TMI Blog1957 (8) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... a serious decline in the number of jockeys available in Calcutta and that if such a decline did in fact occur, races to be held under the auspices of the Club might have to be abandoned and its business closed down. It was, therefore, thought expedient to take some steps for providing against that contingency. The step taken was to establish a school for the training of Indian boys as jockeys so that, when they passed out and got their riding licences, they might be available to the owners desiring to race their horses at meetings held by the Club. It has been found that the school did not prove a success and was closed down after a brief existence of three years. It has also been found that the young men trained at the Club's school would be under no obligation to serve owners entering their horses for races held by the Club. After obtaining their riding licences, they would be at complete liberty to accept employment under anyone they liked and anywhere in any country. During the year ending on the 31st of March, 1949, the Club spent a sum of ₹ 62,818 on the running of its riding school. In the course of its assessment to income-tax for the year 1949-50 and asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he expenditure incurred for procuring it could not be claimed in respect of any one year, because that year would receive only a fraction of the benefit and, therefore, nothing in excess of the expense incurred for purchasing that fraction could be an admissible deduction in respect of that year. Whether that is what he really intended to say or not I am not sure, but since nothing turns upon this additional reason, I may leave it as it is. Against the decision of the Income-tax Officer, the Club appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner upheld the Income-tax Officer's order, but only on the first of the grounds given by him. On further appeal to the Appellate Tribunal, the Income-tax Officer's order was again upheld, but this time on the first and the third of his reasons, including the obscure corollary to the third. After thus failing before all the authorities, the Club asked for a reference of the question to this court and by a single reference in respect of both the income-tax and the business profits tax assessments, the following question was referred : Whether in the facts and circumstances of this case, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sly affected. If, with a view to averting such a contingency, the Club spent money out of its funds in order to establish a source from which jockeys could be supplied, I am unable to see for what purpose the money was spent, if it was not for the purpose of safeguarding the business interests of the Club. As I have already pointed out, the expense was certainly not the expense of earning the profits of the year, but expenses incurred for the purpose of earning or ensuring the earning of future profits in a business is equally expenditure incurred for the purpose of the business. When an expenditure is made by a person, carrying on a business, in order to avert a threat to it or in order to rid himself of an embarrassment or in order to procure a fair field of operations, it has always been held that he makes the expenditure for the purposes of his business. The language in which this view has been expressed has differed in different cases, but in effect what the courts have said has been the same. In connection with this question, the famous words of Lord Davey in Strong Co. v. Woodifield [1906] AC 448, 453 are always recalled and they are that the meaning of the expression for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... securing ends which will indirectly facilitate the carrying on of business can also be expenditure laid out wholly and exclusively for the purpose of the business. The fact that the benefit derived by the Club from the keeping of its riding school would be an indirect benefit does not, therefore, make it impossible to hold that the expenditure incurred in keeping the school was expenditure laid out wholly for the purposes of the business carried on by the assessee. I do not think I need say more on the first ground given by the authorities below for rejecting the Club's claim. I shall only refer to the recent decision of the House of Lords in Morgan v. Tate Lyle Ltd. [1954] 26 ITR 105, where expenses incurred by a company engaged in sugar refining business on a propaganda campaign to oppose the threatened nationalization of the industry were held to be expenses wholly and exclusively laid out for the purposes of the company's trade and, therefore, an admissible deduction in the computation of its profits for income-tax purposes. In the present case too, the Club incurred expenses in founding and keeping a school as a measure of protection against an apprehended decline ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As has been explained in Simon's Income Tax, Viscount Cave's proposition is an amplification of the proposition laid down earlier by Lord Dunedin in the case of Vallambrosa Rubber Co. v. Farmer [1910] 5 Tax Cas. 529, where the learned Lord, then Lord President of the Court of Sessions, had said that, normally, expenditure made once and for all would be capital expenditure and expenditure which would recur year after year would be expenditure on revenue account. Lord Cave pointed out that the test of the expenditure being made once and for all would not always suffice to mark out a particular item of expenditure as expenditure of a capital nature. He added two additional factors, one of which was that the expenditure must be with a view to bringing into existence an asset or advantage and the other of which was that it must be made for an enduring benefit of the business. It will be noticed that he did not discard the test that an expenditure in order to be a capital expenditure, would have to be an expenditure made once and for all. He merely pointed out that two further requirements would have to be satisfied. Applying the test of Lord Dunedin, subsequently adopted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business altogether, appears to me to be a contradiction in terms. Whether a particular expenditure is looked at from the point of view of its result and what is seen is if it has brought some addition to the capital or it is looked at from the point of view of its source and what is seen is if it was paid out of the circulating or the fixed capital. in each case, the capital regarded is the capital held by the business as a part of its holdings on the asset side. I am entirely unable to see how some extraneous advantage, standing wholly outside the scope of a business, can be a part of its capital assets, although it may directly or indirectly benefit the business or facilitate the carrying on of it. The line of cases where the owners of a business sought to remove competition by means of a covenant in restraint of trade, entered into with other businessmen, was referred to on behalf of the Commissioner and it was said that, even in those cases there was no acquisition of a capital asset, but the expenditure had, nevertheless, been held to be capital expenditure. It was pointed out by me in the course of the argument that the agreement by which competition would be exclude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the case of Collins v. Joseph Adamson Co. [1939] 7 ITR 92 on which Mr. Pal next relied. There, the assessee was a member of an association which purchased the undertaking of another company with a view to closing it down and preventing it from being acquired by persons outside the association. The association incurred some further expenditure by making a grant to one of its members in order to enable him to acquire a controlling interest in another competing business and to bring its operations within the rules of the association. The assessee claimed a deduction from his trading profits of his share of the association's expenses. The court held that the payment made by the association had created for its members advantages of an enduring nature which could properly be treated as capital and, therefore, the deduction claimed could not be allowed. Again, the point sought to be made by Mr. Pal was that the dealings with the third parties had been by the association, whereas the deduction was being claimed by the assessee a member, and yet it had been held that even the assessee had acquired an advantage of an enduring nature. It appears to me that in this case also Mr. Pal o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icular year's expenditure of running that school. I have already explained why this expenditure was an expenditure laid out for the purpose of the business. As regards whether it was an expenditure of a capital or revenue nature, I think I can do no better than refer to the test Taid down by Lord Hanworth in the case of Mitchell v. B.W. Noble Ltd. [1927] 1 KB 719, 737 The test is that if the expenditure is not to secure an asset but to enable the business to continue its same course as before and only to remove a difficulty, present or anticipated, in carrying on the business on the same lines as before, then the expenditure is a revenue, not a capital expenditure. That test is completely satisfied. No point was sought to be made out of the circumstance that the expectation with which the Club had founded the school had not been realised. Failure of the Club's hopes in that regard could not prevent the expenditure from being expenditure laid out for the purposes of the business. As Lord Keith observed in the case of Morgan v. Tate Lyle Ltd. [1954] 26 ITR 195, which I have already mentioned, If the purpose of the expenditure is to benefit the trade, it is not necessary ..... X X X X Extracts X X X X X X X X Extracts X X X X
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