9911796707
TMI Blog2016 (4) TMI 306X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 143(3) of the Income Tax Act, 1961 (in short 'the Act') vide order dated November 2011, wherein the income of the assessee was determined at Rs. 9,84,65,850/- in view of the following additions/disallowances: - (i) Disallowance of lease rent paid for use of land for agriculture Rs. 39,22,064/- (ii) Agricultural income treated as income from other sources Rs. 9,97,800/- (iii) Losses from activity of owning and maintenance of horses not being allowed to be set off with the business income under section 74A(3) of the Act. Rs. 8,52,73,864/- For A.Y. 2010-11, the assessee filed its return of income on 15.10.2010 declaring total income of Rs. 3,54,71,825/-. The case was taken up for scrutiny and the assessment was completed under section 143(3) of the Act vide order dated 30.01.2013 wherein the income of the assessee wad determined at Rs. 9,79,44,690/- in view of the following additions/disallowances: - (i) Disallowance of lease rent paid for use of land for agriculture Rs. 29,24,265/- (ii) Agricultural income treated as income from other sources Rs. 11,72,810/- (iii) Losses from activity of owning and maintenance of horses not being allowed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd not from any other source and since in the present case, assessee's main source of income was from breeding of horses, the provisions of section 74A were not applicable to the facts of the present case and thus, the entire expenditure incurred by the assessee company was allowable as a deduction while computing the income of the assessee company and there was no reason to bifurcate the expenditure between breeding activity and activity of owning and maintaining race horses. 7] Without prejudice to the above grounds, assuming without admitting that the activity of 'owning and maintaining race horses' was a separate activity carried out by the assessee company, the learned CIT(A) erred in directing the learned Assessing Officer to verify the nature of expenditure of Rs. 2,35,73,128/- incurred on stud farm staff salaries & wages, sponsorship expenses, legal and professional fees and identify the expenses relating to horse breeding activity and the activity of owning and maintaining race horses and accordingly allow set off of expenses relating to the horse breeding activity against the other business income and carry forward the expenses relating to the activity of ow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he two activities were not separately indicated in the return of income." 5. At the outset the learned A.R. for the assessee submitted that the grounds raised at S. Nos. 7 to 7.2 (supra) by the assessee are not being pressed in this appeal. In view of grounds at S.Nos. 7 to 7.2 not being pressed, they are rendered infructuous and are accordingly dismissed. 6. Ground No. 8 of the assessee's appeal is general in nature and therefore no adjudication is called for thereon. 7. Grounds at S.Nos. 1 to 4 (Assessee's appeal) - Disallowance of Lease Rent Paid - Rs. 29,24,264/- & Ground No. 1 (Revenue's appeal) - Agricultural income - Rs. 9,97,800/- 7.1 The learned A.R. for the assessee was heard in support of the grounds raised (supra) that the learned CIT(A) had erred in holding that the lease rent paid amounting to Rs. 29,24,264/- for use of agricultural land is not allowable while computing the income of the assessee, failing to appreciate that the lease rent paid was incurred wholly and exclusively for the assessee's stud farm business and hence should have been allowed. It is also contended that the learned CIT(A) ought to have appreciated that the lease rent paid was not hit by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that the assessee company owns a large extent of land and has always used the lands to raise agricultural products, which are suitable for consumption by the horses and by the staff. Any surpluses were sold to persons in the nearby localities not with an intention of earning income but to avoid wastage of perishable goods. During the year under consideration, the company took agricultural land on lease from the directors and paid lease rentals as per the lease deeds. It is further stated that paddock grass, oats, grams and vegetables etc. were grown by using unskilled personnel and casual workers. It was further stated that the details of agricultural produce, which was sold in the market were also being furnished. It was contended that it was incorrect to state that the details called for were not filed. 7.4 The A.O did not agree with the contentions of the assessee for the reason that the agricultural operations carried on is not supported by any evidence and since 7/12 extract being a government document which did not reflect any agricultural crops grown on the agricultural lands. The A.O. has taken a view in the assessment that since the grass grows naturally, it is not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to earning any exempted income is liable to be disallowed. In this case, earning of agricultural income involved expenditure of lease rents amounting to Rs. 29,24,264/- and the same is rightly disallowed. Therefore, the said disallowance is upheld in terms of Section 14A of the Act. The expenditure incurred for earning agricultural income has to be set off against the income from agricultural operations. Consequently, the expenditure amounting to Rs. 29,24,264/- has to be set off against the income of Rs. 9,97,800/- and the resultant loss from agricultural operations amounting to Rs. 19,26,464/- has to be treated as the net disallowance u/s. 14A of the Act." 7.6 It is against the above order of the learned CIT(A), both the assessee and Revenue are in further appeal before us. 7.7.1 We have heard the rival contentions of the assessee and the Revenue and have perused and carefully considered the material on record, including the decision of the Coordinate Bench of this Tribunal in the assessee's own case in ITA Nos. 2151, 2152, 2766 & 2767/Mum/2012 dated 11.06.2015. We find that the issues before us in respect of the grounds at S.Nos. 1 to 4 raised by the assessee and ground No. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar which constituted the agricultural income which was credited to the P&L account under the head "other income". The learned CIT(A) also recorded a finding to the effect that 7/12 extracts reflected that mango trees, coconut trees, guava, jamun, rice, cashew nut etc. are being grown. The finding recorded by the learned CIT(A) has not been controverted by the learned D.R. by bringing any positive material on record, we, therefore, find no reason to interfere with the findings recorded by the learned CIT(A) holding that the assessee had earned agricultural income of Rs. 8,01,175/-. With regard to lease rent expenditure of Rs. 26,59,140/- incurred by the assessee, the learned CIT(A) has disallowed the same on the plea that the expenditure was incurred for earning exempt income. We also find that the lease rent was paid to the directors of the assessee company for leasing the lands to the assessee which deserves to be disallowed u/s 14A of the Act to the extend attributable to earning of exempt income. 9. The Revenue has also taken a ground with regard to additional evidence accepted by the learned CIT(A) without giving opportunity to the A.O. In this regard, we found that the A.O. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able as a deduction while computing the income of the assessee company and therefore there was no reason or requirement to bifurcate the expenditure between breeding activity and the activity of owning and maintaining racing horses. The learned A.R. for the assessee was heard in support of the grounds raised on this issue but, fairly conceded that this issues in both the assessee's appeal and Revenues' appeal for the year under consideration has been considered and decided against the assessee and Revenue respectively by the decision of the Coordinate Bench of this Tribunal in ITA No. 21151, 2152, 2766 & 2767/Mum/2012 dated 11.06.2015. 8.2 The learned D.R. was heard in the matter in respect of grounds raised by the assessee. He was also heard in respect of grounds No. 2 taken by Revenue wherein it was contended that the learned CIT(A) erred in directing the AO to set off business losses of Rs. 5,51,64,798/- incurred in respect of horse breeding activities without appreciating that the activities of horse breeding and horse racing in the case on hand were interconnected and the income from the two activities were not separately indicated in the return of income. 8.3.1 The facts of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tuting thoroughbred horses at the company's farm established at village Nanoli District, Pune. For the purpose of this business, the company has constructed stables and other necessary structures at the company's farm, It is explained that the horse breeding is reproduction in horses which is a human-directed process involving selective breeding of animals and aided by planned mating for achieving the desired characteristics in the progeny. The horse breeding activity involved horse breeding / reproduction in the horses by selective breeding, employment of skilled workers, management of stables, engaging supervisors and managers to run the stud farm operations. etc. Further modem breeding management & technologies increase the rate of conception, a healthy pregnancy and successful foaling. It was further submitted that the business mainly involved the sale of two year old horses which are bred at the farm; the company owned broodmares (a female horse used for breeding), which are covered by stallions; stallions and broodmares never participate in races, but they only participate in breeding activities. Appellant has further explained the nature of the industry and emphasize ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... money won by the horses also constitutes an income of this business. Thus, the business is only of horse breeding and placing some of the horses occasionally for races is incidental to the core business. It is further stated that the horses put to racing constituted a small percentage as compared to the total number of horses sold; out of approximately 300 horses, about 15% of the horses participated in the races; there are stallions and broodmares which only participate in breeding activities and do not participate in races. It was further submitted that much more details could be furnished; however, only a concise particulars were made available and in the event the AO is not satisfied; it was requested that technical persons would make further submissions and submit further evidences to explain the horse breeding activity 8.3.4 In the impugned order, the learned CIT(A) partly allowed the assessee's claim after observing as under at paras 8.8 to 8.13 :- "8.8 The facts of the case, the stand taken by the A.O in the assessment order and the contentions of the appellant during the assessment proceedings as well as during the appeal proceedings have been carefully considered. ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etc. These streams of income cannot be considered as income derived from owning & maintaining the race horses. For instance, an amount of Rs. 1,55,55,573/- is recovered on account of livery expenses from other horse owners, who have utilized the stables and other services of the stud farm of the appellant. Similarly, an amount of Rs. 40,75,000/- has been earned from covering fees. Appellant has submitted that the nature of the receipt and the quantum of the receipt were reflected in the books of account and identifiable with distinct accounting codes. Similarly other receipts attributable to the horse breeding activities of the stud farm and the receipts attributable to the racing activities such as stake money are distinct in nature and the same were identifiable in the books of account under different accounting codes. As stated by the A.O in the Remand Report, the income & expenditure breakup provided specifically for stud farm arid racing was verified vis-a-vis the books of account during the remand proceedings. As stated in the remand report, the breakup submitted by the appellant for the stud farm and racing income is in consonance with the books of account submitted before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled for A.Y.2007-08 as well as the grounds of appeal for A.Y.2008-09. Since identical issues arose in the appeal for the A.Y.2009-10, the analysis and conclusions as arrived at in the appellate orders for the A.Yrs.2007- 08 and 2008-09 by the predecessor CIT(A) vide order No.CIT(A) -38/IT- 388/2009-10 for the A.Y.2007-08 and order No.CIT(A)-38/316/ 2010- 11 for the A.Y.2008-09 dated 23.01.2012, mutatis mutandi, are applicable to this appellate order as well. 8.13 The issue of horse breeding activity as a distinct business activity is considered in the light of decision of Hon'ble Madras High Court in the case of Mrs. Kamala Muthia vs. CIT (259 ITR 184) (Madras). As held, carrying on an activity in an organized manner not only in the year in question but also in the prior years and also in the subsequent years with a profit motive is a commercial activity. Any such commercially organised activity carried on by an assessee, with a profit motive, has to be viewed as a business activity. In the case of the appellant, the horse breeding activity is nothing but a business activity. Therefore, the profits or losses arising from such an activity have to be treated as business profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates to the disallowance of losses from activity of owning and maintaining race horses amounting to Rs. 3,08,56,448/-, we found that livestock breeding industry wherein the assessee has incurred expenditure and also earned revenue. The assessee is maintaining a stud farm. Its business is that of breeding and only 15% of its horses take part in the racing activity. Over all, it incurred a loss of Rs. 3,08,56,448/-. It has set off of this loss against the income from shipping business as per the P&L account. The A.O. held that breeding and racing activities constitute one activity u/s 74A the loss from the activity of owning and maintaining race horses cannot be set off against any other income and it can be carried forward and set off only against the income from the activity of owning and maintaining the race horses in the future years. Accordingly, the A.O. disallowed the set off of loss from the stud farm against the profits from the ship management activity. The CIT(A) observed that 15% of the assessee's horses take part in racing. The breeding and racing activities are separate. The major activity is that of breeding. The assessee has on an average around 300 horses and onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst the income from ship management business as section 74A cannot be applied to the loss from breeding business. The ld. CIT(A) has recorded a categorical finding to the effect that the company had on an average 300 horses owned by it at the farm and horses of the clients at the farms out of which only 15% participated in the races, therefore, the loss incurred to the activities attributable to race horses cannot be allowed to be set of against other income in view of provisions of section 74A of the Act. The details filed by the assessee was sent by the ld. CIT(A) to the A.O. for remand report. The A.O. has verified the income and expenditure of composite livestock business as well as racing activity with books of account and found the same in consonance with the books of account submitted by the assessee company. After considering the remand report and corroborative evidences, the ld. CIT(A) recorded a categorical finding to the effect that it constitutes only around 15% of the gross receipt, therefore, only loss incurred thereon is liable to be disallowed u/s 74A to be set off against other income. Section 74A is not applicable for the activity of breeding of horses since the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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