TMI Blog2002 (10) TMI 76X X X X Extracts X X X X X X X X Extracts X X X X ..... of law required to be answered in favour of the Revenue and against the assessee and the second question is not required to be answered. - - - - - Dated:- 10-10-2002 - Judge(s) : V. S. SIRPURKAR., N. V. BALASUBRAMANIAN. JUDGMENT The judgment of the court was delivered by N.V. BALASUBRAMANIAN J.- Tax Case No. 209 of 1986 is a reference at the instance of the assessee, and Tax Case No. 210 of 1986 is a reference at the instance of the Revenue and the assessment year involved in both the tax cases is 1978-79. We dispose of both the tax cases by this common judgment for convenience sake. The Income-tax Appellate Tribunal hereinafter referred to as "the Tribunal", at the instance of the assessee has stated a case and referred the following question under section 256(1) of the Income-tax Act, 1961. "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the Inspecting Assistant Commissioner had jurisdiction under section 144B of the Income-tax Act, 1961, to direct the Income-tax Officer to include a sum of Rs. 1,51,152 as income from horse racing in computing the total income of the assessee which sum was not originally incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee came forward with the reply stating that in addition to three horses, it was owning eight breed mares, which were not in the racing and also furnished the statement for the purchases from the year 1964. It was found that the assessee has received a sum of Rs. 42,111 from the Bangalore Turf Club and another sum of Rs. 85,000 from Bangalore Turf Club which were kept as fixed deposit with another company. The Income-tax Officer also found that certain sums were received by Mrs. Muthiah from the Bangalore Turf Club and it was also found that the assessee was having extensive activities in maintaining race horses and has not made a consolidated account. The officer also found in making the draft assessment that the assessee has not explained the sources for the expenditure and maintenance of the horses and the mares and the assessee had not furnished full details for making a proper assessment. The Assessing Officer found that the sources for the purchase of the two horses and the source for the loss claimed in the racing account required explanation and in the absence of explanation, the amount of Rs. 1,53,250 was treated as income from undisclosed source. The Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeds do not give rise to any capital gains. The assessee also raised an objection that there is no cost of acquisition either in the case of colts or fillies and in the absence of cost of acquisition they are not liable for capital gains. The main case of the assessee was that the amounts received on lease or sale of the horses are not taxable as the receipts are incidental to the activity of hobby carried on by the assessee as the owner of the horses. The Inspecting Assistant Commissioner rejected the contentions of the assessee on the ground that the assessee's claim that racing is its hobby cannot be entertained as the assessee is a Hindu undivided family and it is incongruous to say that the Hindu undivided family can have a hobby. The Inspecting Assistant Commissioner held that even assuming that the karta of the Hindu undivided family can have a hobby that cannot be held to be the hobby of the Hindu undivided family. The Inspecting Assist ant Commissioner also found that there were 11 horses in the stable and three were in racing and eight in the stud farm including the mares and offspring. It was found that the assessee was engaged in rearing good offspring which could compe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the activities of sale and lease of the horses were done on a commercial scale and since the assessee spent considerable time, energy and money in the activity of maintaining the horses and earning income therefrom, the receipts arising therefrom would be taxable. He also held that since the assessee was regularly buying and selling horses and the offspring, the receipts arising from the sale and lease of the horses would constitute the income of the assessee. The Commissioner of Income-tax (Appeals) noticed the provision of section 74A(3) of the Act and held that the income from the sale and lease of horses should be assessed under the head "Other sources" and not either under the head "Capital gains" or under the head "Business". He therefore held that the Income-tax Officer was justified in assessing the income under the head "Other sources" and thus, dismissed the appeal preferred by the assessee. The assessee carried the matter in further appeal before the Income-tax Appellate Tribunal, Chennai, and before the Tribunal also the assessee raised the same contentions which were raised before the Commissioner of Income-tax (Appeals); one on the question of jurisdiction and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the horses. According to him, the Income-tax Officer in the draft assessment order has dealt only with three items, namely, the sources for the purchase of the two race horses and the source for the loss claimed under the racing account and the assessee in his explanation dated April 14, 1981, has fully explained the sources for the sum of Rs. 1,53,250 which was proposed in the draft assessment order and the Inspecting