TMI Blog2016 (4) TMI 306X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 - Held that:- As decided in assessee's own case Section 74A is not applicable for the activity of breeding of horses since these horses are maintained for breeding and selling and not for running horse races. The activity of breeding of horses is similar to that of poultry or piggeries etc. where the animals are bred for the purpose of selling. Section 74A is not applicable for such breeding activity. The ld. CIT(A) also found that during the remand proceedings, the A.O. reported that income and expenditure pertaining to breeding activity and racing activity were found to be captured under two different accounting codes in respect of both the assessment years. The ld. CIT (A) also found that an amount of ₹ 1.94 crores 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 assessee. After considering the remand report and corroborative evidences filed before him, the ld. CIT(A) reached to the conclusion that only the business loss in respect of horse breeding a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act vide order dated 30.01.2013 wherein the income of the assessee wad determined at ₹ 9,79,44,690/- in view of the following additions/disallowances: - (i) Disallowance of lease rent paid for use of land for agriculture ₹ 29,24,265/- (ii) Agricultural income treated as income from other sources ₹ 11,72,810/- (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. ₹ 5,83,75,790/- 2.2 Aggrieved by the orders of assessment for assessment years 2009-10 2010-11 dated November 2011 and 30.01.2013 respectively, the assessee preferred appeals before the CIT(A)-38, Mumbai. The learned CIT(A) disposed off the appeals for assessment years 2009-10 2010-11 vide separate orders dated 26.02.2014 allowing the assessee partial relief in both the assessment years. 3. Aggrieved by the impugned orders of the CIT(A)-38, Mumbai for assessment years 2009-10 2010-11 dated 26.02.2014, both the assessee and Revenue are in appeal before the Tribunal rai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39; 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 ₹ 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 owning and maintaining race horses. He erred in not appreciating that as per the working filed by the appellant company during the course of assessment proceedings as well as before the learned CIT(A) ₹ 2,07,45,318/- out of the aforesaid ₹ 2,35,73,128/- was allocable to the horse breeding activity and the balance ₹ 28,27,810/- was allocable to the activity of owning and maintaining race horses. 7.1] He erred in not appreciating that most of the above expenses (i.e. ₹ 2,07,45,318/- out of ₹ 2,35,73,128/-) were incurred for the breeding business of the assessee company and tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lease Rent Paid - ₹ 29,24,264/- Ground No. 1 (Revenue s appeal) - Agricultural income - ₹ 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 ₹ 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 the provisions of section 14A of the Act and that no disallowance thereunder was called for. The learned A.R. for the assessee, however, fairly conceded that the issue raised in grounds 1 to 4 (supra) has been considered and held against the assessee by the decision of the Coordinate Bench of this Tribunal in the assessee s own case for A.Y. 2007-08 in ITA Nos. 2151 2152, 2766 2767/Mum/2012 dated 11.06.2015 for assessment years 2007-08 and 2008-09. 7.2 The learned D.R. for Revenue was also heard in support of the ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 an agricultural produce, According to the AO, the claim of the assessee that certain grams, vegetables etc. produced are not supported by any evidence in the form of 7/12 extracts. The AO took the view that there was no agricultural activity carried on the lands taken on lease and, therefore, the income claimed to have been earned from agricultural activities has to be treated as Income under 'Other Sources'. Further, it was held that the expenditure incurred towards the lease rent paid to the di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t off against the income of ₹ 9,97,800/- and the resultant loss from agricultural operations amounting to ₹ 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. 1raised by the Revenue have been considered and adjudicated by 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 for assessment years 2007-08 and 2008-09; wherein at paras 8 to 10 thereof the Coordinate Bench had held as under: - 8. Rival contentions have been considered and record perused. We found that during the course of appellate proceedings, the learned CIT(A) found that the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to interfere with the findings recorded by the learned CIT(A) holding that the assessee had earned agricultural income of ₹ 8,01,175/-. With regard to lease rent expenditure of ₹ 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. has not given sufficient opportunity to the assessee, insofar as the documents were asked at the fag end of the assessment proceedings, therefore, the assessee could not furnish the same before the A.O. These documents were filed before the learned CIT(A) who has sent all these documents to the A.O. for his remand report. The A.O. has examined all these documents and sends his remand report. Accordingly, there is no violation of Rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 ₹ 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 the matter on the issue raised before us by both the assessee and the Revenue are as follows: - In the order assessment, after examining the activities under taken by the assessee, the AO has also disallowed losses from activity of horse breeding and owning and maintaining race horses amounting to ₹ 6,32,44,117/-. In this regard the AO has examined the activities undertaken by the assessee. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 emphasized that it is a specialized industry which has to be understood as such. Once a foal is borne, it is maintained at the farm for two years and is sold by a private sale or through auctions conducted by the Turf Club Authorities; the horse breeding business requires services of expert paternity doctors, expert trainers at the breeding farm; at the farm the broodmares belonging t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 'Further, the contentions of the A.O raised in the remand report and the written submissions of the appellant wherein the stand of the A.O has been contested are carefully examined. The A.O has examined the accounting information submitted by the appellant during the remand proceedings and has stated that the bifurcation in terms of horse breeding activity and racing ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 the A.O. Therefore, the bifurcation as submitted by the appellant was verifiable with reference to the books of account maintained and the same has been carried out by the A.0 during the remand proceedings. 8.11 On a careful examination of the contentions of the A.O in the assessment order, it is seen that A.O has not considered the horse breeding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 profits or losses and the same have to be computed under the head Business. On the other hand, the loss as computed by the appellant in terms of the racing segment, and verified by the A.O during the remand proceedings, has to be carried forward u/s.74A(3) of the Act. The stand taken by the A.O in the assessment order is not legally tenable since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of its horses take part in the racing activity. Over all, it incurred a loss of ₹ 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 only 40 horses run in the races. He did not accept the assessee's contention that entire loss is from breeding activity as racing activity is only incidental to the breeding activity. It was also observed that assessee submitted a columner profit and loss account of the race horses owning and maintenance activity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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 these horses are maintained for breeding and selling and not for running horse races. The activity of breeding of horses is similar to that of poultry or piggeries etc. where the animals are bred for the purpose of selling. Section 74A is not applicable for such breeding activity. The ld. CIT(A) also ..... X X X X Extracts X X X X X X X X Extracts X X X X
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