting judgement taking the view that in Indra Sen's(1) case the activity of betting and racing amounted to a business, also observed: "Whether the maintenance of a racing stable does or does not in a particular case amount to 'Business' must depend on the facts and circumstances of each case." Rajagopalan J. Speaking for the Court in Falal Sahib's (2) case observed at page 674: "All we need say, and do say in this case, is that prima facie at least gambling by betting on horses cannot be viewed as a business, though a person indulges in it habitua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld 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 in the account year i.e., the very first year which was under consideration before the High Court. The racing account maintained was a consolidated one for betting and stakes. Losses on betting as well as maintenance of horses, etc., were maintained in the same account. The assessee could not give a break up of betting on his own horses of others. The net loss from betting came to Rs. 7,454 and from stakes Rs. 425 (Ref. 8 ITR. P. 210). The horses ran in races in some subsequent years also. 22. In Falal Saheb's(2) case, the assessee who was a manufacturer of beedees also owned race horses. He w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 then came down. In the accounting period the assessee had five horses. Please see column 2 of table in paragraph 9). (iv) At one time, or the other, in the span of about six years ending with the assessment year now under consideration, the assessee owned the following horses (horses still with the assessee at the end of the accounting period under consideration, the assessee owned the following horses (horses still with the assessee at the end of the accounting period under consideration are asterisked.): 1. ONLY ONE. 2. ONLY FOR YOU. 3. FREEDOM* 4. ONLY SON 5. VIJAY 6. PARTNER BEAR ROSHINI 7. YABABIBI* 8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 for a further average incoming of Rs. 10,000. It is not as if the assessee only reimburses expenses incurred on his behalf by the race club for a part from expenses incurred by the race club the assessee incurs expenses directly, the most important being of horse feeding for it is needless to state that diet plays a most important part in keeping a race horse fit. Above all, the all assessee has been consistently claiming that the racing activity is a business activity. The department also in the past has accepted the stand without demur, though that of course would not the revenue from contending otherwise as they have done and that very forcefully through the tenacious arguments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 27. Before the Appellate Assistant Commissioner the assessee had contended that "Happy Climax" had a broken tendon and "Only You" developed an ulcer. In our view these assertions have to be established by evidence and this aspect has not been gone into at any earlier state. There are various angles, to mention only a few, from which the claim has to be looked at. When did it first come to notice that "Happy Climax" had broken a tendon? Was there any medical report to support the claim? After that, did the horse participate in any race? Was the Race Club informed of the fact when the horse was sold, since apparently the sale was before the last instalment of loan become repayable in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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