Assistant Commissioner has also noticed that the Income-tax Officer on scrutiny of the account has reported that the sum of Rs. 1,53,250 was fully explained. He therefore submitted that the direction given by the Inspecting Assistant Commissioner was not in relation to the draft assessment order and the directions were given by the Inspecting Assistant Commissioner in respect of a matter not covered in the draft assessment order and his submission was that the direction should be confined only to the matters considered in the draft assessment order and it is not open to the Inspecting Assistant Commissioner to give a direction in respect of an item not covered in the draft assessment order. Mr. T.C.A. Ramanujam, learned senior standing counsel appearing for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall forward the draft order together with the objections to the Inspecting Assistant Commissioner and the Inspecting Assistant Commissioner shall, after considering the draft order and the objections and after going through (wherever necessary) the records relating to the draft order, issue, in respect of the matters covered by the objections, such directions as he thinks fit for the guidance of the Income-tax Officer to enable him to complete the assessment: Provided that no directions which are prejudicial to the assessee shall be issued under this sub-section before an opportunity is given to the assessee to be heard." Under section 144B(4) of the Act, if the assessee intimates its objections to the draft order of assessment, the Income-tax Officer is required to forward his draft assessment order together with the objections raised by the assessee to his next higher authority, viz., the Inspecting Assistant Commissioner, and the Inspecting Assistant Commissioner is required to consider the following matters: (i) The draft order of assessment; and (ii) The objections raised by the assessee. It is open to the Inspecting Assistant Commissioner to go through (wherever n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the light of the object of the Act, that the provisions of section 144B have to be construed and interpreted. The crucial words as found in section 144B of the Act relevant for the purpose of the case are, "in respect of the matters covered by the objections". There are four expressions employed in section 144B of the Act which are relevant for the purpose of this case and they are as under: (i) draft order, (ii) objections of the assessee, (iii) the records relating to the draft order, and (iv) matters covered by the objections. The crucial words found in section 144B of the Act are not terms of art with a specialised legal meaning, but they are ordinary English words. We are of the view that the employment of different expressions in the same sub-section would indicate that they do not have the same meaning and different meanings should be given to each one of the expressions. We are of the view that what is material to determine the scope of the jurisdiction of the Inspecting Assistant Commissioner is not the draft order of assessment or the objections raised by the assessee, but whether the direction is issued in relation to the matter covered by the objections. In our view, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the account books, which clearly revealed the receipts from the sale and lease of the race horses. We hold that the Inspecting Assistant Commissioner has neither traversed beyond the draft assessment order, nor outside the objections raised by the assessee. The subject matter of the draft order of assessment was the income from race horses and how it should be assessed and the account books produced by the assessee showed the receipts by way of sale or lease of the horses. We hold that the Inspecting Assistant Commissioner was perfectly justified in issuing a direction in respect of the matters which are covered by the objections raised by the assessee. We find that the Inspecting Assistant Commissioner has not found any new source, but with reference to the same source of income and with reference to the objections raised by the assessee, the Inspecting Assist ant Commissioner has given the directions. The crucial words found in section 144B of the Act are "in respect of the matters covered by the objections". Now let us see some dictionaries where some of the words are considered. It is no doubt true that the Supreme Court in a number of cases has cautioned that it is not adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. The Calcutta High Court held that since in the draft assessment order the amount claimed as expenditure was not disallowed by the Income-tax Officer, the question of disallowance of the amount could not have been covered by the objections of the assessee and therefore, the direction given by the Inspecting Assistant Commissioner to enhance the assessment was not lawful. This decision has no application at all as in the case before the Calcutta High Court the question of disallowance of the amount was not one of the matters covered in the objection raised by the assessee and therefore, the Calcutta High Court found no difficulty in holding that the Inspecting Assistant Commissioner lacked the jurisdiction to issue directions under section 144B of the Act. Though the Calcutta High Court has held that the Inspecting Assistant Commissioner under section 144B of the Act has no jurisdiction to issue directions to the extent as it was not covered by the draft order, the ratio of the decision of the Calcutta High Court is that in respect of the matters covered by the objections raised by the assessee, the Inspecting Assistant Commissioner has the jurisdiction to issue the direction. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct and held that in respect of the matters already covered under the objections of the assessee in the draft order, there is no need for the Inspecting Assistant Commissioner to issue directions under section 144A of the Act since he would have the power to issue directions under section 144B(4) of the Act to enable the Income-tax Officer to complete the assessment. It could be seen from the above observation of the Gujarat High Court that in respect of the matters already covered in the objections, the Inspecting Assistant Commissioner has the power to act under section 144B instead of resorting to section 144A. The above decision is not of any help to the assessee. The decision of the Gujarat High Court is also in favour of the Revenue in the sense that it will be open to the Inspecting Assistant Commissioner to invoke the powers either under section 144A or under section 144B of the Act for the purpose of proper assessment of the income. In Ambica Mills Ltd. v. CIT [1999] 235 ITR 264, the Gujarat High Court also held that section 144B is a procedural provision. The Gujarat High Court also held that it gives wide power to the Inspecting Assistant Commissioner to issue direction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment, a higher officer is associated at the pre-assessment stage so that additions which are not warranted or disallowances which are not justified can be considered and suitable directions can be given. Unlike the appellate authorities who step into the assessment after the order of assessment is made, the Inspecting Assistant Commissioner is empowered to associate himself at the pre-assessment stage itself and it is necessary to emphasise here that the jurisdiction and competence of the Inspecting Assistant Commissioner extend not only to the draft order, but he has jurisdiction to issue directions in respect of the matters covered by the objections raised by the assessee. In other words if there is something in the draft order of assessment to show that the Income-tax Officer has applied his mind to a particular subject matter for a particular source of income for which the assessee has raised his objections against the taxability of the particular subject matter before the Inspecting Assistant Commissioner, then the Inspecting Assistant Commissioner will have the necessary jurisdiction to issue a direction in such a case. In such a situation it cannot be said that he has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e hold that the question of law referred by the assessee is required to be answered against the assessee and in favour of the Revenue. As far as the reference at the instance of the Revenue is concerned, we hold that the Appellate Tribunal has rendered the finding that the income derived by the assessee from the lease or sale of horses arose out of a hobby without any material or without any evidence in support of the case. The facts of the case are clear that the assessee has been systematically doing business in running the race horses and receiving income as stake money and also by way of sale or lease of the race horses. The assessee has maintained the race horses for racing in Madras Race Club as well as in Bangalore Turf Club involving expenditure in the maintenance of race horses. In other words, the assessee was engaged in a systematic activity in the maintenance of race horses and earning income therefrom. The reply of the assessee to the draft assessment order clearly shows that in so far as the Madras Race Club is concerned, there were two accounts, one racing account and another breeding account, and both the accounts disclosed the periodical activity of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee's own case has taken a different view and held that there was a systematic activity carried on by the assessee in carrying on the business. We therefore hold that the Tribunal has completely misdirected itself in holding that the assessee carried on the activity of maintaining the horses and earning income therefrom as a hobby and not as a business activity. We further hold that all further directions given by the Tribunal on the basis that the activity is a hobby are also not in accordance with the law. The Tribunal also referred to section 74A(1) of the Income-tax Act, 1961. Section 74A(2) refers to computation of income to be made in respect of the activity of owning and maintaining race horse. This court in CIT v. M.A. Chidambaram [2000] 243 ITR 260 considered the provisions of section 74A of the Act in the case of race horses and expenditure incurred by the owner of race horses on maintenance and held that the losses if any should be carried forward in the manner provided under section 74A(3) of the Act. Probably we would have remitted the matter to the Appellate Tribunal to consider the applicability of section 74A of the Act in the light of the decision in CIT v. M. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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